• Eight order cancellations
• Stock up 13% from mid Jan
• Downgrade to HOLD

Soft 1Q16 results

Yangzijiang Shipbuilding (YZJ) reported an 11% YoY fall in revenue to RMB2.7b and a 36% drop in net profit to RMB448m in 1Q16, accounting for 18% of both our full year top and bottomline estimates; hence below expectations.

Shipbuilding revenue was 13% lower as vessels delivered in the quarter were relatively smaller in terms of vessel size; interest income from the group’s held to maturity (HTM) assets was also lower at RMB200m vs. RMB266m in 1Q15, due to the reduced investment portfolio size.

Core shipbuilding still delivering; gross loss in other segment

Gross profit margin for shipbuilding, however, remained healthy at 23%, higher than 21% in 1Q15, and this is mainly due to the reversal of RMB40m warranty provision upon expiry of warranty for vessels delivered previously. Other shipbuilding related businesses (sale of scrap metal and the shipping segment) registered a gross loss of RMB14m. Meanwhile, YZJ’s HTM assets rose slightly from RMB9.98b in 4Q15 to RMB10.6b in 1Q16.

Order cancellations in 1Q16

Eight vessel orders were cancelled in 1Q16, and this comprises six 82,000DWT and two 64,000DWT bulk carriers. One of these vessels has yet to start construction, and YZJ has found prospective buyers for four other vessels. 10- 30% down payment of the contract value had been collected for the contracts, and we understand that the customers for the cancelled orders are mainly US funds. In the event that no buyers can be found for the remaining three vessels, the group is likely to park them under its shipping business.

Downgrade to HOLD

The group has been faring relatively well despite the poor industry dynamics, but it is also hard to beat the tide. On its part, YZJ, which is known for its effective cost control, has cut senior management salary by 20%, and laid off about 5% of its labour force.

There is also a target to cut procurement costs by about 5% this year. Meanwhile, we tweak our sum-of-parts valuation such that our fair value estimate is lowered slightly from S$1.06 to S$1.04. As the stock is already up 13% from its low of S$0.88 in mid Jan, we downgrade our rating to HOLD.

Source: OCBC Research - 3 May 2016