Going From Strength To Strength
YZJ’s strong share price performance in the past week has been on the back of substantial new orders that now extend its revenue visibility out to 2027. With ytd orders of US$5.6b, this has shattered its 2023 order win target of US$3b – as a result we upgrade our 2023 order win target to US$7b. We note that Chinese steel costs have come down on a yoy basis, thus potentially setting YZJ up for a strong 1H23. Maintain BUY. Target price upgraded to S$1.65 (previously S$1.58).
WHAT’S NEW
• New order flows still a consistent share price driver. Yangzijiang Shipbuilding (Holdings)’s (YZJ) recent new order win announcements have driven YZJ’s share price up 14% this week. With revenue visibility now out to 2027, our bullish thesis on the company remains intact and we believe the company is well placed to win more orders for delivery between 2026-27. In 2Q23-to-date, YZJ has won new orders for 46 vessels with a total contract value of US$4.42b.
• Highest ever total outstanding orderbook value. YZJ currently has 180 vessels in its orderbook totalling US$14.6b, which is its highest ever. Ytd, the company has US$5.6b in new orders thus exceeding its 2023 target of US$3b. We expect management to revise this target up to at least US$7b at its 1H23 results announcement in mid- to late-Aug 23.
• Steel costs have moderated during 1H23. Average steel costs for 1H23 to date of Rmb4,120/ton is 17% lower than 1H22. According to management, it imputes a cost of Rmb5,000/tonne in its shipbuilding contracts and thus the current weaker steel costs give us more confidence that could see higher yoy shipbuilding margins in its 1H23 financial results. Given that steel demand is weak across most sectors in China, costs will likely stay depressed in the near to medium term, in our view. We currently estimate a 14.5% shipbuilding margin for 2023 vs 13.5% in 2022.
STOCK IMPACT
• Potential for upside in dividends in 2023. In our view, one of the major issues that YZJ faced in the past few years was its capital management. As at end-22 and on a per share basis, YZJ had Rmb1.61 or S$0.31 per share in net cash but the company nevertheless chose to keep its 2022 dividend flat yoy at S$0.05. Recall that at its 2022 results briefing, management stated that it will look to change its dividend policy from that of a flat payout of S$0.04-0.05 per share to a payout ratio. This could mean upside to our S$0.045 dividend for 2023 (or 25% payout). A payout ratio of 40% would equate to a S$0.07 dividend, or a yield of 4.8% based on yesterday’s closing price of S$1.45. In our view, this is a positive move as a payout ratio is more flexible, aligns the interests of shareholders and management, and provides greater stability in dividend payments over time as it adjusts to changes in earnings.
EARNINGS REVISION/RISK
• EPS upgraded. On the back of higher orderbook win estimates, we have upgraded our earnings by 1-7% as shown in the table on the RHS. Previously, we had assumed US$2.5b per year in order wins from 2023 to 2025, however with the new order wins announced yesterday, we have raised our order win estimates to US$7b for 2023 and US$3b for both 2024 and 2025. Note that while the ytd order wins have been impressively large, construction only commences in 2H24 at the earliest (since deliveries are largely between 2025-27) and thus the positive impact on revenue and profit will start in 2024.
VALUATION/RECOMMENDATION
• Maintain our BUY recommendation with a PE-based target price of S$1.65 (previously S$1.58). Our target PE multiple of 8.7x, applied to an aggregate of our 2023 and 2024 EPS forecast, is 1SD above YZJ’s past five-year average of 6.5x. We view as fair given: a) the company’s earnings growth in 2023 and 2024, b) sustainability of its earnings due to its US$14b orderbook at present, and c) earnings visibility that has improved out to 2027 given the recent spate of new orders.
• Not an expensive stock. We note that at our fair value of S$1.65, YZJ would trade at an undemanding 2023F P/B of 1.2x, a level that was last seen in 2012. Since its IPO in 2007, the company’s average P/B is 1.3x.
SHARE PRICE CATALYST
• Better capital management.
• Evidence of margin expansion from 2023 onwards.
• New orders in higher-margin shipbuilding segments, eg dual-fuel containerships, LPG tankers or large LNG carriers.
• Gains from sales of its ships and one remaining jack-up in its yard.