Yangzijiang Shipbuilding - CGS-CIMB Research 2019-03-01: Lifted By Recurring Gains

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Lifted By Recurring Gains

Although the 4Q18 beat was due to other gains, consensus earnings upgrade could sustain Yangzijiang Shipbuildings’s share price outperformance in the near term.
Management keeps its US$2bn order target for 2019 (2018 actual order was US$1.5bn), hoping to clinch more LNG carriers and tankers orders.
Maintain ADD with a higher SOP-based target price of S$1.61. Our FY19-20F EPS is up by 19% to account for higher margins and other income.

YANGZIJIANG SHIPBUILDINGS HOLDINGS LTD (SGX:BS6) 4Q18 net profit of Rmb1.245bn beat consensus (S$580m) and our forecast (Rmb700m) due to other gains and income. FY18 net profit of Rmb3.623bn was 19% above our FY18F.
4Q18 shipbuilding margin was 9% (9M18:20%) due to construction of larger size containerships and c.Rmb100m net provision for contract losses with revised assumptions of S$/Rmb at 6.50 and 10% growth p.a. in steel price and labour costs for two years.
Recall that in 4Q17, Yangzijiang Shipbuildings provided Rmb1.2bn of construction losses based on US$/Rmb of 6.16 and steel costs of Rmb4,700-4,800/tonne. At end-4Q18, the provision for construction losses stood at Rmb1.1bn YZJ reversed c.Rmb299m of provisions over FY18 yielding shipbuilding margin of 17.6% and we expect a similar trend in FY19.

Other income grew more than 300% q-o-q to Rmb494m helped by Rmb169m income from forfeiture of advances received, Rmb207m income from forfeiture of security guarantees (mainly for vessels contracts terminated in 2012-14) as well as Rmb90m of dividend income from financial assets. Other gains grew 21% q-o-q helped by forex gain of Rmb344m.
Yangzijiang Shipbuildings's admin expenses were 54% lower q-o-q with reversal of asset held-to-maturity (HTM) loss at c.Rmb190m in HTM and non-related parties’ microfinance. There was a further write-down of jack-up rig by US$38m (Rmb211m) to market value of US$72m.
There is c.Rmb300m of forfeiture advance that could be reversed in FY19. The adoption of SFRS 9 could also result in lower provisions in HTM impairment losses.

Excluding the above, Yangzijiang Shipbuildings' 4Q18 net profit would have been at c.Rmb468m but we are less inclined to treat these as one-offs given their quarterly recurrence.
Yangzijiang Shipbuildings DPS of 5Scts (FY18: 4.5Scts) was a positive surprise.
The group delivered 11 vessels in 4Q18 (3Q18: 6) and targets to deliver c.60 vessels (FY18: 46), of which 20+ units were those that were provided at zero margins. HTM income grew 26% q-o-q to Rmb459m, which helped to cushion the group’s gross margin at 18.2% (9M18: 18.5%).
Yangzijiang Shipbuildings secured 36 vessels with a total contract of US$1.5bn (vs. our target of US$1.8bn). Management keeps its US$2bn order target for 2019, expecting a better 2H19. No orders have been secured YTD.

Key catalyst could come from LNG vessels from Japanese clients or stronger-than-expected margins.
Yangzijiang Shipbuildings is a safer pick vs. Singapore yards.
Trade war is a key risk.

LIM Siew Khee CGS-CIMB Research | https://research.itradecimb.com/ 2019-03-01

SGX Stock Analyst Report ADD MAINTAIN ADD 1.61 UP 1.370