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