1H22: Operationally Strong, With Higher Margins Expected In 2H22
Operationally, YZJ 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% ? the company expects this to continue to rise over the next 12-18 months. One-fifth of YZJ’s market capitalisation is in cash, and it trades at an inexpensive 2023F PE of 5.4x. Maintain BUY. Target price: S$1.16.
• Operationally a strong set of numbers. Yangzijiang Shipbuilding (YZJ) reported 1H22 revenue growth of 70% to Rmb9.7b, which resulted in a 32% yoy increase in net profit from continuing operations to Rmb1.2b. As guided by management and as previewed in our previous note, the company 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, YZJ 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, the company 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, YZJ disclosed that despite its burgeoning orderbook, it still has slots for large-vessel deliveries in 2024 and thus expects to capitalise on this. The company 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, the company has been working with its clients on the technology side towards ammonia-powered vessels.
• Growing its shipping business. In 1H22, YZJ’s shipping business witnessed a 2.2ppt yoy margin increase to 40.3%, underlining the continued buoyancy of this segment. Notably, the company added three vessels to its fleet – one 82,000dwt bulk carrier and two 1,800TEU containerships. During the analyst call, the company 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, YZJ had net cash of Rmb3.7b, which equates to S$0.19/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 by 5-15%. We have marginally lowered our gross profit margin assumptions for all three of the company’s business segments by 0.5ppt to account for higher-than-expected cost inflation. We also highlight that our earnings downgrade for 2022 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. We have used a 8x and 5x multiple for its shipbuilding and trading & other business segments respectively, thus arriving at a S$1.14 and S$0.04/share valuation for these two segments (see table 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, YZJ would trade at a 2022F PE of 6.9x which we do not view as stretched.
• Inexpensive valuations. YZJ currently trades at a 2023F PE of 5.4x which is an 18% discount to, and 1SD below, its five-year average of 6.6x. Its 2023F P/B of 0.8x is largely in line with its past five-year average of 0.7x. In addition, assuming that YZJ 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.
SHARE PRICE CATALYST
• Evidence of margin expansion from 2H22 onwards.
• New orders in higher margin segments, eg dual-fuel containerships or LPG tankers.