CGS-CIMB Downgrades Yangzijiang on weak order momentum

CGS-CIMB downgraded Yangzijiang Shipbuilding to Hold from Add, despite a “good set” of results for the first quarter, as the brokerage pointed to expectations for weak order momentum.

That was after Yangzijiang reported last week 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.

The brokerage noted the shipbuilder has obtained orders for three vessels worth US$116 million year-to-date, far short of the company’s US$2 billion full-year order target and CGS-CIMB’s US$1.5 billion target.

Management expects vessel orders related to IMO 2020, or the International Maritime Organisation’s new regulation capping sulfur in marine fuels, will start picking up by 2020, the brokerage said.

But CGS-CIMB added, “The impact from IMO 2020 on newbuild orders have been lackluster as owners are still evaluating alternative solutions, including scrubbers installations, and switching from high to low sulfur fuel oil or LNG.”

“Therefore, we think the order momentum into the next two quarters could remain weak, capping the outperformance of the stock,” it said in the note last week.

But it said Yangzijiang still has earnings visibility through 2020 due to its order book of US$3.5 billion, or 101 vessels, with 60 set to be delivered this year. The brokerage also estimated the shipbuilding core gross margin would remain around 16 percent for the rest of the year.

CGS-CIMB kept its target price unchanged at S$1.61.

The stock ended Friday down 0.64 percent at S$1.56.


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