Yangzijiang Shipbuilding - CIMB Research 2018-04-27: Investment Builder

Yangzijiang Shipbuilding - CIMB Research 2018-04-27: Investment Builder YANGZIJIANG SHIPBLDG HLDGS LTD BS6.SI

Yangzijiang Shipbuilding - Investment Builder

  • “Good that I did not spin-off investment” said Yangzijiang Shipbuilding (YZJ) Chairman, Ren Yuan Lin in 1Q18 results earnings briefing. 1Q18 was broadly in line with the help of SFRS.
  • To counter margin pressure from raw materials and Rmb appreciation, YZJ’s profitability will be driven by interest income from its Rmb12bn investments.
  • Most of the low-risk investment (c.8% return) is up for renewal in 1H18 and YZJ is confident to up returns to 12-14%.
  • Shipbuilding gross margin decent at 17% (vs. our 11%) with recognition of better margin vessels pre-17. We expect margin pressure in 2H18 with US$268m of orders YTD.
  • Still HOLD. Target Price is based on SOP (1x CY18 P/BV on HTM, 0.8x CY19 P/BV ex HTM).

1Q18 net profit broadly in line

  • Yangzijiang Shipbuilding (YZJ) 1Q18 net profit of Rmb595m is broadly in line as it included a total of c.Rmb96m reversal from the adoption of the new SFRS. 
  • The reversals included Rmb43.5m for impairment loss of financial assets and Rmb52.5m on allowance for expected losses on construction contracts. Without these, the profit would have been Rmb499m, forming 19% and 21% of our and consensus FY18F forecasts.

Shipbuiding gross margin benchmark: 8%

  • Yangzijiang Shipbuilding (YZJ) delivered nine vessels in 1Q18, with shipbuilding revenue of Rmb2.9bn (-32% q-o-q, +2% y-o-y). Shipbuilding gross margin was still decent at 17% (vs. our 11%) with the recognition of better margin and large-scale vessels secured pre-17. These vessels will be gradually delivered by 1H18. 
  • Management are still cautious of weak pricing trend and margin pressure from appreciation in Rmb and raw materials with some of the inquiries coming in at 8% gross margins, which management is less inclined to pursue.

Would you invest for 12% returns?

  • 1Q18 investment held to maturity (HTM) stood at c.Rmb12bn with investment income of Rmb301m (+45% y-o-y). New portfolio has been yielding 12-14% returns. 
  • Most of the low-risk investment (lending to government at 8%) is due for renewal in 1H18 of which management is confident of hiking the rates to c.12%. This would bridge the gap in shipbuilding margin pressure in 2H18, sustaining profitability and dividend payout.

Keeping the core shipbuilding capabilities

  • Yangzijiang Shipbuilding (YZJ) secured US$268m (9 vessels) of orders YTD. This comprised one unit of 180k DWT bulk carrier, seven units of 82k DWT bulk carriers and one unit of 83.5k DWT combination carrier. Four vessels were terminated in 1Q18. 
  • Outstanding order book was at US$4.5bn for 121 vessels.

Maintain HOLD, lower Target Price to S$1.27

  • With lower order momentum for shipbuilding and margin pressure unabated, we peg 0.8x P/BV (-0.5 s.d. to 5-year mean) to shipbuilding book (previously 1.1x or 5-year mean) but keep 1x P/BV for investment in HTM unchanged. 
  • Catalyst may come from stronger-than-expected orders. 
  • We think appetite in YZJ may diminish in near term as profits may be driven by investment income instead (may be more than 40% Gross Profit). We still HOLD as it is more valued (stronger profits, balance sheet and dividend yield) than Singapore yards.

LIM Siew Khee CIMB Research | http://research.itradecimb.com/ 2018-04-27
SGX Stock Analyst Report HOLD Maintain HOLD 1.27 Down 1.510