Daiwa: Yangzijiang outlook ‘hazy’ despite 1Q19 results beating forecasts.

An aerial view of Singapore’s portAn aerial view of Singapore’s port

Chinese shipbuilder Yangzijiang may have beaten expectations with its first quarter results, but the outlook ahead may be challenging as new shipbuilding contracts trail expectations, Daiwa said in a note Tuesday.

The investment bank noted that Yangzijiang had US$116 million (S$157.86 million) new orders in the first quarter, with management saying it would be a “challenge” to meet its US$2 billion guidance for the year as clients take a wait-and-see approach.

“We expect its order backlog of US$3.5 billion (lowest level since 2013) to see further deterioration for the rest of 2019,” Daiwa said.

The company reported Monday its first quarter net profit increased 38 percent on-year to 824.05 million yuan (S$166.68 million) amid higher deliveries of vessels in the shipbuilding segment.

Daiwa said the results beat its forecasts, mainly on the investment division, which saw its debt investments jump by 4 billion yuan on-year to 16.4 billion yuan, boosting investment income to 561 million yuan in the quarter, from 299 million yuan in the year-ago period.

“Management, however, guided that with the increased liquidity seen in China’s credit market, it is unlikely to see a significant increment in its debt investment base from hereon, further compounded by a declining interest rate environment,” Daiwa said.

In addition, Daiwa noted the benefits of writebacks of previous provisions on shipbuilding contracts were likely to be offset by weaker-than-expected core shipbuilding margins. It pointed to management guidance that new contracts have been at less than the previously forecast 6-8 percent minimum gross profit margin threshold.

Daiwa raised its target price on the stock to S$1.52 from S$1.37 after increasing its 2019-21 revenue forecasts by 1-2 percent and its earnings per share forecasts by a higher 4-11 percent on a larger contribution from the investment division.

But it kept a Hold call.

“We view the stock as fairly valued amid a challenging outlook for the global shipping sector which has negatively impacted ship owners’ propensity and willingness to place new orders,” Daiwa said.

Yangzijiang shares were down 0.64 percent at S$1.56 at 4:48 P.M. SGT.

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