Yangzijiang Shipbuilding - OCBC Investment 2017-11-13: Gross Margin Normalises

Yangzijiang Shipbuilding - OCBC Investment 2017-11-13: Gross Margin Normalises YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Gross Margin Normalises

  • Core results in line.
  • Gross margin falls to 15%.
  • Maintain HOLD.

Strong 3Q results boosted by one off items 

  • Yangzijiang Shipbuilding (YZJ) registered a 13% YoY rise in revenue to RMB4.4b but saw a 23% decrease in gross profit to RMB674m in 3Q17.
  • Share of results of associated companies and JV was RMB31.3m in the quarter, compared to a loss of RMB95.8m in 3Q16; the group’s associated companies saw fair value gains of venture capital investments in 3Q17. Along with lower effective tax rate of 4% in 3Q17 (aided by factors such as tax refund), YZJ’s net profit was RMB866m in 3Q17 vs. RMB281m in 3Q16.
  • Stripping out these one-off items, results were within expectations.

GPM declined as expected 

  • Gross profit margin for the group fell to 15.4% in 3Q17, a new low in recent times. This compares with 22.4% in 3Q16 and 21.2% in 2Q17. Gross profit margin for the shipyard segment was 10.9% in 3Q17 compared to 18.1% in 3Q16 and 13.7% in 2Q17. The decline in gross margin is not surprising given the rise in labour costs, raw material costs (e.g. steel) and competitive pricing throughout an industry that generally still faces overcapacity. 
  • In 4Q17, however, gross margin may be supported by the delivery of vessels with higher contract values and margins.
  • However, on a relative basis compared to other shipbuilders, YZJ has already fared well given strong management capabilities and execution.

Market recovering but overcapacity persists 

  • As for its held-to-maturity assets, the total amount remained stable at RMB10.7b in 3Q17.
  • YTD, the group has secured new orders for 59 vessels with a total contract value of US$1.59b; this compares to US$0.8b in FY16 and US$2.3b in FY15. As at 30 Sep 2017, the group’s outstanding order book was US$4.3b, comprising 103 vessels. 
  • Looking ahead, market conditions for the shipbuilding industry have continued to improve with the BDI recovering to a three-year high, though it will still take time for the overcapacity in the shipping industry to be resolved. 
  • We roll forward our valuations to FY18 numbers and after tweaking our estimates, our FV rises from S$1.48 to S$1.63. Maintain HOLD.

Low Pei Han CFA OCBC Investment | http://www.ocbcresearch.com/ 2017-11-13
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.63 Up 1.480