• In 2022, the stock price of Yangzijiang Shipbuilding trended up gradually as Yangzijiang delivered contract win after contract win, continuing the positive streak into 2023 (year-to-date: US$5.8 billion of new orders).

Chart8.232023 profit forecast by CGS-CIMB. Chart: Reuters
• It not only is sitting on a record orderbook (US$14.7 billion outstanding) but is enjoying profit margins, as reported in its quarterly results, that are respectable. And a number of operating metrics will likely stay favourable, such as steel costs.


• At $1.68 now, the stock price is up 75% over the past 52 weeks, and 40% year-to-date.

• For more, read CGS-CIMB's report, with a link to UOB KH's as well, below.



Excerpts from CGS-CIMB report
Analyst: Lim Siew Khee


Yangzijiang Shipbuilding -- Tight capacity to re-rate valuations

■ We raise our FY23F-25F EPS by 6-14% to reflect the upward GM (gross margin) trend as YZJSB gains from relatively stable steel costs and near-term weaker Rmb.

YANGZIJIANG 

Share price: 
$1.68

Target: 
$1.87

■ We expect order momentum to slow in 2H23F as YZJSB is selective in selling slots beyond 2027F. We expect c.US$1bn-1.5bn order wins in 2H23F.

■ We believe tight global yard capacity should re-rate YZJSB’s valuations and that its valuation gap against the Korean and Chinese peers could narrow.

■ Our TP is raised to S$1.87, still based on a 30% premium to regional yards’ 1.4x average. Catalysts: stronger margins/orders improving profitability.


ship launch

Optimum capacity till 2026F; selling 2027 slots


We expect slower order momentum in 2H23 as yards are full till 1H2027F, with 2-3 large premium slots for 2026F delivery.

Tight yard capacities globally allow YZJSB to choose contracts with good margins and economies of scale (i.e. series of 5-10 similar ships) to reap operating leverage.
-- CGS-CIMB

We believe Yangzijiang Shipbuilding (YZJSB) could secure US$1bn-1.5bn of orders in 2H23F.

Management maintains its 2024F order win target of US$3bn.

Tight yard capacities globally allow YZJSB to choose contracts with good margins and economies of scale (i.e. series of 5-10 similar ships) to reap operating leverage.

With its gross order book at US$14.7bn and operations at full capacity, we forecast revenue run-rates p.a. in the range of US$3bn-3.3bn.

YZJSB is not committing to yard expansion but is looking to acquire smaller adjacent yards to optimise use of capital.

 Can margins reach previous high?

 

1H23 core shipbuilding GM came in at 17.7%, higher than our expectation of 17% in FY23F, mainly due to a weaker RMB and lower steel cost input.

"Newbuild prices have trended up 20-30% since 2020. Labour cost is more competitive now as there is more skilled workforce available, with slower annual salary growth."
-- CGS-CIMB

YTD steel cost of c.Rmb4k/metric tonne is 20% lower than the c.Rmb5k/metric tonne at end-2020-2021.

Management is of the view that steel costs are likely to remain stable in the near-term, on the back of a slower-than-expected recovery in China’s economy.

Newbuild prices have trended up 20-30% since 2020 (Figs 1 to 3). Labour cost is more competitive now as there is more skilled workforce available, with slower annual salary growth. YZJSB noted that labour costs were less than 20% of total costs in 1H23 (pre-Covid: 25% of costs).

We believe GM for new contracts under negotiation currently could fetch more than its average of 15-16% pre-Covid FY17-19 levels.

We raise our GM assumptions to 18.5%/20.5%/21% for FY23F/24F/25F (previously: 16.5-18%), closer to previous highs of c.22% in FY14-16.

 Demand for green vessels 

 

Reiterate Add. IMO’s recent more aggressive targets in decarbonisation could spur owners to refurbish/replace their fleets, in our view.

LimSiewKhee2020Lim Siew Khee, analystYZJSB expects its share of clean energy vessels to increase going forward (primarily from higher methanol orders), which could also drive positive margin impact. Management noted that the methanol retrofit business will be more significant by 2025F.



 Cheaper than the Korean and Chinese yards (2x CY23F P/BV)

 

Our TP is pegged at 1.8x FY23F P/BV, justified by its 18% ROE in FY23-24F.

Risks: sharp rise in steel costs eroding margins and order cancellations weakening its earnings visibility.


Full report here
UOB KH report here




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