Yangzijiang Shipbuilding - CGS-CIMB Research 2022-11-14: Prudent Approach In Expansion

Yangzijiang Shipbuilding - Prudent Approach In Expansion

  • Yangzijiang Shipbuilding (SGX:BS6)'s management said it does not have plans (although there were initial thoughts) to expand capacity and/or outsource even as its 4 yards are operating near full capacity for now. We think Yangzijiang has a prudent track record in capex, and hence we expect Yangzijiang’s decision to expand will only be made if the strong demand for LNG carriers sustains into 2023 or if the risk of recession is eliminated.
  • See Yangzijiang's announcement dated 13 Nov 2022 – No financials were disclosed in its 3Q22 update. Yangzijiang's orderbook is at new highs of US$10.33bn as of 13 Nov 2022 vs 1H22’s US$8.13bn.
  • For new LNG carrier contracts, Yangzijiang said it will be selective as industry demand for such carriers has been strong and supply chain is tight (likely to take 2-3 years to normalise), and that the next contracts will be scheduled for 2025/2026 deliveries. Margins for the first two LNG carriers are not firm but likely comparable to large containerships. Raw materials required to construct LNG carriers differ from traditional containerships/bulk carriers/tankers, which Yangzijiang does not procure in advance, unlike steel.
  • We estimate overall core shipbuilding gross margin to be 13%/17%/18% in FY22F/FY23F/FY24F. We believe margins are likely to continue to expand.
    • Firstly, Chinese steel prices have weakened 28.7% from year-to-date peak of RMB5,331/metric tonne to RMB3,797/metric tonne as at 11 Nov 2022, according to Bloomberg. YZJ is currently using steel cost procurement assumptions of RMB4,400/metric tonne for new contracts.
    • Secondly, vessel deliveries scheduled for 1Q23F were mostly secured in 2021 which have higher contract values.
    • Finally, we expect depreciating RMB against the US$ to result in positive variance, since Yangzijiang procures raw materials mainly in RMB and sells in US$.
  • We roll forward our valuation to FY23F, now based on 1.65x CY23F P/BV (30% premium to regional yards’ 1.3x average due to stronger margin track record). We change our valuation from P/E to P/BV due to limited historical P/E data post Yangzijiang Financial (SGX:YF8) spin-off.
  • We maintain ADD recommendation on Yangzijiang on earnings visibility to FY26F.

Above is the excerpt from research report by CGS-CIMB.
Clients of CGS-CIMB may access the full report in PDF @ https://www.itradecimb.com.sg/.

LIM Siew Khee CGS-CIMB Research | Izabella TAN CGS-CIMB Research | https://www.cgs-cimb.com 2022-11-14
SGX Stock Analyst Report ADD MAINTAIN ADD 1.66 UP 1.630

Previous report by CGS-CIMB:
2022-10-26 Yangzijiang Shipbuilding - First Of Likely More LNG Carrier Orders

Target prices by 2 other brokers at Yangzijiang Target Prices.
Listing of broker reports at Yangzijiang Analyst Report.

Relevant links:
Yangzijiang Share Price History,
Yangzijiang Announcements,
Yangzijiang Dividends & Corp Actions,
Yangzijiang News Articles


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