Yangzijiang Shipbuilding (YZJ) saw a 27% YoY rise in revenue to RMB3.8b and a 73% increase in net profit to RMB720m in 2Q17, such that 1H17 net profit of RMB1.4b accounted for 55% of our full year forecast, in line with our expectations. This was, however, higher than the street’s expectations (1H17 was 67% of Bloomberg FY17F consensus of RMB2.1b). Gross profit margin from the shipbuilding related segment was 13.7% in 2Q17 vs. 15.9% in 2Q16. Meanwhile, a shipbuilding order for one 82000 DWT bulk carrier was terminated in 2Q17.
In 1H17, the group secured new orders of US$450m, with an additional US$381m in Jul, bringing YTD orders to US$832m. At this rate, management’s earlier guidance of US$1.5b new orders in 2017 looks attainable. In comparison, new orders for 2016 and 2015 were US$820m and US$2.25b, respectively.
YZJ’s share price has done very well so far this year, likely a recognition of the group’s good track record amidst a volatile environment and improvement in sentiment in the shipping sector, though management still sounds cautious with regards to the oversupply situation in the overall market. Margins are still pressured and vessel values remain low, but YZJ is likely to remain a survivor and even thrive amidst a consolidated market. Meanwhile, with more yards reporting declining earnings, the number of peers with meaningful P/E ratios has correspondingly decreased. As such, we change our valuation methodology to P/B for the shipyard segment, and by ascribing a P/B of 1.3x compared to the industry average of 1.2x (to account for YZJ’s strong management capabilities and healthier financial position), our FV rises to S$1.58. Though there is still room for further P/B expansion with improving sentiment, a fair amount of new orders expectation is likely baked into the current share price. As such, buyers at current levels face a certain level of downside risk should new order flow momentum slow in the near term. Maintain HOLD; we prefer to be buyers around S$1.48. –OCBC
Yangzijiang Shipbuilding closed at: S$1.60