RenYuanLin 4.2016

“A higher cost of capital in China translates into a higher return on our investment products.”

- Ren Yuanlin
Executive Chairman

(NextInsight file photo)

Yangzijiang Shipbuilding has posted stellar growth of 67% in net profit attributable to shareholders to RMB 2.9 billion for FY2017.

At its results briefing on Thursday (1 March), Executive Chairman Ren Yuanlin cautioned that FY2018 profitability ultimately depends on steel prices and the RMB exchange rate against the USD.

The Group secured orders for 74 vessels in 2017 with a total contract value of US$2.1 billion. It was a bumper year with the value of new contracts double compared to 2016.

Mr Ren said that the Group's new order target for 2018 will be revised to US$1.8 billion.

Vessel prices remain depressed due to competition from state-owned PRC and Korean shipyards that are heavily subsidized.  The lower vessel prices mean that the Group's capacity will be healthily utilized even with the revised new order target.

Its outstanding order book was US$4.7 billion as at 31 December 2017, comprising 123 vessels that will keep its yards utilized until 2020.

Other highlights of FY2017:

    1. Revenue was up 27% yoy at RMB 19.2 billion.
    2. Gross profit margin declined by 6.9 percentage points yoy to 17.2% due to conservative provisions of RMB 1.2 billion to manage the risks of higher raw material cost and RMB appreciation.
    3. Key operating subsidiary New Yangzi ranked world no. 2 yard in terms of the value of new orders received in 2017.

The Group has proposed a final dividend of 4.5 cents per share, or a payout ratio of 29%.


For more information, refer to its FY2017 results media release here.

 

Financial Highlights

FY2017
(RMB m)

yoy change

Revenue

19,205.6

27%

Gross profit

3,312.0

-9%

Gross margin

17.2%

-6.9ppt

Net profit attributable to shareholders

2,931.5

67%


Below is an excerpt of the questions raised at the Group's FY2017 results briefing, and the replies provided by Executive Chairman Ren Yuanlin and CFO Liu Hua.

 

Q: How do you plan to maintain your profitability?

1. Collaboration in advanced LNG technology
We are in talks with foreign players with advanced technology to collaborate on high-end LNG carrier vessels. It will be difficult for the Group to maintain high margins if we build only containerships and bulk carriers.


LiuHua1 2.2015

“Profit margins are relatively better for our flagship 11,800-TEU vessels.”

- Liu Hua
CFO
(NextInsight file photo)

2. Take over semi-completed vessels
More shipyards have been under distress and are exiting the business. The industry consolidation is not over.

Some of these distressed yards started constructing vessels which they cannot complete.

These work-in-progress vessels are available for sale at auctions. If we take over such vessels, we may complete the job at a slightly better margin.

Recently, the prices transacted at these auctions ended up much higher than the floor price. We are still monitoring the situation.

3. Invest in facilities for resource protection
We are seeking business opportunities that complement our main shipbuilding business.

We are looking into investing in LNG fuel stations along the shorelines of our shipyards as demand for LNG is becoming more widespread. With the rising importance of environmental protection, there is huge demand for infrastructure in the resource sector. Our shipbuilding value chain is a huge platform for such opportunistic ventures.

4. Better HTM investment yield
Global deleveraging and in China means the cost of capital in China is on an uptrend. We expect the yield from our Held-to-Maturity Investment segment to be higher this year. This will mitigate some of our shipbuilding margin erosion.

Q: What is your hedging policy on steel?

We don't hedge as we don't store steel for more than 3 months. I believe that our cost of steel will not be overly volatile as we can import steel from Japan and Korea.

 

Stock price  S$1.45
52-week range 94c - S$1.74
Market cap S$5.874 billion
PE (ttm) 9.32 x
Dividend yield 3.04%
Gross Gearing 18.4%
Source: Bloomberg / Company

Q: What was accounted for in your provision of RMB 1.2 billion?

We made provision for foreseeable losses for about 70 vessels on our order book that we have not started work on.

The quantum of provision was based on our forecast of the average RMB/USD exchange rate and steel price over the next 3 years.

The USD exchange rate is now RMB 6.33 and the steel price is about RMB 4,100 per ton. We are making provisions based on possible losses if the RMB strengthens to 6.15 and the steel price rises to RMB 4,800 per ton.

We did not make any provision for vessels that we have already built and are profitable -- our 10,000-TEU and 11,800-TEU containerships as well as some of the small bulk carriers.


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