Yangzijiang Shipbuilding - UOB Kay Hian 2021-09-20: Fundamentals Remain Strong – Re-iterate BUY Rating


Yangzijiang Shipbuilding - Fundamentals Remain Strong – Re-iterate BUY Rating

  • Steel prices, representing one-third of Yangzijiang Shipbuilding (SGX:BS6)’s costs, have stabilised while iron ore prices have collapsed, thus implying higher margins going forward, especially as more of Yangzijiang Shipbuilding’s high-margin containership orders are built.
  • On the demand side, ship owners are experiencing bullish industry conditions, which will potentially underpin order flow into 2022.
  • We remain comfortable with Yangzijiang Shipbuilding’s low loan-to-valuation for its property collateral within its debt investments business. Maintain BUY.

What's New For Yangzijiang Shipbuilding

  • On Yangzijiang’s input side, steel prices have stabilised since April after having risen by ~50% in the first four months of 2021. We also note that iron ore prices on the Dalian Commodity Exchange have tumbled > 40% since mid-Jul 21 taking heat off the high steel prices. Yangzijiang Shipbuilding’s management believes that steel prices should remain stable for the remainder of 2021 and potentially decline in 2022 which would bolster Yangzijiang Shipbuilding’s margins given that steel costs are nearly one-third of its normalised cost structure.
  • For Yangzijiang’s end customers, container shipping remains strong with A.P. Moeller-Maersk recently raising its guidance for 3Q21 and full-year 2021 as continuing bottlenecks in supply chains have led to higher freight rates. Although two major global container liners – Hapag Lloyd and CMA CGM – have instituted rate freezes, this may partially be a strategy to regain market share after having lost ground to smaller players outside of the three major shipping alliances. The Shanghai Container Export Index continues to remain on an upward trend after having risen 50% in 1H21.
  • Traditional year-end spike in end consumer demand will continue to support container rates with US retailers’ sales-to-inventory ratio at 30-year lows. As a result of this, the Far East to North America route, which has already seen rates increase 33% y-o-y, will remain robust in our view. In the longer term, the 2024-25 period will witness the delivery of the majority of the current record global orderbook of 3.3m TEUs of containerships; however, the shipping association BIMCO believes that higher long-term rates will ensure the profitability of these vessels.

Property concerns overblown.

  • China Evergrande’s US$300b debt hole has investments business.

Yangzijiang's orderbook full until 2024.

Maintain BUY rating on Yangzijiang Shipbuilding with unchanged PE-based target price

Shipbuilding margins to expand from 2H21 onwards.

Share price catalysts:

  • Evidence of margin expansion from 2H21 onwards.
  • New orders in higher margin segments, e.g. dual-fuel containerships or LPG tankers.
  • Potential inclusion into the MSCI Singapore Index.
  • Potential demerger of its debt investments business from the core shipbuilding business.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2021-09-20
SGX Stock Analyst Report BUY MAINTAIN BUY 2.000 SAME 2.000