Yangzijiang Shipbuilding - CGS-CIMB Research 2018-08-08: Exceedingly Impressive

Yangzijiang Shipbuilding - CGS-CIMB Research 2018-08-08: Exceedingly Impressive YANGZIJIANG SHIPBLDG HLDGS LTD SGX:BS6

Yangzijiang Shipbuilding - Exceedingly Impressive

  • We were surprised by Yangzijiang Shipbuilding’s record delivery of 20 vessels in 2Q18. Group revenue of Rmb7.9bn was 60% higher than our expectations.
  • Yangzijiang Shipbuilding’s 2Q18 net profit of Rmb994m exceeded our Rmb720m forecast. 1H18 net profit of Rmb1.6bn formed 62% of our FY18F and 68% of consensus.
  • Shipbuilding margin of 21% was broadly in line with our expectation of 20%. There were 10 large vessels that were part of the delivery.
  • Earnings were also boosted by some one-offs - Rmb101m forex gain, impairment losses of trade/other trade receivables (Rmb229m) and HTM (Rmb133m).
  • Maintain ADD. Yangzijiang Shipbuilding proved that it is set apart from Singapore peers and did not need HTM income to outperform. Our SOP Target Price is up slightly to S$1.29 (from S$1.27).

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20 vessels delivered, including 10 very large ones

  • Shipbuilding-related revenue grew 63% q-o-q and 120% y-o-y to Rmb7.6bn, thanks to the delivery of 20 vessels and accelerated progressive construction of larger containerships. The delivery included 10 large vessels (2 units of 400k dwt bulk carriers, 5 units of 10,000TEU containerships and 3 units of 11,800 TEU containerships). 
  • Shipbuilding-related revenue was also boosted by Rmb2.2bn trading revenue (+35% q-o-q, +98% y-o-y).

Shipbuilding margin at 21%, surpassing our 20% forecast

  • The delivery of large vessels secured at better pricing and margin and stronger topline helped to boost shipbuilding Gross Margin to 21% (1Q18: 17%) and above our expected 20%. There was a slight reversal of Rmb14m of expected losses on construction contracts previously provided in FY17 (read: more room for write-backs ahead). 
  • With this set of results, we up our Gross Margin expectations for FY18 to 19% and 17% for FY19F (from 15%).

Higher yield from HTM

  • Yangzijiang Shipbuilding’s interest income from financial assets held to maturity (HTM) of Rmb386m (+28% q-o-q, +13% y-o-y) is in line with a higher interest rate environment albeit HTM assets stood steady q-o-q at Rmb12bn. There was an increase in investment in government-related agencies (16% of collaterals vs. 14% in 1Q18) and shares (2Q18: 36% vs.1Q18: 34%). 
  • Annualised yield on portfolio is estimated at 10.8% in 1H18 vs. 9.4% in FY17. This is in line with management’s guidance of renewing some low-risk government-link notes at c.12% vs. 8% in previous years. 
  • Yangzijiang Shipbuilding took in Rmb133m of HTM impairment losses in 2Q18 (1Q18: reversal of Rmb44m).

Secured US$980m of contracts YTD, US$4.1bn order book

  • Yangzijiang Shipbuilding secured 22 vessels YTD, which included some large vessels - 10 units of 82,000DWT, 2 units of 180,000DWT, 2 units of 208,000DWT bulk carriers, 2 units of 2,400TEU, 5 units of 12,690TEU containerships, and 1 unit of 83,500DWT combination carrier. 
  • YTD order book stood at US$4.1bn (114 vessels), to keep the yard facilities at a healthy utilisation rate up to 2020. We keep our expected orders at US$1.8bn for FY18F.

Net cash, cheap valuations, Rmb1.14bn provision balance unused

  • Net cash stood at c.Rmb4bn, which should sustain the dividend yield of 4.7%. 
  • Yangzijiang Shipbuilding is one of our O&M preferred picks as it is trading at trough valuations (0.6x CY18 P/BV), with potential for positive earnings surprise. It has Rmb1.14bn of unutilised provision for expected losses which could be reversed in the coming quarters, given the weakness in Rmb. 
  • Our EPS is up by 1-18% for FY18-20F to reflect the strong 2Q18, higher HTM income and margins ahead. Our Target Price is up slightly, still based on SOP of shipbuilding (0.8x CY18F P/BV, -0.5 s.d. to 5-year mean) and HTM (1x CY18 P/BV). 
  • Catalysts could come from stronger orders, margins and earnings. 
  • Plunge in shipbuilding activities from trade war is a risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-08-08
SGX Stock Analyst Report ADD Maintain ADD 1.29 Up 1.270