SINGAPORE (June 8): CLSA is maintaining its “sell” on Yangzijiang with 90 cents target saying the recent collapse in BDI will undermine recovery prospects.
Yangzijiang’s share price was largely driven by a stronger-than-expected Baltic Dry Index (BDI) rally in 1Q17 but the BDI has corrected sharply over the past two months, dropping 38% from the recent peak.
And although charters for containerships are relatively more stable, prospects for contract wins seem unlikely as shipping companies hold back capex.
Orderbook guidance has been reduced from US$2.5 billion ($3.5 billion) earlier to US$1.5 billion but 1Q17 order wins reached US$0.3 billion and appears on track to achieve the reduced full-year forecast.
After the delivery of two high-margin LNG vessels in 1Q17, margins could also contract in 2H17 vs 1Q17, points out CLSA.
Despite enjoying better productivity and economies of scale, shipbuilding-related gross margins have been trending down over the past few years.
The y-o-y rise in steel prices from RMB2,500/tonne to RMB3,700/tonne and the absence of higher-margin LNG vessels in the orderbook suggest margin pressure won’t ease anytime soon.
Management also highlighted that its focus will be on topline growth, but this will be achieved at the expense of profit margins.
In a Wednesday report, lead analyst Low Horng Han has lowered his orderwin assumptions and reduced his earnings forecasts by 2% and 13% for 2017 and 2018 respectively, with a 4% y-o-y EPS decline in 2019. Operating margins are forecast to fall from 21% in 2016 to 16.2% in 2017CY and 14% in 2018CY.
“This reflects our view that the pricing environment for orderwins remains tough,” adds Low.
Shares of Yangzijiang are down 1 cent at $1.22.
