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How did Yangzijiang Shipbuilding Holdings Ltd Fare in its Latest Quarter?

Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6), an aptly-named Chinese shipbuilder, released its third quarter results last Friday morning. Let’s take a look at how it performed.

The firm splits its business into two main segments – the shipbuilding-related segment, and the investment segment.

The financial numbers

For the quarter ended 30 September 2014, total revenue increased by 2% year-on-year to RMB3.74 billion. The shipbuilding-related segment, which delivered eight vessels in the quarter as planned (unchanged from a year ago), contributed to around 88% of Yangzijiang’s total revenue. The segment’s top-line also saw a slight dip from RMB3.32 billion a year ago to RMB3.31 billion.

Under the investment segment, interest income from held-to-maturity (HTM) financial assets increased to RMB406.8 million, a rise of some 30% year-on-year. This came as Yangzijiang simply had investments which delivered higher interest rates. Revenue from the company’s micro finance business decreased by 26% from a year ago to RMB26.3 million due to lesser amounts of loans made.

Lower gross profit, other income, and other gains, partially offset by a lower tax expense, ultimately brought about lesser net profit for Yangzijiang for the quarter. Earnings declined by 1.2% year-on-year to RMB811.2 million.

The financial muscle

As of 30 September 2014, the firm had a gross gearing ratio (total borrowings divided by equity) of 53.1%. This is a huge improvement from the figure of 73.2% seen at the end of 2013. The shipbuilder’s balance sheet had strengthened as a result of a shift in its financing strategy to reduce the overall gearing level.

Operational highlights

Operationally, investors might be happy to note that Yangzijiang had seen an increase in its order book. As of 7 November 2014, the company’s order book stood at 114 vessels with a total contract value of US$4.6 billion; a year ago, the company had an order book with 88 vessels and a contract value of US$3.87 billion. With substantial orders of 114 vessels, Yangzijiang’s “yard capacity will be highly utilized until the end of 2016.”

Going forward, the shipbuilding outfit will be reducing its investments in non-shipbuilding businesses and “control its HTM investments.” To that effect,Yangzijiang has sold its equity stakes in a few real estate companies and has only a handful of property development projects left in its main places of business at Jingjiang and Jiangyin. Yangzijiang had first entered into these non-shipbuilding investments as a short-term strategy to cope with “adverse market conditions and reduce volatility in earnings.” The shipbuilder’s Chairman, Mr Ren Yuanlin, gave some further comments on the future of Yangzijiang’s non-shipbuilding segment:

 “While investments in HTM financial assets and property cast concerns among investors, the overall risk is under control. We have a rigorous risk management system in place, and we retain a good degree of flexibility in the investment. Nonetheless, financial and property investments are short-term and peripheral in nature, and we commit to driving long-term growth of the Group oriented in shipbuilding related segments. We will continue to take actions at appropriate times to increasingly concentrate on our core shipbuilding businesses.”

A smooth-sailing outlook

Ren also gave some comments on the company’s outlook and the future of the shipping industry and there are positives in those words, as seen below:

“The industry has shown early signs of recovery as the enquiries and new orders started to see some momentum as compared to that of last year. The softer oil prices are in a way benefiting the recovery of the shipping industry as well. We feel that overtime this will have a positive trickle-down effect on the shipbuilders as well…

…The government is concerned about the overcapacity issue in the shipbuilding industry in China, and has indicated its stance to increase industrial concentration, provide favorable policies to leading players, and nurture the growth of large and sophisticated shipyards to compete in the global arena. Being listed in the White List of qualified shipyards will grant us a favorable position to further strengthen the order book, tap financing facilities when needed, capture the opportunities arising from the consolidation process in the industry, and enhance our overall performance in the long term.”

One Fool’s take

In my opinion, it’s commendable that the firm is looking to focus more on its core competencies (shipbuilding activities) and slowly peel off its non-core businesses. The investment segment contributed to around 11% of total revenue. Revenue from this stream might be hit in the short-term as the firm moves away. However, it should bode well for the long-term, as more efforts are put into growing the shipbuilding segment, where the company is already in a stronger position as compared to many of its industry peers.

Shares of Yangzijiang closed at S$1.15 on Friday.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.