• Reversal of provision is the key reason for Yangzijiang Shipbuilding’s 2Q19 net profit beating our and consensus forecast, lifting shipbuilding margin to 18% vs. expected 16%.
• New orders were still lacklustre at US$209m for 1H19. Company expects the drought of orders to ease in 2H19 with the recent spike in BDI and IPO 2020.
• Our call is a HOLD recommendation with our Target Price of S$1.61 based on SOP (mainly 1x P/BV HTM and shipbuilding).

Beat Thanks to Rmb300m of Provision Reversals and Subsidy

• Yangzijiang Shipbuilding (SGX:BS6)'s 2Q19 net profit of Rmb936m (-6% y-o-y, +14% q-o-q) was 13% and 16% above our expectations and consensus. 1H19 net profit of Rmb1.76bn accounted for 56% of our FY19F.
• The earnings beat was mainly due to a net gain from “non-core” items totaled Rmb300m, including Rmb254m reversal of provision for losses on onerous contracts in shipbuilding, Rmb139.7m subsidy income, offset by impairment loss on debt investment of Rmb93m. Without these, earnings would have been a miss.

Muted Underlying Shipbuilding Margin

• Yangzijiang Shipbuilding's reported 2Q19 shipbuilding gross margin was 18.3% due to the reversal of provisions mentioned above. Adjusted gross margin would have been 10.1% in 2Q19, weaker than 1Q19’s 15.7%.
• With this, the balance of provision for onerous contract stood at Rmb829m. Yangzijiang Shipbuilding made Rmb1.1bn of provisions based on the assumptions of US$/Rmb6.50 and 10% annual increment in steel price as well as labour costs.
• Management previously planned to utilise 60% of the provisions for 60 vessels to be delivered in FY19. Yangzijiang Shipbuilding delivered 18 vessels in 2Q19 (1Q: 18).

Orders Muted But Guided for Drought to Ease

• In 1H19, Yangzijiang Shipbuilding secured new orders for 5 vessels amounting to US$209m – 1 unit of 157k dwt oil tanker, 1 unit of 29.8k dwt self-unloading vessel, 1 unit of 82k dwt bulk carrier and 2 units of 83.5k dwt combination carrier.
• Outstanding order book stood at US$3.1bn for 85 vessels, for delivery up to the end of 2020.
• We maintain our US$1.bn order target for now. Management’s previous order target for 2019 was US$2bn.

Our Call Is a HOLD With a Target Price of S$1.61

• A pick-up in orders could be the key catalyst.
• Downside risks are order cancellations and weaker-than-expected demand for new ships.

Source: CGS-CIMB Research - 5 Aug 2019