• RMB1.2b allowances for contracts
• Market still consolidating
• 4.5 S cents dividend

Core Shipbuilding Business Remains Challenging

Yangzijiang Shipbuilding (YZJ) reported a 15% YoY rise in revenue to RMB6.4b and a 12% increase in net profit to RMB678m in 4Q17, bringing full year net profit to RMB2.9b, accounting for 93% and 123% of ours and the street’s full year estimates, respectively.

Full year net profit was impacted by impairments of RMB236m, largely due to held-to-maturity assets, as well as foreign exchange losses of RMB745m and RMB1.2b of allowances for expected losses on construction contracts. At the same time, there were one-off gains of about RMB1.4b comprising income from forfeiture of advances received and other fair value gains.

Out of the 123 vessels in the group’s order book, we estimate that about 40 are profitable while the rest are challenged in terms of profitability. Out of the remaining 83 vessels, no provisions were made for 20 vessels, while 63 units incurred provisions in 4Q. This relates to the RMB1.2b of allowances for expected losses on construction contracts.

We understand that these vessels were mostly secured in 2016-2017 when the RMB was weaker and steel costs were lower. We note that management’s assumptions used to derive the amount of provisions are RMB/USD 6.15 and RMB4,700/ton.

To Monitor RMB Strength and Steel Costs

In 2017, the group secured new orders for 74 vessels worth US$2.1b, vs. 19 vessels worth US$0.8b in 2016. A dividend of 4.5 S cents has been declared, compared to 4.0 S cents a year ago. Looking ahead, the group plans to

1. further develop its LNG carrier capabilities,
2. capitalise on a consolidating market, and
3. invest in infrastructure and environment protection.

Meanwhile, the overall profitability of the group will be impacted by trends in the USD/RMB (a stronger RMB will result in forex losses as income is denominated in USD, and costs in RMB) as well as steel costs. Given the still tough operating environment for the shipbuilding business, we lower our P/B for this segment to 0.9x and our SOTP-based fair value estimate drops to S$1.49.

Source: OCBC Research - 2 Mar 2018