• The higher number of vessel deliveries in 2Q18 could pave the way for Yangzijiang Shipbuilding (YZJ) to deliver stronger q-o-q earnings in 2Q18F.
• According to Clarksons, YZJ won three more contracts in Jun and Jul worth about US$85m, bringing its YTD wins to US$930m vs. our expected US$1.8bn for FY18F.
• Yangzijiang Shipbuilding is one of our preferred picks in the O&M sector given its trough valuations, net cash and steady earnings in FY18F. 
• Catalysts could come from stronger orders.

Vessel Deliveries Doubled Q-o-q in 2Q18; Expect Better Margins

We expect Yangzijiang Shipbuilding (YZJ) to deliver a 2Q18F net profit of Rmb720m (+20% q-o-q, flat y-o-y). This is based on the delivery of more than 20 vessels in 2Q18 vs. nine in 1Q18. 

Included in the deliveries were some vessels secured pre-2017 at better margins (of more than 20%). As such we expect 2Q18F gross margins for shipbuilding to come in stronger at 20% (1Q18: 17%). There could also be some positive translation impact from the q-o-q Rmb depreciation vs. US$.

Earnings upside should come at end-18 if YZJ decides to write-back the provisions made on expected contract loss for some of the vessels in its orderbook at higher steel prices and Rmb. With the provision write-back, Yangzijiang Shipbuilding could potentially keep its FY18F shipbuilding gross margins at 18% (FY17: 17%) to deliver flat or a slight earnings growth vs. our current expectations of -12% y-o-y and consensus expectations of -20% y-o-y.

More Contracts Secured in Jun and Jul

In our last update on 5 Jun 2018 (Yangzijiang Shipbuilding - Orders Could Surpass Expectations), we reported that Yangzijiang Shipbuilding (YZJ) had secured orders of US$846m for 18 vessels.

Since then, according to Clarksons, the company has secured orders for another three vessels, comprising two units of 2,400 TEU containerships (totaling US$58m) for SITC International and a 83,500 dwt bulk carrier for Torvald Klaveness Group at US$27m. This should bring its YTD order momentum to US$930m, forming 51% of our full-year forecast. Upside could come from orders secured but not picked up by Clarksons.

Maintain ADD and Target Price of S$1.27

We like Yangzijiang Shipbuilding (YZJ) for its net cash position, relatively stronger order momentum vs. the Singapore yards, as well as its ability to preserve margins from the lower cost of steel and Rmb depreciation.

We make no changes to our EPS and Target Price, still based on SOP valuations for shipbuilding (0.8x P/BV or -0.5 s.d. to 5-year mean) and HTM (1x P/BV vs. ROE of 10%). 

We see an opportunity to accumulate as it is trading at trough valuations of 0.6x CY18F P/BV.

Source: CGS-CIMB Research - 10 Jul 2018