• YTD order wins of US$116m are well short of management’s full-year target of US$2bn; we expect momentum to only pick-up by end-2019 or in 2020.
• Yangzijiang Shipbuilidng's share price has outperformed, up 27% YTD, in line with the A share index. It is also trading at +0.5 s.d. of its 5-year average valuation, at 1.02x P/BV.
• Despite a good set of 1Q19 results, we downgrade YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) to HOLD from Add with unchanged Target Price of S$1.61. Revisit once orders show strong signs of a pick-up.

Why Is Yangzijiang Shipbuilidng a HOLD and Not a Reduce?

• Firstly, its order book of US$3.5bn (101 vessels) affirm earnings visibility into FY20F.
• Secondly, with 60 vessels scheduled to be delivered in 2019, about 60% of the Rmb1.1bn provision for contract losses will be utilised, sustaining gross margins at the current 16%.
• Finally, relative to the Singapore yards, Yangzijiang Shipbuilidng’s balance sheet is strong, with net cash of Rmb1.8m, with scope for M&As or investment in R&Ds.
• Our downgrade to a HOLD is premised on the lack of catalysts and valuations above its own average.

Results Slightly Above Expectations, Thanks to Investments

• Yangzijiang Shipbuilidng's 1Q19 net profit of Rmb824m (-34% q-o-q, +38% y-o-y) was above our Rmb727m forecast and consensus’ Rmb711m. This set of results defies the usual seasonally-weaker quarter as it formed 26% of our FY19F mainly due to higher HTM income of Rmb560m (+22% q-o-q, +22% y-o-y) vs. Rmb320m/qtr in the past two years.
• There was strong demand for short-term (3-6 months) corporate lending and fixed income investment opportunities prior to Fed rate-hike pause. The yields of these investments were higher at 12-15% vs. the typical 10% for government.
• HTM investment balance grew by Rmb1.5bn since 4Q18 to a record Rmb16.3bn but we think this could trend down in a lower interest rate climate.

15 Vessels Delivered in 1Q19, GM Should Sustain at 16%

• Core shipbuilding gross margin was 16%, in line with our 16.5% expectation. This is also higher than 4Q18’s 9% and FY18’s 17.6%. There were Rmb16.8m of provision reversals in 1Q19. Recall that it had Rmb1.1bn of provisions for construction losses as of FY18 based on the assumptions of US$/Rmb6.50 and 10% annual increment in steel price (from Rmb4,800/tonne) as well as labour costs.
• Management targets to utilise 60% of the provision balance for the 60 vessels to be delivered in FY19. This should sustain the shipbuilding core gross margin at 16% for the rest of the year, in our view.

US$2bn Target for 2019 a Tall Order

• Yangzijiang Shipbuilidng has secured orders for 3 vessels worth US$116m YTD, well short of its US$2bn full-year order target.
• Although not toning down the guidance, management expects orders for vessels from IMO 2020 to start becoming more apparent by 2020 as owners start scrapping older and less fuel-efficient vessels. We keep our US$1.5bn target intact.

Downgrade to Hold With Unchanged Target Price of S$1.61

• EPS unchanged. Our Target Price is based on SOP.
• Pick up in orders could be an upside.

Slow Orders Capping Upside

• The 3 orders that Yangzijiang Shipbuilidng secured YTD comprised a sizeable 157k dwt oil tanker, 1 unit of 29.8k dwt self-unloading vessel, and 1 unit of 82k dwt bulk carrier. The impact from IMO 2020 on newbuild orders have been lacklustre as owners are still evaluating alternative solutions, including scrubbers installations, and switching from high to low sulphur fuel oil or LNG. Therefore, we think the order momentum into the next two quarters could remain weak, capping the outperformance of the stock.

Source: CGS-CIMB Research - 30 Apr 2019