Yangzijiang Shipbuilding - Shipyard or fund manager?


Yangzijiang-Shipbuilding_Logo
■ 3Q15 net profit (-16% yoy, -34% qoq) was in line with our estimates and consensus, boosted by government compensation. 9M15 formed 76% of FY15.

■ Less HTM investments, more exposure to government-linked hybrid funds/ventures.

■ We cut FY16 EPS and raise FY17 EPS to account some deferrals in shipbuilding revenue.

We lower our target price, based on 1x P/BV, which is based on -1s.d of its 5-year average (previously 1.2x) in view of weaker order outlook and poor earnings quality.

Rmb308m of A-shares related losses
In 3Q15, YZJ posted other gains amounting to Rmb241m which included Rmb557m government compensation from relocation of the old yard. The gain was offset by Rmb207m loss on investment in A-shares. YZJ liquidated Rmb1.2bn worth of A-shares as the market collapsed in 3Q15. Following the divestment of its property arm, Jiangsu Hengyuan in Aug 15, YZJ also incurred Rmb101m of A-share related losses recorded in Hengyuan’s books.

Lower margin to invest in new product type
Core shipbuilding margin widened from 15% in 2Q15 to 18% in 3Q15 mainly due to depreciation of Rmb/US$ receipts. Blended shipbuilding GP margin was at 16.6%, in line with our 16%. High-value contracts have been exhausted and YZJ is entering into a phase of executing new product types such as LNGs and VLGCs (Very Large Gas Carriers). Management remained mum regarding the margins of these vessels citing fluctuations of materials costs and Rmb (read: low margin).

Expect deferrals or cancellations of dry bulkers
YTD order momentum has been decent at US$1.63bn but expected to slowdown in FY16. Order book stood at US$4.8bn, comprising 107 vessels (32 containerships, 71 bulk carriers, 2 LNGs and 2 VLGCs). Given the weak dry-bulk market, some customers in Japan and the US have downsized their operations and may not be able to take on delivery. Management expects to see deferral of deliveries and cancellations in 2016. As such, the number of vessels due for delivery in 2016 is uncertain.

Reclassification of HTM to investment in associates
Investment in HTM financial assets was down 10% qoq to Rmb9.7bn. However this will be replaced by higher investment in associates as YZJ shifts towards taking on equity stakes in lower-return venture capital/government-hybrid investment funds. It recently invested Rmb600m in a 29.85% stake in an industrial investment fund, Shanghai Chengding new Yangzi Investment (70% stake held by Shanghai SOE). Total exposure from such investments stands at c.Rmb1.6bn to date.

Technical Analysis
Daily Chart
Only for short-term trade
We reduce our EPS by 6% for FY16 on lower shipbuilding revenue, in view of potential for deferrals. Dividend yield for the stock is decent at 4%. We would only look at trading the stock on a short-term basis if the share price retreats as there are no near-term catalysts. Our valuation is now based on to 1x P/BV (CY16), which we deem fair on the back of deteriorating earnings. Maintain Hold. (Read Report)

Read Related Reports
1) Yangzijiang Shipbuilding (Holdings) Ltd - Weak 3Q15 but decent orders by Credit Suisse Asia Pacific Equity Research, published on 5 November 2015

2) Yangzijiang - In a Stronger Position To Face Tough Times by RHB Research, published on 5 November 2015

3) Yangzijiang Shipbuilding - Impacted by financial losses by Daiwa Capital Markets, published on 4 November 2015

4) Yangzijiang Shipbuilding - Post results investor lunch takeaways by Deutsche Bank Markets Research, published on 4 November 2015

5) Yangzijiang Shipbuilding - Slowly but surely‏ by DBS Group Research, published on 4 November 2015

6) Yangzijiang Shipbuilding - Reduce: Going downhill‏ by HSBC Global Research, published on 4 November 2015

7) Yangzijiang Shipbuilding - Can’t Sail Against The Tide‏ by Maybank Kim Eng Research, published on 4 November 2015

8) Yangzijiang Shipbuilding - Upgrade on valuations‏ by OCBC Investment Research, published on 4 November 2015

Source : CIMB Research

Labels: , ,