HSBC downgraded Yangzijiang Shipbuilding to Reduce from Buy, saying the operating environment was set to get more difficult as new orders decline, costs increase and competition intensifies.
“After a record US$2.1 billion of new orders in 2017, we had expected order momentum to slow down in 2018 but not to the extent we are witnessing now,” HSBC said in a note on Thursday. It noted YZJ only won US$270 million of new orders in the first quarter.
“Our shipping research team forecasts a bleak outlook for bulk carrier orders, which are the bread and butter for YZJ. The company
does not build liquefied natural gas (LNG)/floating LNG (FLNG) carriers, a segment of the shipbuilding market we are bullish on,” it said.
HSBC also noted that steel prices are inching higher, while a stronger yuan is a headwind as the company’s expenses are in yuan and its revenue is in U.S. dollars. Increasing competition from South Korean, Japanese and Chinese yards could also affect new vessel pricing, it said.
While YZJ has 123 vessels on its orderbook, 83 aren’t profitable, HSBC said, citing a company statement in the first quarter, adding that 63 of the 83 have a zero margin.
The bank lowered its 2018 new order estimate to US$1.2 billion from US$1.5 billion, and cut its 2019 order forecast to US$900 million from US$1.4 billion. It cut its shipbuilding margin to 15 percent for 2018-20 from 19 percent for 2018-19.
That spurred net profit estimate cuts of 20-32 percent for 2018-19 and a lower target price of S$0.87 from S$1.99.
HSBC added that while YZJ’s valuation appears cheaper than peers on a price-to-earnings basis, its earnings profit is worse, while on price-to-book, it looks as cheap as Bumi Armada, but that player’s return-on-equity is expected to rise by double digits next year, while YZJ’s is coming down to 6 percent. j
Shares of YZJ were down 7.87 percent at S$0.99 at 2:45 P.M. SGT on Friday.