Outlook remains buoyant
1H22 results preview and earnings outlook
Expect at least 20% y-o-y increase in earnings in 1H22. Yangzijiang’s shipbuilding related business generated about Rmb1bn net profit in each of 1H21 and 2H21 last year. We expect the company to report net profit of at least Rmb1.2bn for 1H22, on revenue growth. We see room for upside surprise and earnings upgrade post results.
On track for record high deliveries. Based on current schedule, Yangzijiang plans to deliver 70 vessels in 2022, a record high, up 19% from recent high of 59 vessels in 2019 and 40% higher than 50 vessels last year.
This is attributable to improved efficiency and capacity expansion from the reactivation of Changbo yard that builds mostly small-to-medium size vessels. We understand that production progress is largely on track despite some workflow adjustments during the lockdown.
Margins should have bottomed out from 2H21. Yangzijiang’s shipbuilding gross margins had fallen from ~25% in 2H20 to 13.5% in 1H21 and 10.8% in 2H21 due to lower newbuild prices and activity level owing to low order flows at the beginning of the COVID pandemic in 2020. The declining trend is set to reverse from 1H22, and we estimate that margins could rebound from ~10% towards mid-teens level.
Yangzijiang has delivered most of the low margin older contracts in 1H22 and is now executing mostly the higher margin contracts that were secured from end 2020. In addition, the recent favourable forex and steel cost also bode well for further margin expansion in 2H22. The bulk of these orders has factored in high steel prices of over Rmb6000/t and the company has hedged its USD exposure at Rmb6.6-6.8. We project 3-year earnings CAGR of ~15% through to 2024, backed by a record high order backlog of >US$8bn.
Shipbuilding demand remains firm
Freight rates trending up in 2H22. Shipping rates headed south in 2Q as demand was impacted by the economic slowdown in China, exacerbated by COVID lockdowns and recession fears. Positive indicators of demand rebounding have been observed as we enter the peak season from 3Q, which typically witnesses rising freight rates.
Supply is tight. While demand slowdown is inevitable given the rate hikes and weak macro backdrop, the supply side of the equation remains favourable for bulk carriers, tankers, and LNG carriers. Orderbook-to-fleet for tankers and bulk carriers are at historical lows of 5% and 7% respectively, implying low single digit supply growth in the next 2 years. Hence, we could see demand growth outstripping supply growth for these vessels through 2023.
Containerships will see more supply in 2023 with deliveries adding ~8% to current fleet capacity. Orderbook-to-fleet has risen to 28%, a healthy level, after a big wave of ordering in 2020-2021. Besides containerships, newbuild demand is also very strong especially for bulk carriers, but delivery slots at major shipyards have been taken for containership orders with earliest delivery from 2024. Hence, the larger yards are selective in order intake this year given the huge orderbacklog. We are likely to see shipbuilding orders spike again next year for bulkers and tankers as shipyards fill their capacity for 2H24 and 2025.
Possibly the most profitable shipyard. Yangzijiang is the only listed shipyards that has been delivering decent profits and returns through the boom-and-bust cycles since its listing in 2007. Most shipyards peers have been plagued with losses in the past 10 years as shipbuilding faced a prolonged downturn post the supercycle in 2007-2009.
Investment spin-off improves corporate governance. The separate listing of Yangzijiang Financial Holdings (YZJFH) in Apr-2022 should alleviate investors’ concerns on corporate governance relating to the investment business. Yangzijiang is now a pure shipbuilding player to ride the industry uptrend.
Making breakthrough in clean vessels and LNG carriers. YTD, Yangzjijiang secured decent new orders of c.US$1bn. It is worth noting that recent new orders for LNG dual-fuel containerships and Liquefied Ethylene Gas (LEG) carriers showcase Yangzijiang’s growing focus and expertise in the LNG market. The dual fuel containerships are equipped with a GTT Mark III membrane containment tank system, which has been co-developed in-house. This demonstrates the Group’s focus in moving up the value chain to more complex LNG vessels and lays a foundation for further business expansion. This is also part of its strategy to improve ESG by offering cleaner solutions.
Discount to peers unwarranted. Yangzijiang remains very undervalued, trading at 1x FY22 P/B and 8x FY22F PE. Its Korean and Chinese peers are trading at an average P/B of 1.2-1.5x, though most are in the red this year and are projected to make small profits in 2023. On the other hand, we forecast Yangzijiang to deliver 15% earnings CAGR and mid-teens ROE in 2022-2024.