|• With a suite of global customers and their strong orders for ships, Yangzijiang Shipbuilding is not vulnerable to the current weak domestic Chinese economy. Indeed its stock price has run up 34% year-to-date, trading at $1.72 recently.
• This is on the back of its robust business performance: For 1HFY23, it reported a 16% increase in revenue to RMB11.3 billion and a 47% increase in net profit to RMB1.73 billion, riding on its core shipbuilding business.
• The company's orderbook is strong, with a total value of RMB14.7 billion as of June 30, 2023. This is the highest orderbook value in the company's history, which means that its future financial performance is on strong footing.
• CGS-CIMB is forecasting RMB3.6 b (S$670 m) profit for full-year 2023. And a dividend yield of 3.9% -- based on a forecast rise from RMB0.25 in 2022 to RMB0.35 this year.
• With a market cap of around S$6.76 billion currently, the stock is trading at ~10X PE (on CGS-CIMB's forecast FY23 earnings) -- which is not an unattractive valuation. Read more of what the CIMB analyst has to say after a recent visit to the shipyard....
Excerpts from CGS-CIMB report
Analyst: Lim Siew Khee
Inverse direction between ASP and cost driving margin upcycle
|■ We visited YZJSB’s New Yard and Xinfu Yard in Jiangyin on 19 September. The yards are currently executing orders clinched in 2021.
■ Its improving earnings quality in FY24F (we project 15% EPS growth) could stand out given the 4.4% aggregate net profit growth for the Singapore companies we cover.
■ Reiterate Add with a higher TP of S$1.96 at 50% premium (previously 30%) to the average P/BV of CY23F for regional yards on YZJSB’s superior margins and ROE.
|Yard visit in a nutshell|
Since our previous visits to YZJSB yards in 2013 and c.2008, YZJSB has climbed up the shipbuilding value chain and now builds large-scale vessels with systematic yard workflows.
According to management, YZJSB targets to deliver 57 vessels in 2023 (31 YTD) and 50 p.a. in 2024-25, with a variance of 2-3 vessels a year.
|Global newbuild containership prices have trended up c.30% since May 2021, while steel prices have retreated c.40%.|
Current staff strength at the yard including subcontractors stands at c.26k-28k (average pre-2020: 18k-19k). Its yard staff generally work 8-hour single shifts with reduced workload on weekends.
On average, from strike steel to completion, the yard takes c.10 months to build a <100k dwt bulk carrier and 14-16 months for a +20k TEU containership.
The yard has steel inventory on hand for c.3-4 months of its requirement. 3Q is typically its busiest for the year.
|We now expect FY24-25F GPM of 23-24%|
Management is of the view that steel prices are likely to remain stable in the near term.
Global newbuild containership prices have trended up c.30% since May 2021, while steel prices have retreated c.40%, according to Bloomberg (Fig. 6).
As YZJSB progressively executes orders from 2H21, when ship prices had just started to turn positive, we believe its core shipbuilding gross margin (GM) for FY24-25F could reach 24%.
We lift our GM forecasts to 23% in FY24F and 24% in FY25F (previously: 21% in FY24-25F).
|Deferrals a key downside risk|
As Shanghai Containerised Freight Index plunged to c.949 on 15 Sep 2023 from its peak of c.5,094 in Jan 2022, the profitability of containership operators started to weaken as EBITDA margins declined c.50% quarter to date, according to Bloomberg.
|"Order cancellations are likely in a recessionary environment but milestone payments from YZJSB customers of up to 50% prior to delivery could limit this risk."|
We take comfort in liners’ firm balance sheets from the super profits generated in 2021-22.
Order cancellations are likely in a recessionary environment but milestone payments from YZJSB customers of up to 50% prior to delivery could limit this risk.
We think deferrals could be more likely than cancellations, if any.
Full report here