• Resilient shipbuilding margins
• Four orders terminated
• US$318m new orders in 1Q

Good 1Q17 Results

Yangzijiang Shipbuilding (YZJ) reported a 73% YoY rise in revenue to RMB4.7b and a 49% increase in net profit to RMB667.7m in 1Q17, such that both figures accounted for 37% of our full year estimates, and are above ours and the street’s expectations. There was higher revenue from the shipbuilding business, mainly due to recognition of RMB551m on the resale of four 82,000DWT bulk carriers in 1Q17 which were terminated previously in FY16.

The trading business also reported higher revenue of RMB1.5b in 1Q17 vs. RMB430m in 1Q16. Gross profit margin from the shipbuilding-related segment was 15.3% in 1Q17 vs. 18.0% in 1Q16 and 21.2% in 4Q16, due to relatively higher contribution from the lower-margin trading segment. On a group basis, overall gross profit margin was 19.0% in 1Q17 vs. 24.0% in 1Q16.

HTM Assets Remained Quite Stable

The level of held-to-maturity assets remained stable at RMB10.6b in 1Q17, compared to RMB10.9b in 4Q16. This is about 10% lower than the level seen in 1Q15. As for the micro-finance business, YZJ has been decreasing the overall loan balance over the years. Four orders cancelled in 1Q17 Four shipbuilding orders were terminated in 1Q17 (three 36,500DWT bulkers and one 10,000 TEU containership). One of the four vessels has not started construction, and YZJ is seeking for buyers for the other three vessels. An average of about 20% down payment have been collected.

Positives Likely Priced in

Encouragingly, the group is receiving more shipbuilding enquiries, though asking prices remain low (GPM lower than mid-teens). So far in 1Q17, the group secured new orders of US$318m, and management has a target of US$1.5b for this year. In comparison, new orders for 2016 and 2015 were US$820m and US$2.25b, respectively. As of end Mar 2017, YZJ had an outstanding order book of US$4.03b, comprising 84 vessels. With the better-thanexpected results, we increase our earnings estimates and tweak our SOTP valuation such that our fair value estimate rises from S$0.96 to S$1.18. Maintain HOLD.

Source: OCBC Research - 2 May 2017