Jittery investors perk up at Yangzijiang divestment strategy

It’s a smart move for the shipbuilding giant.

Yangzijiang’s move to divest its non-core investments and focus instead on the company’s shipbuilding business is expected to work in its advantage, but the change will be gradual as a lot of its non-core projects are set to be completed within the next two years.

According to DBS, the strategic shift will boost investors’ confidence amid jitters of shadow banking and property bubbles.

Here’s more from DBS:

Yangzijiang’s execution capability impressed and set the stage for Yangzijiang to undertake larger, higher value-add vessels. The contracts for four Very Large Ore Carriers (VLOCs) yesterday further underlines Yangzijiang’s growing presence in the very large / mega ships segment, which currently makes up 25% of its orderbook by units and 40% by value.

Applauding the move to divest non-core. Included in the VLOC announcement yesterday, Chairman & CEO Mr Ren Yuanlin took the opportunity to reaffirm Yangzijiang’s vision of staying focused on shipbuilding related businesses and, for the first time, disclosing publicly that the company would eventually divest its non-core businesses.

We believe the process would begradual over the next 2-3 years as 1) half of current Held-to-Maturity(HTM) investments fall under non-current assets, which will be largely collected in two years; and 2) the property development project at the old yard site is expected to be completed by 1H16.

There should not be a material impact to FY14-15 bottom-line as the potential “loss of income” could be offset by deposit interest and write-back of Rmb600-700m worth of bad-debt provisions.