Analysts are remaining positive on Yangzijiang Shipbuilding (YZJ) BS6 after the company reported earnings of RMB2.81 billion ($544.4 million) in the FY2022 ended December 2022, 24% lower than its earnings in FY2021.
CGS-CIMB Research’s Lim Siew Khee and Izabella Tan have maintained their “add” rating for YZJ with a target price of $1.66, while DBS Group Research analyst Ho Pei Hwa has reiterated her “buy” call for YZJ with an unchanged target price of $1.70.
The CGS-CIMB analysts note that YZJ’s 2HFY2022 core net profit of RMB1.44 billion, 30% down y-o-y, was in line at around 53% of their full-year FY2022 forecast, but formed a higher 57% of the Bloomberg consensus forecast.
They note that year-to-date (YTD), YZJ has announced order wins of some US$670 million ($904 million), representing around 22% of its order win guidance of US$3 billion for FY2023.
“We believe the target is achievable. Clarksons showed that YZJ secured two 95,000 Twenty-foot Equivalent Unit (TEU) containerships from Lepta Shipping for an undisclosed amount. Tradewinds also reported that YZJ is contending with Hyundai Heavy Industries for five 15,000 to 16,000 TEU LNG-fuel neo-panamaxes worth some US$900 million Yang Ming Marine Transport,” say Lim and Tan, while noting that YZJ has not confirmed these new order wins.
As YZJ secures 40% progressive payment prior to delivery according to management, including a 10% to 20% upfront deposit at the point of contract signing, the analysts believe the risks of order cancellations are lowered.
“However, as container freight rates have pulled back significantly since its peak in January 2022, instead of cancellations, we believe a delay in deliveries could be possible. Thus far, YZJ has not had any contract delays negotiations,” they add.
Despite steel costs creeping up, they see the possibility of YZJ’s FY2023 gross margins rising.
They have kept their gross margin forecasts of 17% in FY2023 and 18% in FY2024, as two-thirds of raw materials requirements in FY2023 were procured at lower steel prices and they expect YZJ to execute its higher-priced contracts secured from end-2021 to 2022 in FY2023 to FY2024.
The CGS-CIMB analysts’ target price of $1.66 is based on a 2023 price-to-book value ratio (P/BV) of YZJ’s 30% premium to regional yards’ 1.3x average on a relatively stronger margin track record. This is justified by an FY2023 to FY2024 18% return on equity (ROE) on an order book that stretches till FY2026 with an order replenishment of US$3 billion in the near term, they say.
YZJ’s profit growth of some 19% in FY2023 to FY2024 could also sustain a dividend payout of 36%, which is higher than the 31% average in 2016 to 2021, before the spinoff of YZJ Financial Holdings, which contributed some 40% of its profit during the period.
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Meanwhile, Ho of DBS says that YZJ’s FY2022 earnings could have been above expectations if not for provisions made for jack-up rigs, and shows signs of “compelling” growth ahead as the prime shipbuilding proxy to the clean energy trend.
“YZJ 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 5 percentage point cost advantage through yard optimisation as well as superior project execution and cost controls,” says Ho.
She adds that YZJ has successfully forayed into the LNG carrier market and targets to improve its corporate ESG. “YZJ’s improving corporate governance and pivot towards cleaner vessels such as dual-fuel containerships and gas carriers, which now account for around 40% of its orderbook, could draw more interest from ESG funds,” notes the analyst.
Meanwhile, securing more orders for LNG carriers allows YZJ to scale up and strengthen its market positioning, while the LNG carrier market has high technical barriers to entry and could provide Yangzijiang the next leap of growth, says Ho.
She believes the market has yet to fully appreciate the earnings growth potential from YZJ’s record order backlog. “YZJ’s yards are full through 2025 with an orderbook of over US$10 billion. This is expected to propel an earnings CAGR of 20% in the next three years, driven by both revenue growth and margin expansion, as 80% of its orderbook is made up of containership orders that command higher value and margins. We expect further uplift in its orderbook, boosted by potential orders for large LNG carriers,” says the analyst.
Ho’s target price of $1.70 is based on a 1.7x FY2023 P/BV with a 10.8x implied price-to-earnings ratio (P/E), which she believes is justified by YZJ’s high 17% ROE and 4% dividend yield. This points to a 28% upside potential on top of a 4% dividend yield.
She believes 20% of YZJ’s re-rating could come from earnings growth and 8% from an uplift in the valuation multiple from 8.4x towards 10.8x P/E, on the back of more LNG carrier orders and ESG improvement.
On the other hand, Ho notes that the company’s revenue is denominated mainly in US dollars. Assuming the net exposure of some 50% is unhedged, every 1% depreciation in the US dollar could lead to a 1.5% decline in earnings, while for every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS), this could also result in a 0.8% drop in earnings.
As at 11.44am, shares in YZJ were trading 3 cents or 2.27% down at $1.29.
