Yangzijiang Shipbuilding - CGS-CIMB Research 2018-11-08: Decent Quarter With The Help Of Provision Reversal


Yangzijiang Shipbuilding - Decent Quarter With The Help Of Provision Reversal

  • Yangzijiang Shipbuilding's 3Q18 net profit of Rmb779m included Rmb152m reversal of provision made in FY17. With this, results were in line. 9M18 net profit was 78% of FY18F.
  • Positive: shipbuilding margin of 20% was lifted by reversal. 
  • Negative: HTM impairment losses +142% q-o-q to Rmb322m.
  • Order wins were lower q-o-q at c.US$220m, bringing total YTD to US$1.2bn. YZJ guides for stable operational and financial performance in FY18.

Results in line with reversal of provision

  • Reported profit formed c.85% of consensus FY18F. Excluding reversal of provision, Yangzijiang Shipbuilding (YZJ)’s net profit of Rmb627m would have been 10% below our forecast of Rmb700m. The reversal was a result of progressive construction of vessels to be making zero margin based on the assumptions of US$/Rmb of 6.16 and steel costs of Rmb4,700- 4,800/tonne.
  • Recall that YZJ made a total of Rmb1.2bn of provisions in FY17. We believe the current quarter’s reversal is more forex-related.

Shipbuilding margin at 20% with reversal and 15% without

  • With the above reversal, shipbuilding gross margin came in handsomely at 20% (3Q18: 21%). Cost of sales was higher by Rmb38m which included operating costs for Huayuan Group that was acquired in 2Q18.
  • YZJ delivered six vessels in 3Q18, as expected, lower than 2Q18’s record of 20 vessels. Most of the high-value vessels were delivered in 1H18.

US$1.2bn order wins YTD, c.US$220m since Aug 18

  • YTD, Yangzijiang Shipbuilding has secured new contracts worth US$1.2bn, or a total of 28 vessels. Since Aug, it has secured c.US$220m worth of orders, which include 2 units of 82,000DWT bulk carriers, 1 unit of 83,500DWT combination carrier and 3 units of 2,700TEU containerships. We are keeping our FY18 target of US$1.8bn.
  • Order book stands at US$4.1bn for 114 vessels to be delivered over the next 2.5 years.

Higher HTM balance and higher impairment losses

  • Income from financial assets held to maturity (HTM) was stable q-o-q at Rmb364m but HTM balance grew to Rmb13.29bn from Rmb11.9bn in 2Q18. Government-related collaterals formed 24% of total collaterals (2Q18: 16%), along with the increase in borrowers from the infrastructure sector (27% in 3Q18 vs. 22% in 2Q18). However, we are slightly alarmed that impairment losses widened q-o-q to Rmb333m from Rmb133m in 2Q18.
  • 9M18 impairment losses amounted to Rmb422m, higher than FY17’s Rmb230m.

Maintain ADD, Target Price up to S$1.37 from rolling forward to CY19F

  • Net cash stood at Rmb3.85bn in 3Q18.
  • No change to our EPS but our Target Price is increased to S$1.37 as we roll forward our SOP valuation to CY19F (0.8x P/BV shipbuilding, 1x HTM P/BV).
  • Catalysts include stronger orders, successful sale of vessels to Japanese customers via the Mitsui JV and more provision write-backs.
  • Plunge in shipbuilding activities from trade tension is a risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2018-11-08
SGX Stock Analyst Report ADD MAINTAIN ADD 1.37 UP 1.290