|Yangzijiang Shipbuilding has a robust orderbook of US$11b, giving revenue visibility up to 2026. UOB KH has a BUY rating and $1.58 target price for the stock. Below are CGS-CIMB's thoughts -- and a higher target price of $1.66 -- on the FY2022 results:|
Excerpts from CGS-CIMB report
Analysts: Lim Siew Khee & Izabella Tan
Raised order win guidance to US$3bn
|■ Absolute DPS for FY22 was maintained at 5.0 Scts (FY21: 5.0 Scts) despite spinning off YZJFH in Apr 22, dividend payout at 36% (vs. 31% previously).
■ Maintain Add and TP, S$1.66. We like YZJ for its earnings visibility till FY26F, margin expansion and sustainable order replenishment of US$3bn p.a.
Raised annual order win guidance to US$3bn for FY23F
2H22 core net profit of Rmb1,442m (+12.6% hoh; +16.7% yoy) was in line at c.53% of our FY22F estimate, but above Bloomberg consensus at c.57% of FY22F.
YZJ announced YTD order wins of US$0.67bn, representing c.22% of its order win guidance of US$3bn for FY23F.
|40% progressive payment|
|"YZJ secures 40% progressive payment prior to delivery according to management, including 10-20% upfront deposit at the point of contract signing, which we believe could lower the risks of order cancellations."
We believe the target is achievable. Clarksons showed that YZJ secured two 95,000 Twenty Equipment Unit (TEU) containerships from Lepta Shipping (amount undisclosed).
Tradewinds also reported that YZJ is contending with Hyundai Heavy Industries for five 15,000-16,000 TEU LNG-fuel neo-panamaxes worth c.US$900m Yang Ming Marine Transport. YZJ has not confirmed these new order wins.
Order cancellations risk low
YZJ secures 40% progressive payment prior to delivery according to management, including 10-20% upfront deposit at the point of contract signing, which we believe could lower the risks of order cancellations.
However, as container freight rates have pulled back significantly since its peak in Jan-22, instead of cancellations, we believe delay in deliveries could be possible. Thus far, YZJ has not had any contract delays negotiations.
FY23F gross margin could rise despite steel costs creeping up
Steel prices have been inching upwards to Rmb4,362/metric tonne as at 22 Feb 2023 (+5.7% YTD), which management expects to stabilise at c.Rmb5,000/metric tonne for 2023.
But we keep our GM forecasts of c.17% in FY23F and 18% in FY24F, as: 1) twothirds of raw materials requirements in FY23F were procured at lower steel prices; and 2) we expect YZJ to execute its higher-priced contracts secured from end-2021 to 2022 in FY23F-24F.
We understand from the management that YZJ had in 4Q22 assumed steel at Rmb4,400/metric tonne for 2025-2026 deliveries.
|Maintain Add on earnings visibility till FY26F from order execution
Our TP of S$1.66 is based on CY23F P/BV, i.e. a 30% premium to regional yards’ 1.3x average on a relatively stronger margin track record.
This is justified by FY23-24F 18% ROE on order book that stretches till FY26F and order replenishment of US$3bn in the near term.
The profit growth of c.19% in FY23-24F could sustain dividend payout of 36%.
This is higher than average 31% in 2016-21 (before the spinoff of YZJFH, which contributed c.40% of its profit then).
Re-rating catalysts: stronger margins/orders improving profitability.
Downside risks: sharp rise in steel costs eroding margins and order cancellations weakening the earnings visibility.
Full report here.