Yangzijiang Shipbuilding - OCBC Investment 2018-03-16: Commendable Performance In Tough Industry

Yangzijiang Shipbuilding - OCBC Investment 2018-03-16: Commendable Performance In Tough Industry YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Commendable Performance In Tough Industry

  • SOE yards looking at naval and cruise ships.
  • YZJ aiming for LNG segment.
  • Supported by investment arm.

State-owned yards going for naval ships, cruise ships 

  • The shipbuilding industry has been undergoing tough times due to overcapacity, but the cruise ship segment remains a bright spot. For instance, Italy’s Fincantieri (parent company of VARD Holdings) and Germany’s Meyer Werft GmbH are fully booked for the next four years, hence it is not surprising that more Chinese yards are looking at this segment for work.
  • Wuchang Shipbuilding, a unit of state-owned China Shipbuilding Industry Corporation (CSIC), for example, is entering this new line of business – it recently won an order for two 70,000 ft luxury vessels from Fujian Guohang Ocean Shipping. Another segment that state-owned yards have been getting work is defence-related vessels, alleviating underemployment issues.

YZJ more focused on containerships, bulk carriers; to grow LNG segment 

  • Yangzijiang Shipbuilding has been focused on building containerships and dry bulkers, but it also successfully delivered two 27,500 CBM LNG carriers last year. Its order book of 123 vessels comprises 44 containerships, 76 bulk carriers and three oil tankers. 
  • As early as end 2016, YZJ had expressed interest in the cruise ship segment, but management also noted then the complexity of building such vessels. In 2016, Mitsubishi Heavy Industries withdrew from the cruise ship market after losing billions on the construction of AIDAprima; the group revealed that it was difficult finding an appropriate supply chain for Asia for some of the specific equipment required for cruise ships. 
  • Meanwhile, as YZJ is not a state-owned yard, the likelihood of it securing defence related work is small.

Investment arm: 32% of gross profit 

  • Cognisant that the group cannot just rely on shipbuilding-related businesses to sustain earnings (out of the 123 vessels in the group’s order book, we estimate that about 40 are profitable while the rest are challenged in terms of profitability), YZJ’s management started building an investment arm years ago which in FY17 accounted for 32% of gross profit.
  • Meanwhile, the overall profitability of the group will be impacted by trends in the USD/RMB and steel costs. We fine-tune our estimates and our SOTP-based fair value estimate slips from S$1.49 to S$1.34.
  • (Maintain HOLD)

Low Pei Han CFA OCBC Investment | http://www.iocbc.com/ 2018-03-16
OCBC Investment SGX Stock Analyst Report HOLD Maintain HOLD 1.34 Down 1.490