Analysts at CGS-CIMB Research, Citi Research and DBS Group Research have kept their “add” and “buy” calls on Yangzijiang Shipbuilding BS6 with higher target prices of $1.87, $1.84 and $1.90 respectively following stronger-than-expected 1HFY2023 ended June earnings results.
For its 1HFY2023, Yangzijiang reported 1HFY2023 net profit of RMB1.73 billion ($321.7 million), up 26% y-o-y, ahead of expectations. This is on the back of stronger revenue growth of 16% and margin expansion. Additionally, the company delivered 31 vessels during the period, on track to meet its full year target of 57 vessels.
As at end-June, Yangzijiang’s orderbook stood at an all-time-high of US$14.7 billion, of which 56% are clean energy vessels. Based on Yangzijiang’s revenue maximum run rate of about US$3.3 billion a year, the current order book implies over four years of revenue coverage, which is at higher than the ideal range of 2-3x, says DBS Group Research analyst Ho Pei Hwa.
"Yangzijiang is the largest and best-managed private shipbuilder in China and has a wide economic moat to compete against Chinese and Korean peers. It has at least a five percentage point (ppt) cost advantage through yard optimization as well as superior project execution and cost control. It successfully made a foray into the liquefied natural gas (LNG) carrier market and targets to improve its corporate environmental, social and governance (ESG)," she writes.
"We believe 60% of the re-rating could come from earnings growth and 40% from an uplift in the valuation multiple from 8x towards 10x P/E, on the back of more LNG carrier orders; and ESG improvement," she adds.
Citi analyst Jame Osman notes that there are scopes for margins to improve further. Following a post-results briefing, Yangzijiang outlined the potential for gross shipbuilding margin improvement to persist on several factors in the near-term.
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For one, steel costs in China are expected to remain stable, while labour costs have already started to decline given ample supply. About 60% to 70% of Yangzijiang’s order book is hedged to the US dollar, while construction on higher-priced orders are progressively recognised.
To this end, Osman lifts his shipbuilding margin assumptions for FY2023 to FY2025 by 1.7 percentage points to 2.3 percentage points, as well as forecasting FY2023 margin of 17.8%.
For 2HFY2023, CGS-CIMB analyst Lim Siew Khee expects slower order momentum as yards are full until 1HFY2027, with two to three large premium slots for 2026 delivery. She believes Yangzijiang could secure US$1 billion to US$1.5 billion of orders in 2HFY2023, while the company maintains its FY2024 order win target of US$3 billion.
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“Tight yard capacities globally allow Yangzijiang to choose contracts with good margins and economies of scale to reap operating leverage. With its gross order book at US$14.7 billion and operations at full capacity, we forecast revenue run-rates per annum in the range of US$3 billion to US$3.3 billion. Yangzijiang is not committing to yard expansion but is looking to acquire smaller adjacent yards to optimise use of capital,” says Lim.
She further notes that International Maritime Organisation’s recent more aggressive targets in decarbonisation could spur owners to refurbish or replace their fleets. Yangzijiang expects its share of clean energy vessels to increase going forward — primarily from higher methanol orders — which could also drive positive margin impact. Lim highlights that Yangzijiang expects its methanol retrofit business to be more significant by FY2025.
CGS-CIMB has raised its FY2023 to FY2025 earnings per share estimates by 6%-14%, while Citi has raised its FY2023 to FY2025 earnings per share estimates by 20%-95%. DBS has raised its FY2023 to FY2024 earnings forecast by 14% and 5% respectively.
As at 12.47pm, shares in Yangzijiang are trading 7 cents higher or 4.43% up at $1.65.
