• Continues to execute well
• Cancelled orders resold in 4Q16
• 4 cents final dividend

Commendable results…

Yangzijiang Shipbuilding (YZJ) reported a 76% YoY rise in revenue to RMB5.5b and net profit of RMB607.8m in 4Q16 vs. net profit of RMB41.5m in 4Q15. For the full year, YZJ recorded net profit of RMB1.75b vs. our forecast of RMB1.84b, within expectations. Gross profit margin of 24.1% in FY16 was healthy, compared to 23.2% in FY15. We understand that four vessels that were cancelled in 2016 were resold in 4Q16, boosting revenue by RMB 500-600m.

Trading revenue of RMB1b was also recognized in 4Q16 vs. none in 4Q15. The depreciation of the RMB against the USD also helped to support margins in 4Q16.

On the costs side, the group benefited from low raw material costs such as steel that were bought earlier. As raw material prices have been rising (e.g. price has about doubled for steel for YZJ since 1H16), this may affect shipbuilding margins going forward.

… amidst challenging environment

Currently, the group has five yards (New Yangzi, Xinfu, Old Yangzi, Changbo and Huayuan). The latter two are experiencing low utilization rates; Huayuan is a ship demolition yard and management also does not have a positive long term view on this segment due to China’s increasing emphasis on environmental protection.

Meanwhile the overall operating environment remains weak; although the market for dry bulk is incrementally better, more ship owners in general are seeking to delay or cancel their containership orders. As for the IMO ballast water convention which is entering into force this year, YZJ sees it increasing vessel prices by 5% on average.

4 cents final dividend; 43% payout ratio

YZJ has proposed a final dividend of S$0.04/share compared to S$0.045/share in FY15, translating to a yield of 4.1%, based on yesterday’s closing price of S$0.98. This also means a payout ratio of 43%, which management commented is very high and unlikely to be exceeded in the future. We tweak our estimates and increase our P/E for the shipyard from 7x to 8x despite the weak macro outlook, as the group has consistently demonstrated superior execution ability and healthy margins. Maintain HOLD with higher FV of S$0.96.

Source: OCBC Research - 2 Mar 2017