Yangzijiang Shipbuilding - CIMB Research 2018-03-01: All Depends On Rmb And Steel Costs

Yangzijiang Shipbuilding - CIMB Research 2018-03-01: All Depends On Rmb And Steel Costs YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - All Depends On Rmb And Steel Costs

  • Yangzijiang Shipbuilding's 4Q17 net profit of Rmb678m was in line with our expectation. FY17 reported net profit of Rmb2.93bn at 97% of our full-year forecast but above street's Rmb2.5bn.
  • Shipbuilding gross margin would have been 41% if not for Rmb1.2bn provision made for contract losses for 70 vessels in order book due to higher steel costs and Rmb.
  • FY17 order win of US$2.1bn met guidance (US$2bn), but it guides for lower y-o-y orders of US$1.8bn for 2018, citing stiff competition from SOE yards and Koreans.
  • Higher DPS of 4.5 Scts (FY16: 4 Scts).
  • Toned down order win and uncertainties in margin could cap YZJ's share price performance.
  • Downgrade from Add to HOLD, with a lower target price of S$1.51 still based on SOP.

Strong quarter to stomach Rmb1.2bn cost provision… 

  • 4Q17 net profit included Rmb1.2bn of provision made for foreseeable losses on 70 unbuilt vessels on the back of higher assumptions for US$/Rmb (6.16) and steel costs (Rmb4,700-4,800/tonnes) for the next two years. The orders for these vessels were secured in 2016-17 when Rmb. 
  • With the provision, these vessels will yield zero margin upon construction. Upside/downside depends on the actual forex and steel costs.

… shipbuilding margin at 41% without the above 

  • With the above, shipbuilding margin came in at 13% in 4Q17 and 17% in FY17 (FY16: 25%). Excluding provisions, shipbuilding gross margin was 41% in 4Q17, thanks to the back-end profit recognition for the deliveries of three large-size containerships – 10,000 and 11,800 TE. 
  • Yangzijiang Shipbuilding expects to deliver seven large-sized vessels (gross margin of +25%). As such, we think shipbuilding gross margin in FY18F would still be in the region of 15-16%. 
  • Yangzijiang Shipbuilding delivered a total of 33 vessels in 2017 (2016: 39).

Expect lower y-o-y order wins 

  • Yangzijiang Shipbuilding closed the year with US$2.1bn of new orders, in line with its original guidance of US$2bn. Order book stood at US$4.7bn for 123 vessels. However, management has set a lower target of US$1.8bn for 2018 in view of stiff competition from Koreans and state-owned Chinese yards. 
  • YTD, there has been no significant order wins for Yangzijiang Shipbuilding. Bulk carriers and container ship order wins were mainly dominated by Chinese, Korean and Japanese yards, according to shipping intelligence service provider Clarksons.

HTM generating higher returns 

  • Yangzijiang Shipbuilding generated Rmb1.08bn of held-to-maturity (HTM) interest income in FY17, with gross margin of 96%, thanks to deleveraging of financing in China, resulting in higher returns for its trusts and investments. 
  • Management thinks the margins for HTM could still trend upward in 2018. Average returns for HTM investments climbed y-o-y to 9.4% in FY17 (FY16: 8.5%). 
  • Some of the investments are generating c.12% of returns according to management.

Downgrade from Add to HOLD; reduce target price to S$1.51 

  • Net cash stood at Rmb1.3bn at end-FY17. With no major orders secured YTD, we believe Yangzijiang Shipbuilding's share price could be capped in the near term. 
  • We cut our EPS by 5.6-10.9% for FY18-19F to account for lower order assumptions of US$1.8bn for FY18F and US$1.4bn for FY19F (previously US$2bn and US$1.6bn). 
  • Our FY18F shipbuilding gross margin is now 15% (previously 19%), in view of higher steel costs and stronger Rmb. 
  • Re-rating catalysts could come from stronger-than-expected orders.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-03-01
CIMB Research SGX Stock Analyst Report HOLD Downgrade ADD 1.51 Down 1.800