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Yangzijiang Shipbuilding Holdings’ Latest Earnings: A Pinprick of Light in a Long, Dark Tunnel

Yangzijiang Shipbuilding (Holdings) Ltd (SGX: BS6), or YZJ, is one of the largest private shipbuilding companies in China. The group produces a broad range of commercial vessels, including large containerships, bulk carriers, and LNG carriers. YZJ has four shipyards in Jiangsu province with an annual shipbuilding capacity of 6 million DWT and a well-established customer network spanning North America, Europe, and other parts of the world.

With the recent release of its Q2 2019 earnings, YZJ reported a 12% year-on-year decline in revenue, a drop of 23% year on year in gross profit, but a gentler decline of 6% year on year in net profit attributable to shareholders. The group is still facing industry headwinds in H1 2019, with a lower number of vessels (18) delivered compared to the same time last year (20). Looking at other aspects of its business, it seems there may be a small pinprick of light appearing at the end of a long, extended, dark tunnel.

Resilient financials but a muted outlook

Though YZJ reported a somewhat weaker Q2 2019 earnings report, H1 2019 performance was fairly decent, with a 3% year-on-year rise in revenue and an 11% year-on-year rise in net profit. However, investors should note that most of the income flowed from YZJ’s financial division, which makes loans similar to what a bank does. This division has been propping up the overall group as it has been showing good growth.

According to the group, though, many factors in the shipping industry contributed to a new order drought, and just five new orders were secured during H1 2019 for the group, leading to a muted outlook. There may be some light at the end of that tunnel, too, though, as the Baltic Dry Index (a measure of dry bulk shipping activity) rebounded strongly, and sentiments have improved.

Order book declining

Source: Yangzijiang’s 2Q 2019 Presentation Slides

YZJ has seen its order book declining to a two-year low, as shown in the chart above. At US$3.1 billion, the order book can keep the yards busy for the next 1.5 years, but orders need to be continually replenished, otherwise, yard utilisation will fall and negative operating leverage will kick in.

As mentioned, only five new shipbuilding contracts worth US$0.21 billion were secured in H1 2019. By contrast, the whole of 2018 saw the group clinching a total of 36 contracts worth US$1.46 billion.

Growing the LNG carrier division

YZJ is attempting to diversify its shipbuilding capabilities beyond containerships and dry bulk carriers and entered into a 51% joint venture with Mitsui Shipbuilding to grow its LNG carrier business. On 16 July 2019, YZJ announced the acquisition of a 55% stake in Odfjell Terminal (Jiangyin) Company Ltd and will be upgrading this terminal for LNG handling.

This is good news for investors as the group seeks to diversify its revenue streams and become less reliant on just two types of vessels. Ren Letian (CEO of the group) was also quoted as saying that the “LNG related business will be an important catalyst that elevates YZJ’s growth in the next decade.”

A tough, cyclical industry

Despite a better performance in YZJ’s financial division and the group’s attempts to diversify the business into LNG carriers, the fact remains that shipping is a tough and cyclical industry. The group needs time to grow its LNG division to a size and scale that can contribute significantly to group revenue and profit. In the meantime, the uncertain conditions leading to the order book drought means investors should probably stay away for now and monitor corporate developments.

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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.