Yangzijiang

Yangzijiang: 2Q15 results missed expectations as net profit slipped 17% y/y to Rmb1.03b, although distorted by several one-offs gains.

Revenue of Rmb5.71b (+34%) was driven by higher shipbuilding sales of Rmb3.34b (+12%) from increased vessel deliveries (11 vs 9 in 2Q14), as well as higher volume of trading business amounting to Rmb1.42b (+192%).

Despite a reduced investment portfolio, interest income derived from financial assets grew 31% to Rmb446.4m. Meanwhile, investment segment grew to Rmb481.2m (+33%) from the maturity of several high return investments, while investment income from its micro finance business also expanded 52% to Rmb34.7m.

Gross margin compressed to 18% (2Q14: 28, 1Q15: 26%) as most of its newer shipbuilding orders were likely contracted on lower margins. This was reflected in the further deterioration in its core shipbuilding margin to 15% from 24% in 2Q14 and 21% in 1Q15.

Bottom-line was shored by other gains of Rmb412.1m (2Q14: -Rmb29.8m), comprising disposal of financial assets (Rmb157m), FX gains (Rmb155m) and government subsidy (Rmb124m).

The one-off gains were partially offset by lower interest income of Rmb64.7m (-70%) due to debt repayments, and a turnaround in share of associate/JV profit to Rmb0.4m (2Q14: -Rmb15.6m).

At end Jun, the group had an outstanding order book of US$4.14b at end-2Q15, down from US$4.6b at end 1Q15, comprising 102 vessels, which will keep its yards utilized until mid-2017.

For first two months of 3Q15, the group secured eight containership orders totaling US$510m plus options worth another US$510m. To weather the industry overcapacity and mitigate cancellation risks, the group has facilitated the conversion of nine existing bulker orders into containerships and is looking to add clean energy vessels to its product range to enhance future growth.

Meanwhile, management is committed to controlling the size of its held-to-maturity portfolio, now standing at Rmb5.35b, and take a prudent approach to managing its risks. Net gearing has climbed to 18.8% from 9.8% in Dec '14 but remains comfortable.

At the current price, Yangzijiang is trading at a consensus FY15e P/E of 7.3x and 1.04x P/B. The street has 11 Buy, 4 Hold and 3 Sell ratings with a TP of $1.63.