Yangzijiang Shipbuilding (Holdings) Ltd - Does it have an order from Iran?

22/9/2014 – Yangzijiang Shipbuilding (Holdings) Ltd says returning to its core business is timely as newbuild prices have risen together with an increase in enquiries.

As at June 30, 2014, orders stand at 122 vessels with a total value of US$5 bln, and this guarantees high yard utilisation until end of 2016, the shipbuilder says.

More investment will go into research and development for larger and more sophisticated vessels because the market is growing for vessels with higher operational efficiency.

Yangzijiang says it has won the most new orders among all yards in China since the start of the year, and order size ranked first in terms of Compensated Gross Tonnage (CGT) in the country.

These results were reported by eworldship.com, a China shipbuilding industry portal which Yangzijiang describes as being one of the most influential in the country.

Analysts are collectively bullish.

OCBC Investment Research, Maybank Kim Eng Research, DBS Equity Research and Macquarie Research all have BUY calls with a general confidence that the company's return to core business is going to excite the stock price.

But Maybank did flag potential risk from the company's held-to-maturity assets because it suspects their actual collateral is 2-3 times lower than reported.

But if earnings from the core business of shipbuilding is captured at predicted levels, then losses arising from these investments could be covered.

These are the company's performance results for Q2FY14:

Revenue: -3% to CNY4.27 bln
Profit: +52% to CNY1.24 bln
Cash flow from operations: CNY4 bln vs CNY1.4 bln
Dividend: 0 cents per share vs 0 cents per share
Order book: US$5 bln over 2 years

Revenue dipped 3% because there were fewer vessels delivered.

They delivered only nine vessels this quarter, compared to the 11 in the corresponding period last year.

Profit doubled to CNY1.24 bln because cost control efforts were effective to keep expenses down.

Despite what Yangzijiang has said in its outlook, the picture might not be so bright as a competitor, Shanghai Waigaoqiao concedes that 2015 could be a bad time.

Also, media reports earlier this year in July and August about Yangzijiang having orders from Iranian companies made near-term performance even riskier if America imposes sanctions.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Does it have an order from Iran?

The Wall Street Journal first ran a story on July 17, about Yangzijiang building ships for Iran.

It names state-owned operator Islamic Republic of Iran Shipping Lines (IRISL) as the customer for which Yangzijiang will build ten bulk carriers for non-oil commodities.

Two weeks later, TradeWindsrevealed Iran's state grain importer, Governmental Trading Corp (GTC) was behind the order.

Either way, Yangzijiang has neither confirmed nor denied the report.

Question

2. Will it face sanctions for dealing with Iran?

Sanctions against Iran are the most severe ever imposed on a country.

This Huffington Postarticle gives some background.

In fact, the United States has just imposed further sanctions on Iran, and named UAE-based Goldentex FZE and Italy-based Jettin SpA as new sanction targets.

Goldentex FZE was penalised for its involvement in Iran's shipping sector, so what does this mean for Yangzijiang?

If, in fact, it has any orders from Iran, will it face sanctions too?

TradeWinds reported that "the actual ownership of ordering entities is not in Iranian hands and the structure of the deal puts several layers between Iran and the yard.

Yangzijiang Shipbuilding Holdings is not commenting publicly but is said to be privately denying it has an Iranian customer."

(Read the full story to get all 6 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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