SINGAPORE (Mar 2): CIMB is downgrading Yangzijiang Shipbuilding to "hold" with a lower $1.51 target price given its share price could be capped near term given no major orders were secured year to date.
The research house is cutting the stock's EPS by 5.6-10.9% for FY18-19 to account for lower order assumptions of US$1.8 billion ($2.4 billion) for FY18 and US$1.4 billion for FY19.
"Our FY18 shipbuilding gross margin is now 15% (previously 19%), in view of higher steel costs and stronger RMB," says CIMB analyst Lim Siew Khee in a Thursday.
Yangzijiang closed the year with US$2.1 billion of new orders, in line with its original guidance of US$2 billion. Order book stood at US$4.7 billion for 123 vessels.
However, management has set a lower target of US$1.8 billion for 2018 in view of stiff competition from Koreans and state-owned Chinese yards.
Year to date, there has been no significant order wins for Yangzijiang. Bulk carriers and container ship order wins were mainly dominated by Chinese, Korean and Japanese yards, according to shipping intelligence service provider Clarksons.
To recap, Yangzijiang's 4Q17 net profit included RMB1.2 billion of provision made for foreseeable losses on 70 unbuilt vessels on the back of higher assumptions for US$/RMB (6.16) and steel costs (RMB4,700-4,800/tonnes) for the next two years.
See: Yangzijiang Shipbuilding posts 12.1% rise in 4Q earnings to $141.7 mil
"The orders for these vessels were secured in 2016-17 when RMB was low. With the provision, these vessels will yield zero margin upon construction," says Lim, adding upside or downside will depend on actual forex and steel costs.
With the above, shipbuilding margin came in at 13% in 4Q17. Excluding provisions, shipbuilding gross margin was 41% in 4Q17, thanks to the back-end profit recognition for the deliveries of three large-size containerships.
Yangzijiang delivered a total of 33 vessels in 2017 and expects to deliver another seven large-sized vessels with gross margins of more than 25% in FY18.
"As such, we think shipbuilding gross margins in FY18 would still be in the region of 15-16%," says Lim.
In FY17, Yangzijiang generated RMB1.08 billion of held-to-maturity (HTM) interest income with gross margin of 96%, due to deleveraging of financing in China, resulting in higher returns for its trusts and investments.
Management thinks the margins for HTM could still trend upward in 2018. Average returns for HTM investments climbed y-o-y to 9.4% in FY17 from 8.5% in FY16. Some of the investments are generating roughly 12% of returns according to management.
As at end FY17, net cash stood at RMB1.3 billion.
As at 11.54am, shares in Yangzijiang closed 3 cents lower at $1.42 or 10.1 times FY18 earnings.
