CGS International (GCSI) analysts Lim Siew Khee and Meghana Kande have maintained “buy” on Yangzijiang Shipbuilding with a higher target price of $2.50 from $2.35 previously on higher margin expectations.
They note that Chinese steel prices are down about 10% year-to-date (ytd) to around RMB3,700 ($684) per tonne. With this, Yangzijiang Shipbuilding is likely to see greater margin uplift than expected.
The company’s recent contracts include steel price assumptions of RMB4,000 to RMB5,000 per tonne. As the company procures steel six months in advance, CGSI believes it will be able to operate at high margins well into 2H2025.
“We increase our shipbuilding gross margin forecast to 28% for both FY2024 and FY2025 as Yangzijiang Shipbuilding executes higher-value contracts won since 2021 at lower steel prices. We expect the company’s 1HFY2024 core net profit to be about RMB2.6 billion, up 12% h-o-h and 53% y-o-y,” the analysts point out.
There is also a strong demand for bulk carriers, the analysts highlight. Citing Clarkson data, they note that global trade of iron ore was up 5.4% y-o-y, grains grew 7.6% y-o-y, and minor bulk rose by 3.4% y-o-y.
The increasing trade activity has been driving up bulk carrier earnings as tracked by the Baltic Dry Index, which is up about 2.4% ytd, Lim and Kande note.
“With 25 bulk carriers in its fleet as of 1QFY2024, Yangzijiang Shipbuilding is likely to see strong ship management margins in the near term. We forecast gross margins 35%, 30%, 25% for FY2024, FY2025 and FY2026. In addition, a heated secondhand market could also drive further shipbuilding orders for the company as fleet owners take advantage of the favourable freight and time charter rate environment,” they add.
Yangzijiang Shipbuilding could also be a strong contender for future clean gas carrier orders, as it still has a few slots left for early 2027 delivery, CGSI highlights.
As at July 15, shares in Yangzijiang Shipbuilding are trading at an unchanged $2.26.
