Analysts stay positive on Yangzijiang Shipbuilding with recovery of shipping rates and strong new orders

The company's orderbook is at a record US$14.82 billion

CGS-CIMB Research and DBS Group Research analysts have stayed positive on Yangzijiang Shipbuilding following its 3QFY2023 business update on Nov 2.

In the quarter, the shipbuilder won new orders worth some US$770 million ($1.04 billion) for 14 vessels, thanks to a rebound in the oil tanker market.

The strong orders momentum has prompted CGS-CIMB analyst Lim Siew Khee to estimate that the company will report new orders totalling US$1 to US$1.5 billion by the end of 2HFY2023. As of 9MFY2023, the company's order book has reached a record US$14.82 billion.

Lim, citing the management, notes that the company expects to win some US$3 billion in orders in the coming FY2024 and as a sign of its growth appetite, it is awaiting the go-ahead from local authorities to let it acquire new land to support expansion in capacity.

"Expectations of a rebound in charter rates could be driving the demand for tankers, in our view," notes Lim in her Nov 3 note, where she kept her "add" call.

According to Lim, citing data from Clarksons, 1-year time charter rate for medium-range tankers fell from their recent peak of US$31,250 per day in March 2023 to US$24,000 in July 2023. However, in recent days, the rate has gained to around US$26,000.

"Management noted that the current tanker charter rates are at a good level to support customers’ ship costs, but future ship demand would depend on further developments in the global geo-political situation," says Lim.

The company delivered a total of 11 vessels were delivered in 3QFY2023 and according to the management, there were no requests by customers to delay orders nor were there cancellations.

Lim expects Yangzijiang Shipbuilding's earnings to continue to benefit from low steel costs and favourable forex trends.

She projects the company's gross margins to be at 19.5%, 23% and 24% for FY2023, FY2024 and FY2025 respectively.

Her target price of $1.96 is based on a 50% premium to regional yards’ 1.3x average FY2023 book value, justified by Yangzijiang's track record of generating a stronger margin.

Ho Pei Hwa of DBS Group Research is similarly positive on this counter.

"We came away from Yangzijiang’s analyst briefing feeling reassured on prospects of the shipyard group," writes Ho in her Nov 3 note, where she has kept her "add" call and $1.90 target price.

"While order wins momentum might slow down, the current hefty order backlog provides good earnings visibility through 2026. There is upside risk to our earnings forecasts at 10% CAGR in 2023-2025," adds Ho.

She acknowledges that while Yangzijiang Shipbuilding operates in a cyclical shipping and shipbuilding industry, the company has built up a track record showing its ability to weather through the industry's cycles since listing in 2007.

Yangzijiang Shipbuilding is the only shipyard in the region that generated positive annual profits every year since the Global Financial Crisis in 2008-09, she says,

"With orderbook-backed earnings growth and strong net cash of around 30 cents per share as well as 4-5% dividend yield, it is one of our top picks as a defensive play in the current choppy environment," adds Ho.

Yangzijiang Shipbuilding closed Nov 3 at $1.52, up 2.01% for the day.

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