Steady outlook
- This is YZJ’s first results announcement after its debt investment business (YZJFH SP: Add, TP S$0.74) was spun off in Apr 22.
- Excluding discontinued operations, core profit of Rmb1,171m was in line with our expectations but missed Bloomberg consensus at 49%/39% of FY22F.
- It is on track to meet its target of 70 vessel deliveries by end-FY22F. Orderbook at US$8.13bn for delivery in 2022-25F. ReiterateAdd.
Record 35 vessels delivered; YTD order wins at US$1.09bn
YZJ delivered 35 vessels in 1H22 (vs. 23 vessels in 1H21), the highest ever on a half yearly basis. We think it is on track to hit its target of 70 vessel deliveries by end-FY22F. YZJ secured additional US$100m of orders for two vessels in July 22, bringing YTD order wins to US$1.09bn for 18 vessels (10 containerships, 6 bulk carriers, and 2 LNG/LPG/LEG vessels). We deem YTD US$1.09bn order wins as healthy compared to its average order wins of US$1.4bn p.a. during FY09-FY20. YZJ projects to deliver its
US$8.13bn orderbook in 2022-25F, which should give it earnings visibility beyond FY24. Management does not see high risks of order cancellations despite the economic volatility. We take comfort in that YZJ collects a 40% deposit prior to delivery.
High raw material costs could taper off in 2H22F; margins to rise
Shipbuilding GM fell to 12.8% in 1H22 vs. 13.5% in 1H21 as average steel prices climbed c.35% from Jun-Dec 20 to Jun-Dec 21 (5,445 Rmb/metric tonne). YZJ typically procures steel 3-6 months in advance, with steel costs typically forming c.20% of total COGS. Steel prices declined to an average of 4,966 Rmb/metric tonne in Jan-Jun 22. We also expect execution of higher-value contracts (secured in FY21) to start in 2H22F. We remain conservative as we forecast a 13% shipbuilding GM for FY22F, but higher GMs of 17% and 18% for FY23F and FY24F, respectively. Management guided that YZJ still has a few large containership slots for deliveries in 2024, reserved for high margin orders.
Shipping revenue at all-time high; to focus on shipping for now
1H22’s shipping revenue of Rmb561m (+37.4% yoy) is comparable to FY18-FY20 average levels of Rmb642m. This is in line with higher average freight rates of 4,561 in 1H22 (vs. 4,396 in 1H21), based on the Shanghai Containerized Freight Index (SCFI). YZJ added a bulk carrier and two containerships to its shipping fleet in 1H22. Management intends to focus on shipping for now. With freight rates on a downtrend, however, we projected a 10% yoy decline in shipping revenue in FY23F.
Reiterate Add with TP of S$1.63
YZJ secured six clean energy vessel orders in 1H22. We think further penetration into the clean energy industry could enable YZJ to catch up with its Korean peers. Our TP is based on 10x CY23F P/E (2-year average), which implies a CY22F P/BV of 1.7x. Rerating catalysts: faster-than-expected delivery of vessels, improving economic environment in China. Key downside risks: a spike in steel costs, plunge in freight rates.
