Yangzijiang to expect lacklustre orders as newbuild market takes breather

Profits have fallen flat in 3Q.

Yangzijiang reported a decent 3Q14 net profit of Rmb811m, flattish y-o-y despite the absence of pre-crisis orders. 9M14 net profit amounted to Rmb2.8bn.

Shipbuilding gross margin moderated 3ppts q-o-q to 21%. The margin compression is in line with the broader industry trend, which saw earnings and margins bottoming in 2015.

Including Held-to-Maturity (HTM) investments, Yangzjiang is in net cash of 33 Scts per share or 26% of its NTA.

Having said that, Yangzijiang is set to outperform peers with 5- to 10-ppt higher margins (through better newbuild prices, payment terms and efficiency as well as active cash management) and deliver relatively stable profits with upside potential from the recognition of the relocation fees from government (Rmb720m and profits from disposal of previously cancelled vessels c.Rmb600m). 

Order momentum has tapered off in 2H14, as the newbuild market takes a breather. We believe the shipping and shipbuilding markets are headed for a recovery path in the next two years, though it may be a bumpy journey. This will benefit established yards like Yangzijiang, whose orderbook of US$4.6bn translates into a healthy book-to-bill of 2.2x.

Yangzijiang is paring down its non-core investments as promised. HTM investments have been reduced to Rmb12.6bn, from Rmb13.0bn a quarter ago. This is expected to be further scaled back to Rmb12.0bn by end-2014 and potentially to <Rmb10bn by end-2015. It has also divested c.Rmb1.8bn worth of property projects since 2Q14 and targets to divest the remaining Rmb1.8bn (excluding old yard redevelopment) in the near future.