Yangzijiang Shipbuilding - UOB Kay Hian 2022-11-15: Valuations Starting To Look Stretched; Downgrade To HOLD


Yangzijiang Shipbuilding - Valuations Starting To Look Stretched; Downgrade To HOLD

  • Yangzijiang Shipbuilding (SGX:BS6)’s 3Q22 update showed solid project execution with continued timely delivery of its customers’ ultra-large containerships.
  • After its strong share price performance, Yangzijiang’s valuations now appear stretched – and with its yard capacity full until at least 2H25, further new-order wins may not drive Yangzijiang's Share Price higher.
  • We believe much of the good news has been captured and thus downgrade Yangzijiang to HOLD. We roll forward our valuation year to 2023, resulting in a fair value of S$1.55.

Downgrade Yangzijiang Shipbuilding to HOLD due to valuations.

  • Yangzijiang's Share Price has easily outperformed the STI since the demerger of its financial investments arm in Apr 22 with the stock up 70.1% vs the STI’s 1.7% increase. As a result, Yangzijiang’s P/E and P/B valuations now look stretched relative to its historical range with the former close to 1 standard deviation above its 5-year average while its P/B is above its 5-year peak. We are also cognisant that its yard capacity is full until at least 2H25 and thus any new order wins would not necessarily lead to earnings accretion until at least 2024. We therefore downgrade Yangzijiang to a HOLD rating.
  • New order wins on pause in the near term. During its analyst briefing for its 3Q22 business update, Yangzijiang's management commented that it will likely see a pause in new-order wins until at least mid-1Q23 given that many shipowners are travelling, coupled with the fact that an extended holiday season is around the corner. It should be noted that Yangzijiang’s order wins this year have easily exceeded expectations with nearly US$4.2b in new orders.
  • For 2023, Yangzijiang has maintained its ‘standard’ order-win expectation of US$2b with orders for tankers and bulk carriers rather than containerships, while LNG vessels will witness longer term growth.
  • No new capacity additions. Despite the fact that Yangzijiang’s yards are full until 2024, thus any new orders will face delivery only from 2H25 onwards, management stated that it remains content with its shipyard capacity and will not look to expand either organically or via acquisitions.
  • Strong execution of current orderbook. Yangzijiang disclosed that as at 13 Nov 22, it had delivered 60 vessels to its customers which is ahead of its Jan 22 management plan. As previewed during its 1H22 results briefing, Yangzijiang expects to deliver 70 vessels this year.

Overall shipbuilding margins expected to expand.

  • Yangzijiang highlighted that with average steel prices in November at around RMB4,400 per tonne, its shipbuilding margins could see some expansion for the ships that will be delivered in 2025 and 2026. While it has previously guided for flat shipbuilding margins in 2H22, it may improve in 2023 as it expects steel prices to gradually trend down.
  • However, Yangzijiang sounded a note of caution as some of its current construction projects commenced at a period when steel prices were high in 2021, thus limiting the margin expansion in 2023.

Expects to be selective for new orders for LNG carriers (LNGC).

  • On the analyst call, Yangzijiang’s management stated that it will selectively accept new orders for large LNGCs as it sees some supply chain risk for equipment and raw materials. While Yangzijiang stated that gross profit for its LNGC construction will be good, it did not provide any guidance on the gross profit margin given that LNGCs have a longer construction period and use a larger amount of raw materials relative to other vessels and thus not comparable.

Yangzijiang Shipbuilding is still holding a lot of cash.

  • As at end-1H22, Yangzijiang had net cash of RMB3.7b, equating to S$0.19/share.
  • While Yangzijiang’s capex in 2022 may increase slightly given its RMB6m investment in the Jianying LNG terminal, management has stated that it will also look to return cash to its shareholders. However, this return of cash to shareholders may take the form of either a share buyback or a higher dividend payout ratio for its full-year dividend.

Yangzijiang Shipbuilding – Earnings forecast revision & recommendation

  • Downgrade Yangzijiang to HOLD with a higher fair value of S$1.55. We have rolled forward our valuation year to 2023 and applied a target P/E multiple of 9.0x (unchanged from previous target multiple) to our 2023 EPS forecast. Our target P/E multiple is 1 standard deviation above the Yangzijiang’s past 5-year average of 6.7x which we view as fair given the company’s earnings growth in 2023, as well as the stability of its earnings due to its US$10.3b orderbook at present.
  • We note that at our fair value of S$1.55, Yangzijiang would trade at a 2023 P/B of 1.3x.
  • See
  • Catalysts:
    • Evidence of margin expansion from 2023 onwards.
    • New orders in higher-margin shipbuilding segments, e.g. dual-fuel containerships, LPG tankers or large LNG carriers.

Adrian Loh UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-11-15
SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.55 UP 1.440