Yangzijiang Shipbuilding - DBS Research 2022-08-04: Trading At Unwarranted Deep Discount To Peers

YZJ's 1H22 results preview and earnings outlook

• We expect Yangzijiang Shipbuilding (SGX:BS6) to report net profit of at least RMB1.2bn (20% y-o-y increase) for 1H22, on revenue growth. We see room for upside surprise and earnings upgrade post results.
• Based on current schedule, Yangzijiang Shipbuilding 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.
• Yangzijiang Shipbuilding’s gross margins had fallen from ~25% in 2H220 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 Shipbuilding 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.

Shipbuilding demand remains firm

• 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.
• 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.
• We are likely to see shipbuilding orders spike again next year for bulkers and tankers as shipyards fill their capacity for 2H24 and 2025.

Solid fundamentals; possibly the most profitable shipyard.

• Yangzijiang Shipbuilding 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.
• The separate listing of Yangzijiang Financial (SGX:YF8) in Apr-2022 should alleviate investors’ concerns on corporate governance relating to the investment business.
• Year-to-date, Yangzijiang Shipbuilding secured decent new orders of ~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. This is also part of its strategy to improve ESG by offering cleaner solutions.
• Yangzijiang Shipbuilding remains very undervalued, trading at 1x FY22 P/B and 8x FY22F P/E. 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 Shipbuilding to deliver 15% earnings CAGR and mid-teens ROE in 2022-2024.