SINGAPORE (Aug 10): UOB KayHian is downgrading Yangzijiang Shipbuilding to “hold” with entry and targets prices of $1.14 and $1.42 respectively as valuations for the stock look stretched.
In a Thursday report, analyst Foo Zhi Wei says orders continue to remain challenging, and despite the improvement in contract wins, Yangzijiang was hesitant to raise its order wins target of US$1.5 billion ($2.1 billion) for 2017.
Yangzijiang says the shipbuilding industry continues to have excess capacity although the situation has improved significantly from 2009.
The number of shipbuilders has declined 57% from 2009 to 2016, and is expected to fall further to 70% by 2017.
Coupled with an improvement in charter rates and second-hand prices, that is currently spurring new orders.
However, it remains uncertain if the recovery is sustainable, given the historical inclination of shipowners to exacerbate the supply situation at the hint of an upturn in each cycle.
In 2Q17, Yangzijiang Shipbuilding reported headline net profit of RMB720 million ($983 million) on the back of higher revenue of RMB3.8 billion and an 89% y-o-y decline in interest expense.
Shipbuilding revenue rose on higher activity but margins were pressured by low contract prices with the industry mired in overcapacity.
Excluding one-off impact from fair value gains, disposal gains, forex losses and impairments on financial assets, core net profit was RMB591 million. The results exceeded UOB’s expectations as 1H17 core net profit of RMB1.2 billion formed 61% of its full-year estimate.
Revenue for the shipbuilding segment was RMB3.4 billion in 2Q17, thanks to higher shipbuilding activities and trading revenue.
Gross margin for the overall shipbuilding business was 14%. This was due to lower gross margins for the core shipbuilding business on lower contract prices for its vessels and a higher proportion of earnings from the trading business, which had a low gross margin.
Investment income saw earnings rise to RMB331 million. This was driven by higher income from its held-to-maturity (HTM) portfolio, which saw earnings rise 34%.
Year to date, Yangzijiang has secured 33 new shipbuilding contracts, worth US$832 million. This compares against its full-year contract win of US$820 million secured in 2016.
Two vessels were sold away while another had its order terminated. The group also had one shipbuilding contract for an 82,000dwt vessel cancelled in 2Q17, bring year-to-date cancellations to five vessels.
Management declined to give guidance on the contract wins outlook for next year, saying they prefer to deal with one calendar quarter at a time.
As at 3.01pm, shares in Yangzijiang are up 5 cents at $1.60.
