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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