CGS International’s Lim Siew Khee and Meghana Kande and Citi Research’s Luis Hilado have maintained their “add” and “buy” calls on Yangzijiang Shipbuilding (YZJ) following the positive order book momentum highlighted in YZJ’s business update for the 1QFY2024 ended March 31.
In their report dated May 27, Lim and Kande note that YZJ’s order book has reached a record high of US$16.1 billion ($21.69 billion) as of May 2024.
While keeping their target price at an unchanged $1.96, the CGSI analysts remain “optimistic” with the rise of YZJ’s share of clean energy vessels to 61% of its order book which includes new orders for six methanol dual-fuel containerships.
Additionally, the analysts also like that the group has already secured new contracts valued at US$3.32 billion year-to-date (ytd), representing 74% of the company’s FY2024 target of US$4.5 billion. Of the 38 vessels contracted, 12 are containerships and 14 are oil tankers.
With the current container freight rate index standing at double the level seen at the end of 2023 as per Clarksons Shipping Intelligence, the analysts view that elevated freight rates have contributed to YZJ’s current order momentum.
“Although YZJ did not release its financials in its business update, we expect to see an improvement in its margins on the back of stable steel prices,” say Lim and Kande.
Additionally, with China’s currency weakening against the American dollar, the analysts note that China’s domestic steel spot prices have been trending below RMB4,000 ($743.82) per metric tonne since early March this year as per Bloomberg data. Lim and Kande expect YZJ’s overall gross margins to stand at 24.5% and 25.4% for FY2024 and FY2025 respectively.
Citi Research’s Hilado also continues to like YZJ for the group’s “robust” order book momentum.
“We believe that with YZJ achieving 74% of its $4.5 billion FY2024 target already ytd, guidance will likely be increased in the 1HFY2024 reporting period. In our view, management maintained its guidance in 1QFY2024 likely due to such guidance not yet factoring for FY2028 contracts,” he writes.
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“Thus, if order intake remains strong and leads to opening up its yards for FY2028 work such guidance will likely lead to upside,” he adds.
Furthermore, Hilado notes that management has indicated that containership demand remains strong with operators continuing to operate profitably despite the Red Sea incidents.
As such, the analyst has raised his FY2024 estimate for order win assumption to $6.8 billion, which is 50% higher than the group’s present guidance. Hilado’s new estimate translates to revenue visibility for up to FY2028.
Referring to YZJ’s FY2023 results, the analyst notes that management continues to “cautiously explore” potential yard expansion in the face of current industry demand.
“We believe the trade-off of short-term margin pressure from expansion or construction-related expenses and timing the cycle being the key determinants of whether such endeavours are pursued,” says Hilado.
With his increased revenue and order win estimates, the analyst notes that YZJ continues to offer “healthy” upside from current levels due to the industry upcycle and has raised his target price from $1.84 to $2.45. The analyst’s target price is based on a P/E ratio of 10 times.
As at 4.04pm, shares in YZJ are trading 7 cents higher or up 3.63% at $2.00.
