CGS International’s (CGSI) Lim Siew Khee and Meghana Kande have maintained their “add” call on Yangzijiang Shipbuilding (YZJ) and increased their target price by 39 cents to $2.35 after an analyst briefing on May 28.
At the briefing, which took place a day after CGSI’s initial report, YZJ explains that the key positive surprise for ytd orders was contributed by containerships backed by strong freight rates, which in turn boost ship owner’s profitability leading to increased newbuild orders.
Affirmed by the company’s ytd order wins of US$3.32 billion ($4.48 billion) with deliveries scheduled in 2027, the analysts have subsequently upped their order win target for YZJ to US$5.5 billion for 2024. This is despite YZJ’s conservative guidance of US$4.5 billion for 2024.
The CGSI analysts also note the “healthy” demand for gas carriers, with YZJ delivering 28 vessels in 1QFY2024 and the company being on track to deliver 63 vessels in FY2024.
The company’s enquiries remain healthy for very large ethanol carriers (VLEC) and very large ammonia carriers (VLAC). A supply shortage of methanol has also caused some of YZJ’s customers to enquire on LNG-fuelled vessels, with slots available for vessels to be delivered in 2027.
“There are also enquiries for 2028 deliveries but YZJ is selective and will only focus on high priced/margin contracts for negotiation,” add the analysts.
See also: OCBC, citing potential recovery, initiates coverage on Nanofilm with tentative 'hold' call
YZJ averages around 13 to 14 months to deliver a vessel, with a strike steel revenue recognition of 20%, note the CGSI analysts.
The analysts also note that China’s domestic steel spot prices have remained stable at RMB4,000 ($743.82) per metric tonne, which supports their thesis on YZJ’s margin expansion.
While the company’s FY2023 payout stood at 33% with a dividend per share (DPS) of 6.5 cents, the CGSI analysts maintain their payout forecast at 32% with a DPS of 7 cents in FY2024.
See also: Macquarie revises Singapore earnings growth for FY2024 to 7% from 3%
The analysts’ target price increase is based on a 35% premium to regional yards, given its stronger margin record and superior return on equity of 20%.
As at 2.17pm, shares in YZJ are trading at 19 cents higher or up 9.55% at $2.18.
