• Although the 4Q18 beat was due to other gains, consensus earnings upgrade could sustain Yangzijiang Shipbuildings’s share price outperformance in the near term.
• Management keeps its US$2bn order target for 2019 (2018 actual order was US$1.5bn), hoping to clinch more LNG carriers and tankers orders.
• Maintain ADD with a higher SOP-based target price of S$1.61. Our FY19-20F EPS is up by 19% to account for higher margins and other income.

More Conservative Provisions for Contract Losses for Shipbuilding

• YANGZIJIANG SHIPBUILDINGS HOLDINGS LTD (SGX:BS6) 4Q18 net profit of Rmb1.245bn beat consensus (S$580m) and our forecast (Rmb700m) due to other gains and income. FY18 net profit of Rmb3.623bn was 19% above our FY18F.
• 4Q18 shipbuilding margin was 9% (9M18:20%) due to construction of larger size containerships and Rmb100m net provision for contract losses with revised assumptions of S$/Rmb at 6.50 and 10% growth p.a. in steel price and labour costs for two years.
• Recall that in 4Q17, Yangzijiang Shipbuildings provided Rmb1.2bn of construction losses based on US$/Rmb of 6.16 and steel costs of Rmb4,700-4,800/tonne. At end-4Q18, the provision for construction losses stood at Rmb1.1bn YZJ reversed Rmb299m of provisions over FY18 yielding shipbuilding margin of 17.6% and we expect a similar trend in FY19.

Various Gains Worth Rmb780m With More to Come in FY19

• Other income grew more than 300% q-o-q to Rmb494m helped by Rmb169m income from forfeiture of advances received, Rmb207m income from forfeiture of security guarantees (mainly for vessels contracts terminated in 2012-14) as well as Rmb90m of dividend income from financial assets. Other gains grew 21% q-o-q helped by forex gain of Rmb344m.
• Yangzijiang Shipbuildings's admin expenses were 54% lower q-o-q with reversal of asset held-to-maturity (HTM) loss at Rmb190m in HTM and non-related parties’ microfinance. There was a further write-down of jack-up rig by US$38m (Rmb211m) to market value of US$72m.
• There is Rmb300m of forfeiture advance that could be reversed in FY19. The adoption of SFRS 9 could also result in lower provisions in HTM impairment losses.

Net Net

• Excluding the above, Yangzijiang Shipbuildings' 4Q18 net profit would have been at Rmb468m but we are less inclined to treat these as one-offs given their quarterly recurrence.
• Yangzijiang Shipbuildings DPS of 5Scts (FY18: 4.5Scts) was a positive surprise.
• The group delivered 11 vessels in 4Q18 (3Q18: 6) and targets to deliver 60 vessels (FY18: 46), of which 20+ units were those that were provided at zero margins. HTM income grew 26% q-o-q to Rmb459m, which helped to cushion the group’s gross margin at 18.2% (9M18: 18.5%).
• Yangzijiang Shipbuildings secured 36 vessels with a total contract of US$1.5bn (vs. our target of US$1.8bn). Management keeps its US$2bn order target for 2019, expecting a better 2H19. No orders have been secured YTD.

Maintain ADD With a Higher Target Price of S$1.61

• Key catalyst could come from LNG vessels from Japanese clients or stronger-than-expected margins.
• Yangzijiang Shipbuildings is a safer pick vs. Singapore yards.
• Trade war is a key risk.

Source: CGS-CIMB Research - 01 Mar 2019