Yangzijiang

Yangzijiang: 2Q12 results below expectations. Revenue at Rmb 3.9b, +13% yoy, but net profit declined 9% to Rmb 878.2m, as higher finance costs (up 5-fold to Rmb 110.4m) and lower other gains (-90% at Rmb 23.1m due to FX movements) more than offset gross margin improvement (2Q11: 29.6%, 2Q12: 30.5%). The higher revenue and gross margins came as YZJ continued to book revenue from orders secured pre-financial crisis. In addition, the shop demolishing business contributed Rmb 123.2m in 2Q12. 15 vessels were delivered on schedule in 2Q12, same as in 1Q12. Mgt notes the shipbuilding industry is in its down cycle and the operating environment continues to be difficult and challenging. Adds uncertainties in the global environment has added pressure to the financing situation. But says it remains confident of delivering the remaining 30 vessels it has on order, on schedule in 2H12, bringing the targeted vessel delivery to 60 in FY12. Orderbook stands at US$3.8b. In 2Q12, the co entered into shipbuilding contracts with buyers from Europe and Asia to build 2 units of 64k dwt bulks and 6 units of 1100 TEU containerships out of which 4 units of 1100 TEU containerships are buyer options valid till 2013. Total estimated value of the 8 vessels on order is US$159m, scheduled for delivery in 2014. However, recall it ceased 8 shipbuilding contracts (2 units of 34k dwt and 6 units of 82k dwt bulks) with its customers in 2Q12 due to customers failure to meet subsequent financial obligations. An avg 15% deposit was collected on the vessels and confiscated. The 2 units of 34k dwt and 1 unit of 82k dwt bulks were sold. The group is actively sourcing for buyers for the remaining vessels. YZJ trades at 4.9x P/E.