Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) is one of the largest private shipbuilding companies in China. It makes a wide range of commercial vessels, including large containerships, bulk carriers, and liquefied natural gas (LNG) carriers, at its four shipyards in Jiangsu Province, China.
Last Friday (10 August), Yangzijiang’s shares closed at S$0.99 apiece, up 8.8% for the week. In comparison, during the same period, the Straits Times Index (SGX: ^STI) put on just 0.6%. What could be the reason behind the increase in Yangzijiang’s share price? The most probable cause is that the company reported a robust set of financial results for the second quarter of 2018.
Strong financial numbers
Revenue for the reporting quarter came in at RMB 8.0 billion, more than doubling from the top line of RMB 3.8 billion a year ago. The huge improvement was due to a higher number of construction and delivery of several large-size vessels for the quarter. In 2018’s second quarter, 20 vessels were delivered as compared to just four in the same quarter a year ago.
Several of the large-size vessels delivered during the second quarter of 2018 commanded higher margins as well, resulting in the gross profit margin for Yangzijiang’s core shipbuilding business to increase slightly from 20% a year ago to 21%.
Meanwhile, net profit for the reporting quarter rose 38% to RMB 994.9 million. The net profit margin fell to 12% from 19% a year ago.
On a half-year basis, Yangzijiang’s revenue grew 53% to RMB 12.9 billion while net profit improved by 15% to RMB 1.6 billion.
The following chart shows the gross profit, gross profit margin, net profit, and net profit margin for Yangzijiang from 2014 to the first half of 2018:
Source: Yangzijiang earnings presentation
Even though Yangzijiang’s net profit in the first half of 2018 was a vast improvement year-on-year, the company’s net profit margin is still way off the 2014 peak of 22.7%.
As of 30 June 2018, the shipbuilder had RMB 7.9 billion in cash and cash equivalents, and RMB 3.8 billion in total debt, giving a gross gearing of 13.7%. This is an improvement from the end of 2017 when it had RMB 6.2 million in cash and RMB 4.9 billion in total borrowings, translating to a gross gearing of 18.4%.
In the second quarter of 2018, operating cash flow surged from RMB 345.9 million to RMB 3.8 billion. With capital expenditure (including the acquisition of financial assets) falling from RMB 311.5 million to RMB 151.1 million, Yangzijiang’s free cash flow improved from RMB 34.4 million to RMB 3.7 billion.
As of 7 August 2018, the shipbuilder had an outstanding order book of US$4.1 billion for 114 vessels, which the company expects to provide a stable revenue stream for the next 2.5 years at the minimum.
On its outlook, Yangzijiang commented:
“Supported by improving global seaborne trade volume and higher charter rates for several major vessel categories, the shipbuilding market continued to recover in 2018. Despite studies that suggest limited impact of the protectionism and trade wars on the global trade volume, the Group is mindful of the uncertainties and the potential risks to the shipping and shipbuilding demand. However, the Group’s existing order book has no exposure to the sectors on the US’ tariff list, and the Group doesn’t see the tariff list directly impacting its future order flow.
In the longer term, seaborne trade will remain a dominant part in international trade. The growth of e-commerce, China’s Belt and Road initiative, and International Maritime Organization rules and regulations on vessel emission standards are all expected to support the shipbuilding demand for high-tech, environmentally- friendly and energy-efficient vessels. In China, the supply-side reform will further propel the consolidation in the shipbuilding industry, and stronger shipyards, including Yangzijiang, will benefit. Overall, the Group remains cautiously optimistic on the outlook for the shipbuilding industry.”
The Foolish takeaway
Yangzijiang’s share price hit a 52-week intraday low of S$0.84 around a month ago. The price has since recovered slightly to end at S$0.99 last Friday. If the shipbuilding market continues to improve and Yangzijiang can ride on the better sentiment, its financial performance should strengthen further. Patient investors could then be rewarded in the longer term.
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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.