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Yangzijiang Shipbuilding gets a strong ‘buy’ amid improving margins and higher order book: analysts

The best is yet to come for Yangzijiang Shipbuilding, analysts say as they anticipate stronger prospects after its “better-than-expected” profits.

For the 1QFY2021 ended March, the shipbuilder’s earnings came in at RMB761.7 million ($156.8 million) up 89% y-o-y, thanks to the construction of more containerships and large-sized vessels as well as improved charter margins that collective raised gross profits.

This surpassed the RMB610 million profit that CGS-CIMB Research analyst Lim Siew Khee had penciled.

This is due to the RMB212 million in net forex gains and the RMB154 million reversal of impairment for assets held under maturity, she elaborates.

These gains came despite a 25% dip in revenue to RMB2.62 billion that resulted from lower shipbuilding activities and trading revenue.

Analysts were however not taken aback.

Says UOB Kay Hian (UOBKH) analyst Adrian Ho, “we were not perturbed by [the decline in revenue], as shipbuilding margins had expanded to 14.7% [from] 8.4% in 1QFY2020 which was affected by the pandemic”.

“Management reiterated its belief that its revenues will trough in 1Q2021 and should increase from 2QFY2021 onwards,” amid a stronger new order win outlook, he writes in a May 3 note.

The shipbuilder is gunning for US$5 billion ($6.67 billlion) in new orders this year, having achieved US$4.01 billion in new orders for 75 vessels last year.

While its current order book stands at US$6.6 billion, management is hopeful of hitting its target. However, they say a cause for concern is the competition from small yards, observes CGS-CIMB’s Lim.

The favourable shipping outlook, that comes as the orderbook-to-fleet ratio for containerships has rebounded to a normalised level of around 15%, bodes well for Yangzijiang, says DBS Group Research analyst Ho Pei Hwa.

This marks a historical low for bulk carriers and tankers, thus indicating potential uptick in orders when market conditions improve, she adds in a 3 May note.

Even so, the shipbuilder may have difficulty coping with new orders, with its main yard capacity is “full with delivery stretched till 1Q24 for large ships and 3Q23 for smaller ships,” mulls Lim.

“Shipping clients could be pressed for slots and look to alternative yards for newbuilding,” she adds.

The company is looking to reactivate its Changbo yard by mid-2021 such that it can build the smaller 1,000 to 3,000 TEU containerships; Its Yangzi and Xinfu yards will concentrate on building mid and large-sized vessels.

At present, some activities such as steel cutting, are operating on 2 to 3 shifts on these yards. Others meanwhile remain on single shifts due to the equipment bottlenecks such as in the speed and availability of gantry cranes, notes UOBKH’s Loh.

Even so, she says that Yangzijiang is not looking to acquire any shipyards in China, even as it reaches full capacity for its order book delivery scheduled for 2023.

Still, the close proximity of the yards allows for synergies that allow for operational efficiency that is not possible when yards are spread out, mulls Loh.

With delivery slots already filling up for big ships in 2Q2024 and smaller ships in 3Q2023, he reckons the company may be more selective on taking in new orders, and even negotiate for higher newbuild prices.

Going forward, Loh expects Yangzijiang to log higher shipbuilding margins once it starts building its large slate of containerships in 2H2021.

He adds that the possible shift towards dual fuel in some of its newbuild ships may allow for the charge of higher profit margin.

To this end, the analysts have unanimously posted “buy” or “add” calls on Yangzijiang Shipbuilding.

CGS-CIMB’s Lim has a target price of $1.63, while that for UOBKH’s Loh is $1.76.

DBS’s Ho has put forth a target of $1.80, saying the company is the “best proxy for the newbuild supercycle” which last took place in 2007.

Aside from the counter’s share price is set to rise on: renewed optimism on both the macro economy and shipping market, buoyant contact flows and a resultant increase in pricing power as well as progress in the liquefied natural gas carrier market, mulls Ho.

Earnings growth and the possibility of an increase in dividend payout also justify the higher target price, she adds.

As at 3.32pm, shares in Yangzijiang Shipbuilding were flat at $1.47.
Source: The Edge Singapore

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