CGS-CIMB Research analysts have maintained their “add” recommendation for Yangzijiang Shipbuilding (Holdings) BS6 with an unchanged target price of $1.66.
In their report dated April 25, analysts Lim Siew Khee and Izabella Tan say they expect gross margins to rise from the execution of Yangzijiang’s higher-valued contracts secured from FY2021.
Year-to-date (ytd), Yangzijiang has secured order wins of US$1.18 billion ($1.58 billion) scheduled for delivery from FY2023 to FY2026, or 39% of its US$3 billion target for the full year.
Orders secured this calendar year have consisted of 18 oil tankers, one Liquefied Ethylene Gas (LEG) vessel and 4 bulk carriers.
The analysts point out that product tanker newbuild prices ytd have trended upwards by 8% to 10% y-o-y. Meanwhile, freight rates for Large-Range (LR) 2 tankers rose to a historical high of US$46,500 per day in April and Medium-Range (MR) tanker freight rates neared an all-time peak of US$32,000 per day in March.
“We believe this reaffirms the firm tanker outlook that could underpin Yangzijiang’s FY2023 order win target of US$3 billion. We note that ytd order wins of US$1.18 billion are nearing Yangzijiang’s average order wins of US$1.4 billion per annum from FY2009 to FY2019,” say Lim and Tan.
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In its contract negotiations, Yangzijiang has raised steel cost assumptions from RMB4,400 ($848.50) per tonne in 2022 to RMB5,000 per tonne in 2023, where steel prices have been trending. The company says it does not expect further increases to steel prices considering the relatively weaker demand from other industries, such as real estate in China.
Meanwhile, contract prices have also trended upwards since 1QFY2021.
While no financials were disclosed in the company’s 1QFY2023 update, the analysts note that Yangzijiang’s orderbook of US$10.98 billion continues to bear its previous peak of US$10.51 billion as at end-FY2022.
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The company has two to three slots left for delivery in FY2025, reserved for potential shipowners with large orders of around 10 vessels who prefer at least one vessel to be delivered in FY2025.
According to Yangzijiang, this approach could give the company an edge over peers in potential contract negotiations, as most peers’ yards are full for delivery in 2025.
For FY2026, Yangzijiang has fewer than 10 vessel slots left for delivery, with no vessel preference and its main priority being securing the highest contract prices.
Ytd, the company has delivered 16 vessels or some 28% of its 57 vessel target for FY2023.
Consequently, the analysts believe Yangzijiang’s margin growth is protected and set to expand from FY2023 to FY2025. They are estimating FY2023, FY2024 and FY2025 gross margins of 17%, 18% and 18% respectively.
Their target price of $1.66 is based on a 1.7x 2023 price-to-book value (P/Bv), at a 30% premium to regional yards’ 1.3x average given Yangzijiang’s stronger margin track record, justified by its FY2023 to FY2024 return on equity (ROE) of 18%. “We maintain our ‘add’ call on margin expansion and sustainable order replenishment of US$3 billion per annum,” say Lim and Tan.
The analysts’ rerating catalysts include stronger margins and orders improving profitability, while downside risks include a sharp rise in steel costs eroding margins and order cancellations weakening its earnings visibility.
As at 1.23pm, shares in Yangzijiang were trading 1 cent or 0.81% up at $1.25.
