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Yangzijiang’s 3Q boosted by one-offs and margins are slipping but BDI’s looking better

Yangzijiang Shipbuilding’s 3Q17 earnings were lifted by RMB309 million ($63.3 million) gains.

This consisted of a fair value gain of RMB82 million on nancial assets, RMB148 million subsidy income, RMB61 million on the disposal of two shipping vessels, and RMB 95 million from the disposal of its entire 50% equity interest in Jiangsu Huayuan Metal Processing Co, offset by an exchange related loss of RMB102 million.

Excluding the gains, 3Q17 earnings would have been in line with Bloomberg consensus forecast.

Yangzijiang also registered a 13% y-o-y rise in revenue to RMB4.4 billion in 3Q17 but saw a 23% decrease in gross prot to RMB674 million.

In a Friday note, CIMB analyst Lim Siew Khee thinks Yangzijiang, being among the last few strong yards in China, could ride the upcycle of improving sentiment in global trade and commodities. The research house is raising its target price to $1.80 with an “add” call.

After clinching 14 vessel orders in Jul 2017 for US$381 million ($519 million), Yangzijiang has since secured another 24 vessel orders worth US$754 million consisting of mainly bulk carriers.

As at end 3Q17, its orderbook stood at US$4.3 billion for 103 vessels.

Management has raised its 2017 orderbook guidance to US$2 billion and expects a similar strong trend in 1H18.

Payment terms for newbuilds are still attractive at 30/70.

According to Lim, Baltic Dry Index strength and emission control requirements set by International Maritime Organisation (IMO) are two drivers for stronger orders. And shipowners are booking delivery slots to avoid higher costs of construction.

However, OCBC analyst Low Pei Han says stripping out the one-off items, Yangzijiang’s results were within expectations. However, gross prot margin for the group fell to 15.4% in 3Q17, a new low in recent times.

This compares with 22.4% in 3Q16 and 21.2% in 2Q17. Gross prot margin for the shipyard segment was 10.9% in 3Q17 compared to 18.1% in 3Q16 and 13.7% in 2Q17. The decline in gross margin is not surprising given the rise in labour costs, raw material costs and competitive pricing throughout an industry that generally still faces overcapacity.

In 4Q17, however, gross margin may be supported by the delivery of vessels with higher contract values and margins.

Still, compared to other shipbuilders, Yangzijiang has fared well given strong management capabilities and execution.

Looking ahead, Low says market conditions for the shipbuilding industry have continued to improve with the BDI recovering to a three-year high, though it will still take time for the overcapacity in the shipping industry to be resolved.

“We roll forward our valuations to FY18 numbers and after tweaking our estimates, our FV rises from $1.48 to $1.63. Maintain ‘hold’,” says Low.

Shares of Yangzijiang are down 4 cents to $1.62 or 10.8 times CIMB’s FY18 forecast core earnings.
Source: The Edge

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