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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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).

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%).

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).

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 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