<Results Analysis> 3Q23 – Key takeaways from briefing
- Revenue and margins set on growth track with favourable steel cost and forex as well as delivery of higher value add, larger vessels
- Low risks of cancellation / rescheduling despite softer economic and shipping outlook
- Capacity expansion remains on the table; potential venture into retrofitting business
- Reiterate BUY; TP S$1.90
What’s new
We came away from Yangzijiang’s analyst briefing feeling reassured on prospects of the shipyard group. While order wins momentum might slow down, current hefty order backlog provides good earnings visibility through 2026. There is upside risk to our earnings forecasts at 10% CAGR in 2023-2025 Revenue and margins are set on growth track as the group delivers higher value and margin orders and optimise yards utilisation, further boost by favourable steel cost and forex. Risks of cancellation/rescheduling remain low with no indication of such talks at this juncture as these cleaner vessels are much needed to meet IMO carbon emission reduction target. Potential capacity expansion could provide further uplift to forecasts and share price.
Our view
While Yangzijiang operates in cyclical shipping / shipbuilding industry, they have demonstrated track record to weather through industry cycle since listing in 2007. It is the only shipyard in the region that generated positive annual profits every year since the Global Financial Crisis in 2008-09. With orderbook-backed earnings growth and strong net cash of c.30Scts per share as well as 4-5% dividend yield, it is one of our top picks as defensive play in current choppy environment. Reiterate BUY and TP S$1.90.
Key takeaway from analyst briefing:
- Revenue and margin trend. Pace of revenue recognition in 3Q23 is similar to 1H23. While management does not typically guide on margins given the forex and steel price fluctuation, in the last briefing, they sounded optimistic that gross margin could hit 20% or more in anticipation of steady steel cost and forex, which has thus far been the case. Recent steel plate cost average Rmb5,000/t, within the expected range, while c.50% of the USD is hedged, leaving remaining exposure to take advantage of the favourable USD strength.
- Risks of cancellation and rescheduling remain low. Containership market is expected to be in oversupply the next 2-years due to influx of deliveries of newbuild orders placed the past 2 years and global economic slowdown. Management reassured that there is no talks about cancellation or rescheduling at the moment, the cleaner and more efficient newbuild containerships are much needed to rejuvenate the fleet in view of the IMO carbon emission reduction target (by at least 40% by 2030 relative to 2008).
- LNG, Methanol or Ammonia as alternative fuel? Yangzijiang remains focused on higher value-add dual-fuel vessel, tanker and possibly pure car, pure truck carrier (PCTC); bulk carrier is least preferred given the stiff competition. Container shippers have turned to ordering methanol dual-fuel ship (from LNG dual fuel in the past) to reduce greenhouse gas emissions, but it will take years for green methanol output to meet demand and for costs to fall. In addition, shipyard slots are full through 2026. As such, there might be delay in decision making for ordering of methanol dual-fuel containerships.
- Order win target unchanged. Management reiterates target to replenish orderbook at annual revenue run rate, which is approx. US$3bn currently. Though, they have secured more than double of the order wins target in 9M23. The yard is full through 2026 and half of the delivery slots are filled for 2027.
- Capacity expansion remains on the table; potential venture into retrofitting business. Management continues to pursue the optionality to expand capacity in vicinity of its existing yard facilities. They remain in talks with government on possibility to acquire neighbouring lands. Besides adding on shipbuilding capacity, this could also pave the way for new retrofitting business that expected to see demand surge from 2025 upon availability of main engine supply. It is not ideal to acquire another shipyard, as operations would be costlier and inefficient.