Yangzijiang earnings at mercy of a rising Chinese yuan, analysts say

Shares of shipbuilder Yangzijiang have tumbled for two days, despite reporting headline full-year net profit that beat analysts’ consensus forecasts.

Analysts’ pointed to a stronger Chinese currency and steel prices.

“A stronger renminbi will result in forex losses as income is denominated in U.S. dollars and costs in renminbi,” OCBC said in a note on Friday.

‘Challenged’ profitability on some vessels

The Singapore bank also noted that out of 123 vessels on the groups orderbook, it estimated around 40 are profitable while the rest are challenged. Out of the remaining 83, 63 incurred provisions in the fourth quarter, in relation to 1.2 billion yuan of allowances for expected construction-contract losses, OCBC said.

“We understand that these vessels were mostly secured in 2016-17 when the renminbi was weaker and steel costs were lower,” OCBC said.

It cut its fair value estimate to S$1.49 and kept a Hold call.

CIMB also cut its outlook for the company, downgrading the stock to Hold from Add. It cut its target price to S$1.51 from S$1.80 after lowering 2018-19 earnings per share forecasts by 5.6-10.9 percent on lower order book assumptions.

’No major orders’

CIMB noted that management set a lower target of US$1.8 billion of new orders for 2018, down from US$2.1 billion last year, amid stiff competition from South Korean and Chinese state-owned yards.

“With no major orders secured year-to-date, we believe its share price could be capped in the near term,” CIMB said  in a note dated Thursday.

Analysts at Nomura were a tad more upbeat, but just a tad.

Nomura raised its earnings per share forecasts for 2018-19 by around 64-65 percent, citing lower asset-provision assumptions, lower finance cost estimates and assuming a lower tax rate. It raised their target price to S$1.25 from S$1.04.

Watching the steel

But it stuck with a Reduce call.

“We think elevated steel prices in China may continue to weigh on the company’s gross marking and discourage demand for shipbuilding orders,” Nomura said in a note on Friday.

For 2017, net profit rose 67 percent on-year to 2.93 billion yuan on revenue of 19.2 billion yuan, up 27 percent on-year, the shipbuilder reported in an SGX filing after the market close on Wednesday.

The stock was down 2.07 percent at S$1.42 at 1:22 P.M. SGT on Friday, after falling around 4 percent on Thursday. The February 14 global market rout low of S$1.34 may act as a near-term support.