Yangzijiang Shipbuilding - UOB Kay Hian 2022-08-10: 1H22 Operationally Strong, With Higher Margins Expected In 2H22


Yangzijiang Shipbuilding - 1H22 Operationally Strong, With Higher Margins Expected In 2H22

  • Operationally, Yangzijiang Shipbuilding reported a strong 1H22 with 35 vessels delivered and nearly US$1.1b in new orders, which brought its net orderbook to US$8.13b. Sequentially its shipbuilding margin expanded by 2ppt to 12.8% − Yangzijiang expects this to continue to rise over the next 12-18 months.
  • One-fifth of Yangzijiang’s market capitalisation is in cash, and it trades at an inexpensive 2023F P/E of 5.4x. Maintain BUY.

Yangzijiang's 1H22 results operationally a strong set of numbers.

  • Yangzijiang Shipbuilding (SGX:BS6) reported 1H22 revenue growth of 70% to RMB9.7b, which resulted in a 32% y-o-y increase in net profit from continuing operations to RMB1.2b. As guided by management and as previewed in our previous note, Yangzijiang delivered 35 vessels during 1H22 which, on a run-rate basis, is ahead of its previous 2022 delivery target of 60 vessels. In our view, Yangzijiang is highly likely to achieve its new target of 70 vessels. At the bottom line however, results missed expectations due to fair value loss on currency hedges.
  • While 1H22’s shipbuilding margin of 12.8% was slightly lower than expected vs our full-year forecast of 13.5%, due to higher raw material costs, it was positive to note that the margin was sequentially higher than the 10.8% margin achieved in 2H21.
  • During the analyst briefing, Yangzijiang's management stated that it expects its shipbuilding margin to continue to expand in the next 12-18 months as it transitions towards building its higher-margin orders that it garnered in 2021.
  • Outlook for new orders. Despite having an US$8.13b orderbook with deliveries stretching into 2025, management appeared confident in achieving US$2b in orders this year (ytd order wins: US$1.1b). Importantly, Yangzijiang disclosed that despite its burgeoning orderbook, it still has slots for large-vessel deliveries in 2024 and thus expects to capitalise on this.
  • Yangzijiang stated that its clients are increasingly focusing on reducing emissions, which is why 1H22 saw a number of dual-fuel vessel orders. In the future, while dual-fuel vessels which use LNG are part of the solution to lower emissions, it is still not a zero-emissions product. As a result, Yangzijiang has been working with its clients on the technology side towards ammonia-powered vessels.

Growing its shipping business.

  • In 1H22, Yangzijiang’s shipping business witnessed a 2.2ppt y-o-y margin increase to 40.3%, underlining the continued buoyancy of this segment. Notably, Yangzijiang added three vessels to its fleet - one 82,000dwt bulk carrier and two 1,800TEU containerships.
  • During the analyst call, Yangzijiang's management stated that these vessels were built on a speculative basis two years ago and while they are currently operating within its shipping fleet, it will look to divest them in the near to medium term.

Still holding a lot of cash.

  • As at end-1H22, Yangzijiang had net cash of RMB3.7b, which equates to S$0.19 per share.
  • During the analyst briefing, management stated that its capex in 2022 may increase slightly given its RMB6m investment in the Jianying LNG terminal and will also look to return cash to its shareholders. Management however did not commit to whether this would be in the form of a share buyback or a higher dividend payout.

Lowering earnings forecasts for Yangzijiang Shipbuilding by 5-15%.

  • We have marginally lowered our gross profit margin assumptions for all three of Yangzijiang’s business segments by 0.5ppt to account for higher-than-expected cost inflation. We also highlight that our earnings downgrade for Yangzijiang's FY22 principally relates to fair value losses from currency hedging, both at the company and at the associate/JV level.
  • Maintain BUY with an SOTP-based target price of S$1.16. See details in the report attached below. By using publicly-sourced replacement cost for its shipping assets, we value this segment at RMB4.8b or S$0.26/share – this is double that of the company’s carrying cost of these assets, or 3x higher than its book value of $0.09 as at end-21. At our target price, Yangzijiang would trade at a 2022F P/E of 6.9x which we do not view as stretched.
  • Inexpensive valuations. Yangzijiang's share price currently trades at a 2023F P/E of 5.4x which is an 18% discount to, and 1 standard deviation below, its 5-year average of 6.6x. Its 2023F P/B of 0.8x is largely in line with its past 5-year average of 0.7x. In addition, assuming that Yangzijiang maintains a payout ratio of 25% for 2022 (2021: 26%), the stock would yield 4.0% and thus provide downside support for its share price.
  • See
  • Catalysts:
  • Evidence of margin expansion from 2H22 onwards.
  • New orders in higher margin segments, eg dual-fuel containerships or LPG tankers.

Adrian LOH UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-08-10
SGX Stock Analyst Report BUY MAINTAIN BUY 1.160 SAME 1.160