Yangzijiang Shipbuilding - UOB Kay Hian 2019-03-01: 4Q18 Results In Line, 1H19 Order Outlook Will Be Challenging

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YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - 4Q18: Results In Line, 1H19 Order Outlook Will Be Challenging

• Yangzijiang Shipbuilding delivered 4Q18 net profit of Rmb1,245m (+84% y-o-y). 2018 core net profit was Rmb3.2b, after excluding Rmb415m in net one-off gains, forming 98%/122% of UOBKH/consensus earnings.
• Core shipbuilding gross profit margin of 12.5% is expected to see pressure in 2019.
• Rmb1.1b provisions for potential loss-making vessels will be reversed gradually in 2019-20. Earnings revised up by 7-15%.
• Positives priced in, maintain HOLD with revised target price of S$1.39. Entry price: S$1.25.

4Q18 RESULTS

4Q18 net profit of Rmb1,245m, helped by one-offs.

• YANGZIJIANG SHIPBUILDING HOLDINGS LTD (SGX:BS6) reported headline net profit of Rmb1,245m (+84% y-o-y). Included within the results was a net one-off gain of Rmb623m, stemming largely from net forex gains (Rmb411m), income from forfeiture of advances/security guarantees (Rmb377m) and reversal of impairment losses from microfinance/other investments at amortised costs, offset by inventory write-down for their sole jack-up rig (Rmb211m) and allowance for expected losses on construction contracts (Rmb99m).
• Core net profit for 4Q18 is estimated at Rmb623m (-69% y-o-y), reflecting a core net margin of 12.6% (4Q17: 31%, 3Q18: 13%).

2018 core net profit of Rmb3.2b, within expectations.

• For the full-year, Yangzijiang Shipbuilding reported headline net profit of Rmb3.6b, helped by Rmb415m in net one-off gains arising from the same reasons listed above for 4Q18. Excluded, core net profit was Rmb3.2b, forming 98%/122% of UOBKH/consensus earnings, within expectations.

Shipbuilding gross profit margin fell to 9% on net provision of Rmb100m.

• Revenue was Rmb3.1b for 4Q18 (-27% y-o-y), reflecting delivery of 11 vessels (4Q17: 6 vessels). Vessel mix comprised mainly of lower-value dry bulks and multi-purpose vessels.
• Gross profit was Rmb295m, reflecting gross profit margin of 9.4% (4Q17: 13.3%, 3Q18: 20.2%). Excluding the net provision of Rmb100m for potential construction losses, core gross profit margin was ~12.5%.

Net provision for expected construction losses at Rmb1.1b.

• Yangzijiang Shipbuilding has provided Rmb1.1b (2017: Rmb1.2b) for expected losses on 43 vessels (2017: 80 vessels). Driving the assumptions are three factors:
  1. USDCNY depreciating to 6.5 from 6.7 at present,
  2. 10% p.a. increase in steel prices for 2019/2020 and,
  3. labour costs rising by 10% p.a. in 2019/20.
• Of the 43 vessels provided, some 20-30 vessels will be delivered within 2019, so provisions are expected to be reversed as they are delivered.

Another Rmb300m in income forfeiture awaiting recognition.

• The Rmb377m in income recognised from forfeiture of advances and securities arose from order terminations in 2012- 14. Another Rmb300m in income from vessel deposit forfeitures remains to be recognised.

Income from other investments at amortised costs rose to Rmb482m.

• Total value of investments at amortised costs (fka held-to-maturity (HTM) investments) reached an all-time peak of Rmb14.8b, driving gross interest income Rmb482m. Yangzijiang Shipbuilding said it was unlikely to further increase the size of their holdings in these instruments.

No orders secured ytd, a difficult year ahead.

• 2018 contract win came in at US$1.46b, falling short of the US$2b target. Total orderbook as of end-18 was US$3.9b. Yangzijiang Shipbuilding noted that the outlook for 1H19 was challenging at the least, and expects the order momentum to pick up in 2H19.
• Contract win target remains at US$2b, with a focus on securing tanker and gas carrier contracts. Dry bulk and containership orders were less likely going forward given the slew of deliveries over 2019-20 globally.

Higher dividend of 5 S cents declared.

• This compares against 4.5 S cents in 2017, and reflects a 28% payout ratio against headline earnings.

STOCK IMPACT

A challenging 1H19, positives priced in.

• Despite the challenging 1H19 orders outlook, Yangzijiang Shipbuilding’s shipyards are almost full, with the only spare capacity stemming from its Taichung yard. With order backlog of US$3.9b stretching into 2021, earnings are assured for 2019-20, though the key issue remains profitability.
• We expect core shipbuilding gross profit margin of 12.5% to come under pressure in coming quarters: of the 60 vessels that Yangzijiang Shipbuilding will be delivering in 2019, some 20-30 vessels will come from the 43 vessels provisioned for losses.
• Despite Yangzijiang Shipbuilding’s remark that they are unlikely to raise the balance of HTM assets, we expect higher contributions from this segment as Yangzijiang Shipbuilding seeks to maintain profitability.
• Overall, we expect lower core profitability from that seen in 2017-18, and Yangzijiang Shipbuilding’s earnings to trend with the shipping cycle.

EARNINGS REVISION/RISK

Adjust 2019-20 earnings by 7-15%.

• Given the stronger than expected earnings in 2018 despite the headwinds of falling gross profit margin, we have raised our earnings for 2019- 20 by 7-15%. The rise stems from a upward tweak in shipbuilding gross profit margin and revenue, as well as higher contributions from HTM investments.
• Earnings for 2021 is introduced at Rmb2.4b.

VALUATION/RECOMMENDATION

Maintain HOLD, target price lifted slightly to S$1.39.

• We maintain our HOLD rating on Yangzijiang Shipbuilding, with a slightly revised target price of S$1.39 pegged to an unchanged 0.9x 2019F P/B.
• Yangzijiang Shipbuilding's share price is currently trading at 0.92x 1-year forward P/B (LT mean: 0.9x) and 3.5% forward dividend yield. Valuations appear to have priced in the positives.
• Entry price: S$1.25.

Foo Zhiwei UOB Kay Hian Research | https://research.uobkayhian.com/ 2019-03-01

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.39 UP 1.36