• 9M earnings 90% of cons. full year
• US$1.2b new orders YTD
• Higher FV estimate of S$1.41

Strong Set of Results - 9M18 Earnings Was 90% of Cons. Full Year

Yangzijiang Shipbuilding (YZJ) delivered a 23% YoY rise in revenue to RMB5.4b and a 10% fall in net profit to RMB866.0m in 3Q18, bringing 9M18 net profit to RMB2.4b. This is a much better than expected set of results, with 9M18 earnings accounting for 94% and 90% of ours and the street’s full year estimates, respectively.

Gross profit margin for shipbuilding was 20% in 3Q18, compared to 15% in 3Q17, mainly due to a stronger USD against the RMB, as well as reversal of RMB152m of provision that YZJ made previously (in anticipation of potential losses when the RMB was stronger).

Though the group made an impairment of RMB333m on financial products, the investment segment delivered strong earnings of RMB373m in 3Q18, which was a 67% YoY rise compared to 3Q17. This was mostly net interest income generated due to increased investment volume in 3Q18.

US$4.1b Order Book to Keep Yards Busy

YTD, the group has secured new orders for 28 vessels worth US$1.2b, bringing its outstanding order book to US$4.1b for 114 vessels, which ranks the group 1st in China and 4th in the world in terms of order book size. These orders will keep the group’s yard facilities busy up to 2020 with a healthy utilization rate.

YZJ also recently announced the establishment of a shipbuilding JV with Mitsui E&S Shipbuilding Co and Mitsui & Co to expand its customer base with diversified vessel types, mainly in LNG-related vessels. This bodes well in terms of capability upgrades and potential new orders in the future.

Financial Assets Valued at 0.65x Book for Margin of Safety

In China, the domestic credit environment is still tight, and small and medium-sized enterprises defaults continue to rise. Though this may mean increased risk of impairments, we have always valued the group’s financial assets at a discount to Chinese banks’ valuations in our sum-of-parts valuation.

Meanwhile, with the better-thanexpected results, we have increased our earnings estimates and our FV estimate rises from S$1.32 to S$1.41. As such, we upgrade our rating to BUY.

Source: OCBC Research - 8 Nov 2018