Yangzijiang: Exceeds Expectations

  • Record delivery of 20 vessels in 2Q18. Group revenue of RMB 7.9bn was 60% higher than expectations.
  • 2Q18 net profit of RMB 994m exceeded forecast.
  • Shipbuilding margin of 21% was broadly in line with expectation. Therewere 10 large vessels that were part of the delivery.
  • Earnings were also boosted by some one-offs – RMB 101m FX gain, impairmentlosses of trade/other trade receivables (RMB 229m) and HTM (RMB 133m).
  • YZJ proved that it is set apart from Singapore peers and did not rely on HTM income to outperform.

Update from my previous post on YZJ Shipbuilding, the group report strong 2Q18 results amidst tensions on global trade war. YZJ has always been my preferred pick due to cheap valuation, strong balance sheet and its reputation as one of the largest Chinese shipbuilders in the region.

20 vessels delivered, including 10 very large ones
Shipbuilding-related revenue grew 63% qoq and 120% yoy to RMB 7.6bn, attributed 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 RMB 2.2bn trading revenue (+35% qoq, +98% yoy).

Shipbuilding margin at 21%, surpassing 20% forecast
The delivery of large vessels secured at better pricing and margin and stronger topline
helped to boost shipbuilding gross margins to 21% (1Q18: 17%) and above expected 20%. There was a slight reversal of RMB 14m of expected losses on construction contracts previously provided in FY17.

Higher yield from HTM
Interest income from financial assets held to maturity (HTM) of RMB 386m (+28% qoq,
+13% yoy) is in line with a higher interest rate environment albeit HTM assets stood
steady qoq 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. YZJ took in RMB133m of HTM impairment losses in
2Q18 (1Q18: reversal of RMB 44m).

Secured US$980m of contracts YTD, US$4.1bn order book
YZJ 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.

Net cash, cheap valuations, RMB 1.14bn provision balance unused
Net cash stood at RMB 4bn, which should sustain the dividend yield of 4.7%. YZJ was one
of my preferred pick as it is trading at trough valuations (0.6x CY18 P/BV), with
potential for positive earnings surprise. It has RMB 1.14bn of underutilized provision for
expected losses which could be reversed in the coming quarters, given the weakness in
Rmb. Catalysts could come from stronger orders, margins and earnings. Plunge in shipbuilding activities from trade war is a risk.

 

Source: CGS-CIMB Research
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