• Decent set of results
• Shipbuilding margins to dip in 2H18
• Supported by investment arm

1Q18 Results in Line

Yangzijiang Shipbuilding (YZJ) reported a 6% YoY rise in revenue to RMB5.0b but saw an 11% drop in net profit to RMB595m in 1Q18, such that the latter accounted for 23% of our full year estimate, in line with expectations. Shipbuilding margin was 17% in 1Q18 vs. 23% in 1Q17; excluding a RMB53m reversal of earlier provisions on construction contracts, shipbuilding margin would have been ~15.5%.

Expect Drop in Shipbuilding Margins in 2H18

YTD, the group has secured new orders for nine vessels worth US$268m vs. US$2.1b for the whole of 2017. Four vessels were terminated in 1Q18, all of which construction has not started yet. As at 31 Mar 2018, the group had an outstanding order book of US$4.5b for 121 vessels, which will keep its yards busy till 2020. However, as mentioned in our earlier reports, a good number of the vessels are challenged in terms of profitability with higher raw material costs and stronger RMB against the USD. As such we expect a drop in shipbuilding margins in 2H18.

On Trade Tensions Between US and China

Recent trade tensions have resulted in uncertainties in international trade and the shipping industry as well. From management’s point of view, the impact of a potential trade war (if any) will be indirect (i.e. in the event of a significant decline in global economic growth and seaborne trade). According to management, YZJ’s existing order book has no exposure to the sectors on the tariff list, and the group does not see the existing tariff restrictions on its own impacting future order flows.

To Maintain Scale While Riding Out the Cycle

Looking ahead, YZJ seeks to secure work in the dry bulk and containership segments, push for more R&D in the LNG vessels space, and gradually build up its capabilities in this field. Though profits from shipbuilding may be pressured, the investment business (~32% of FY17 gross profit) should meanwhile provide support to earnings.

We tweak our estimates, and given the dim outlook for the shipbuilding industry, we lower our P/B for this segment from 0.8x to 0.7x, such that our fair value estimate slips from S$1.34 to S$1.22.

Source: OCBC Research - 30 Apr 2018