Yangzijiang’s share price is currently up 7%. The company is set to report its 3Q19 results on 7th November. Is the market expecting a set of solid results from the company this coming Thursday?
Yangzijiang’s share price impacted by Chairman’s investigation
Share price of the counter has declined by about 40% since hitting the peak back in April 2019. The key reason for the hefty decline in August 2019 was due to reports that its Chairman, Mr Ren Yuanlin had gone “missing” for a period of time.
The company subsequently clarified that Mr Ren had been assisting in a confidential investigation carried out by the PRC government authorities and will be granted a leave of absence by the board to focus on the matter.
Despite the clarifications, Yangzijiang’s share price has remained weak since then, with its share price hovering around the S$0.90-S$1.00 mark the past couple of months.
Analysts are generally positive on the counter, with 7 BUYS, 2 HOLD and 2 SELL, according to data from Bloomberg.
YZJ’s new orders momentum resuming
The company has been winning a number of new orders since the “scandal” broke out, bringing total YTD new orders to around USD$650-700m. Despite the encouraging new order wins development of late (that has been sorely lacking in 1H19), it is still a big gap between what management has guided for approx USD$1.5bn-2bn in new orders for 2019. Can Yangzijiang meet its own internal guidance?
We believe there is still a possibility of the company to meet this new order target, if one of its existing LOI turns into firm order. According to a TradeWind report dated 6 June 2019, Yangzijiang has signed an LOI with Mediterranean Shipping Co to provide 10 replacement container vessels for the latter, valued at USD$910m.
If this LOI turns into a firm order before year-end, YZJ will be able to meet its new order wins target, a major surprise given that most analysts in the street do not expect YZJ to come anywhere close to its new order wins guidance.
YZJ’s 3Q19 results expected to be decent…
We believe that Yangzijiang should report 3Q19 earnings that will meet analysts’ expectations, with likely further reversal of previous provisions that were made. This will help to buffer its shipbuilding’s gross margins to be above 15%.
….But 2020 outlook remains challenging
We expect Yangzijiang’s 2019 shipbuilding margins to be in the high teens, aided by the progressive reversal of provisions. However, this reversal will mostly be completed by end-2019. Therefore, we forecast its shipbuilding margins to take a huge dip in 2020 due to new orders secured which are of a low-margin nature.
New orders secured in recent quarters are likely to have gross margins in the region of mid-high single digit percentage at best vs. the 20%+ region which the market has been so accustomed to. What this means is that Yangzijiang will need to recognize double the level of revenue in order to generate the same amount of profitability ahead.
With its order backlog currently at an “all-time” low with new order wins prospect not exactly through the roof, it will be an increasing challenge for this Chinese shipyard behemoth to continue its strong earnings growth trajectory witnessed over the past 3 years.
FX tailwind might be insufficient to stem future earnings decline
A positive tailwind in recent months has been the strength of the USD vs. CNY. Despite USD strength, we believe it is insufficient to mitigate the decline in gross margins likely to be increasingly evident over the coming quarters/years, unless the CNY totally collapses against the USD.
For those who are unfamiliar with Yangzijiang’s operating profile, the company will benefit from stronger USD against CNY as its revenue is priced in USD-terms while costings are mainly in CNY-terms.
Potential to re-rate over a short-term horizon
While we are cautious over the counter’s longer-term fundamental outlook, we believe the counter can still re-rate in the short term if 1) new order wins surprise positively, 2) issues pertaining to its Chairman’s “investigation” is fully resolved.
No doubt that the Chairman’s son is more than capable to take over the role of CEO, we believe the market still acknowledges that the Chairman is a quintessential figure of the company and if he is to be implicated in any way pertaining to the “corruption charges” of Liu Jianguo, a former party secretary of Jinjiang City, the shares of Yangzijiang will undoubtedly be negatively affected.
Conversely, a full clearance with the Chairman “back to work” will likely see the share price of Yangzijiang rebounding strongly. Until then, we expect its share price to be trading in the region of S$0.90-S$1.10.
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