Yangzijiang Shipbuilding - Low margin is finally here

2Q15 net profit was slightly above our expectations and consensus. 1H15 net profit accounted for 57% of our FY15 forecast, mainly due to c.Rmb426m gains from the sale of investments, forex and subsidy. YZJ is sacrificing margin to win orders. Current new orders are secured at 10% GP margin vs. the historical average of 20%. Although order momentum could pick up in 3Q15 to hit the order target of US$2bn, the overall outlook is challenging with stiff competition from Korean and Japanese yards. We up our FY15 EPS by 4% to reflect the strong quarter but cut FY16-17 EPS by 3-9% for lower shipbuilding margins. We peg YZJ at 1.2x P/BV, in line with its average ROE of 12%. YZJ remains a Hold. Re-rating catalysts include a rebound in order momentum.

Sacrificing margin for orders
2Q15 core shipbuilding margin was 15%, down from 21% in 1Q15. Including trading (GP margin of 2%), blended shipbuilding GP margin was 11%, down from the historical 19-20% and below our 17% expectations. High-value contracts have been exhausted and YZJ is in the phase of executing lower-margin jobs. New contracts are also closed at c.10% GP margin.

2Q15 net profit lifted by gains; low risk of impairment of Chinese stocks, YZJ registered Rmb155m forex gains, Rmb157m gains on disposal of financial assets as well as Rmb124m subsidy income. As YZJ has been making c.10% provision for asset impairment against its HTM investments, the recent weakness in Chinese equities did not have a major impact on its portfolio. Its HTM investments balance declined to the 4Q14 level of c.Rmb10.7bn.


Technical Analysis
Daily Chart
Challenging order outlook but US$2bn target remains
The outlook for dry bulk is weak but containerships are still seeing enquiries. However, YZJ faces stiff competition from the Korean yards in pricing and from Japanese yards given the country’s currency weakness. YZJ has clinched c.US$880m of new orders YTD including US$510m secured in Jul and Aug 15 for eight container ships (4x 9,700 TEU and 4x 3,800 TEU). These contracts came with US$510m worth of options. Management is bullish that its order target of US$2bn can be achieved by 9M15. Order book is US$4.6bn YTD. (Read Report)

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Source : CIMB Research

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