Yangzijiang Shipbuilding - OCBC Investment 2019-08-06: Stability Is Key

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YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Stability Is Key

• 2Q supported by provision reversals.
• Increasing financial investments.
• Hoping for more orders.

Supported by provision reversals

• Yangzijiang Shipbuilding (SGX:BS6) reported a 12% y-o-y fall in revenue and a 6% drop in net profit to RMB936.4m, such that 1H19 net profit accounted for 57% and 56% of ours and the street’s full year forecast; results were slightly better than expected but we note that its performance was supported by the reversal of RMB254m of loss provisions for onerous contracts that were previously recognised.

Increasing its financial investments

• Yangzijiang Shipbuilding continued to increase its financial investments (termed “debt investment at amortised costs”).
  Total amount rose from RMB16.35b as at end 1Q19 to RMB18.79b in 2Q19, representing 42% of the group’s total assets. Impairment provision for debt investmen at amortised costs stood at RMB1.65b as at end 2Q19.

New orders expected to pick up

• Global new shipbuilding orders declined substantially in 1H19 by 50% in DWT terms vs. 1H18, due to weaker economic and trade growth, and uncertainties related with the forthcoming IMO rules on emissions.
• During this period, Yangzijiang Shipbuilding secured new orders worth US$209m, but this may pick up by the end of the year. Recall that the group clinched new orders worth US$1.46b in 2018.

Monitoring sustainability of BDI recovery

• In the last few months, the Baltic Dry Index recovered to healthier levels, aided by better fundamentals though we think it also reflects an upturn in demand driven by higher Brazil iron ore exports at a time when many vessels were out of service for maintenance.
• Recall that iron ore supply was severely disrupted earlier this year owing to adverse weather in Australia and closure of mines in Brazil, which contributed to the slump in BDI in 1Q19.
• Based on the 5 Aug 2019 closing price of S$1.36, Yangzijiang Shipbuilding is trading at 8.6x cons. forward P/E, 0.84x forward P/B, along with a 3.6% forecasted dividend yield.
• We fine-tune our estimates and our sum-of-the-parts based fair value estimate eases from S$1.45 to S$1.39.

OCBC Research Team OCBC Investment Research | https://www.iocbc.com/ 2019-08-06

SGX Stock Analyst Report HOLD MAINTAIN HOLD 1.39 DOWN 1.450