Excerpts from CGS-CIMB report

Analysts: Lim Siew Khee  & Izabella Tan

Yangzijiang Shipbuilding
More clarity on yard expansion plans

■ Key questions during our KL NDR included: yard expansion plans, post-containership boom, margin outlook, cost control measures and dividend.

YANGZIJIANG 

Share price: 
$1.43

Target: 
$1.66

■ Re-rating catalysts for YZJSB include gross margin of above 20% and potential yard expansion if there is a strong build-up of LNG carrier orders.

■ We forecast DPS of S$0.05-S$0.07 (payout: 34-40%) for FY22-23F, translating into dividend yields of 3.6-5.2%. Reiterate Add.


Ship 11.21
Capacity expansion if orders increase meaningfully
YZJSB said it does not need to expand capacity to execute its current order book of US$10.33bn. YZJSB currently has two 175,000 CBM LNG carriers on order at Xinfu yard for delivery in 2025-26.

"Higher-than-expected gross margin due to lower steel costs and favourable forex impact from weaker Rmb/US$ could be a near-term catalyst."

However, if there is a build-up of LNG carrier orders of 10 units or more, management could consider capacity expansion into an adjacent land at its Xinfu yard, which could cost c.Rmb2.5bn (to be constructed over two years).

On full capacity, the new yard could add delivery of 5 LNG carriers p.a. YZJSB’s current yard capacity is full until end-2025 but YZJ guides that there are 3-5 premium slots reserved for LNG carriers/oil tankers for 2025/early-2026 deliveries.

We think YZJSB is capable of funding internally and still maintain its net cash position, as it had a net cash of c.Rmb3.7bn at end1H22. YZJ is on track to deliver 70 vessels by end-FY22F (all-time high), but we expect YZJ to deliver <70 vessels in FY23F since these vessels are larger.

What other catalysts to look out for?
Firstly, we believe higher-than-expected gross margin due to lower steel costs and favourable forex impact from weaker Rmb/US$ could be a near-term catalyst.

With steel price retracing 25% since May 22, we believe margin expansion could start to kick in by 4Q22F. We currently forecast gross margin of 17-18% in FY23-24F but see upside potential for YZJSB to achieve above 20% (average GM in 2016-17) when the yard was executing the previous peak orderbook secured in 2013-2015 (average of US$2.3bn p.a.).

Steel accounts for 25%/35% of containership/bulk carrier costs.

Secondly, we believe its order win guidance is conservative at US$2bn for 2023F. We believe the premium slots reserved could set YZJSB ahead of the Korean yards that are full till end-2026.

Sustained LNG carrier market post winter could be a game changer for YZJSB if the order win momentum continues, in our view. Risks include a steep rise in steel costs and sharp US$ depreciation hurting margins, and order cancellations and a steep decline in freight rates affecting potential newbuild orders and chartering.

Higher dividend payout of 34-40% for FY22-23F

LimSiewKhee2020Lim Siew Khee, analystWe believe YZJSB could keep its absolute FY22F DPS at S$0.05 (34% payout) even after the spin-off of its debt securities business.

This is higher than its historical average of 29% before the spin-off.

IzabellaTanIzabella Tan, analystWe see room for higher payout of 40% (S$0.07) for FY23F on the back of 23% yoy EPS growth from order execution.

We maintain Add as we see earnings visibility until FY26F.

Our TP is based on 1.65x CY23F P/BV (30% premium to regional yards’ 1.3x average due to stronger margin track record).


Full report here.


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