Analysts positive on Yangzijiang Shipbuilding after new yard investment announcement

CGS, Citi and DBS analysts have all kept their “buy” and “add” calls, and DBS raised its TP to $2.75.

Analysts are positive on Yangzijiang Shipbuilding after the announcement of a new yard investment of about 1,300 mu, or 866,671 sqm of land in Jiangsu Province on July 15. 

The shipbuilding group plans to invest about RMB3 billion ($550 million) in capital expenditures over the next two years to complete this project, with long-term prospects of liquid natural gas and other clean energy vessels in mind.

All analysts from three brokerage firms, CGS International, Citi Research and DBS Group Research have kept their “add” and “buy” calls. CGSI and Citi analysts have kept their target price at $2.50 and $2.45 respectively, while DBS’s analysts have raised their target price to $2.75. 

Lim Siew Khee and Meghana Kande from CGSI say that the new yard could deliver five to six vessels p.a. or US$850 million ($1.14 billion) to US$1 billion in orders. They estimate that the new yard will be about 60% the size of the group’s existing Jiangsu Yangzi Xinfu yard, which focuses on the construction of mid-to-large-sized vessels. 

“Recall that Yangzijiang had invested RMB650 million for the remaining 20% equity stake in Xinfu yard in 2021, implying a total value of RMB3.25 billion for the entire Xinfu yard,” they say. 

Xinfu yard delivered 12 containerships in 2023, which Lim and Kande estimate to be about US$1.3 billion worth of contracts, and it is also scheduled to deliver 12 vessels in 2025. 

They use Xinfu as a benchmark and expect the new yard to deliver five to six vessels of similar size p.a.

“Assuming US$170 million per vessel (based on year-to-date average prices for 13k TEU newbuild liquified natural gas (LNG) dual fuel containerships), we estimate the new yard could add about US$850 million - US$1 billion in new order wins p.a. This represents about 15-18% of our 2024 order win target of US$5.5 billion,” they add. TEU stands for twenty-foot equivalent unit.

Lim and Kande’s target price is still based on a 35% premium to regional yards’ average calendar year (CY) 2024 P/BV of 1.53 times, on improved margin outlook. The analysts’ re-rating catalysts include stronger margins and stronger order wins, and note that key downside risks include a sharp rise in steel costs affecting margins, order cancellations, and unfavourable outcome of the US investigation into the Chinese shipbuilding industry impacting new order wins.

Likewise, Citi analyst Luis Hilado says that Yangzijiang’s net cash position of RMB11 billion by FY2025 makes the funding of the project appear highly feasible. 

While the breakdown of cost between land facilities has yet to be disclosed, he assumes a 30:70 ratio, respectively, and a 10-year average asset life, the additional depreciation charges could amount to RMB 210 million annually or about 3% of our current FY2026 profit forecasts. 

“Albeit an initial profit pressure point, management is likely looking ahead to the long-term project and revenue upside from demand for clean energy ships,” he says. 

Hilado values the company at $2.45, based on a target multiple of 10 times, or 1 standard deviation above its 10-year mean prior to the spin-off of its financial arm, applied to his FY2024 earnings per share forecasts. 

“We believe our target multiple is fair considering Yangzijiang’s strong medium-term earnings visibility/momentum given its record order book amid the current shipping industry upcycle, and as it now offers investors pure-play shipbuilding exposure as one of the leading shipyards in China,” he adds. 

Finally, DBS analysts add that this new land acquisition will “lift growth prospects ahead”. They say that the land’s proximity to its existing Xinfu yard will enable Yangzijiang to seamlessly integrate the new facilities, thereby enhancing both productivity and operational efficiency.

They estimate it could boost capacity by about 20% and enable the delivery of an additional six ultra-large or high value add vessels, and could raise Yangzijiang’s annual revenue run-rate from US$3.5 billion to US$4 billion or US$4.5 billion, lifting its growth prospects beyond 2026. 

The capex could be fully funded by internal resources, supported by the group’s strong net cash position of over RMB10 billion net cash as of end 2023, they add. 

DBS analysts say that Yangzijiang’s share price has done “spectacularly well” post 1QFY2024 business update at end May, surpassing their target price. “The share price pulled back from the high of almost $2.50 was due to normalisation following the impact of the Red Sea attack, in our view. We believe there are more legs to the rally in view of the robust order flow amidst a multi-year shipbuilding upcycle, translating to double-digit earnings growth for the next few years boosted by potential capacity expansion,” they add. 

As such, they raise their target price to $2.75, on a higher valuation multiple of 2.3 times P/B, in line with its historical 20% premium to industry average, justifiable by Yangzijiang’s stronger return on equity and yield as well as financials. This translates to 12 times FY2024 P/E, which is undemanding, they add. 

As at 10.39am, shares in Yangzijiang Shipbuilding are trading 15 cents higher or 6.52% up at $2.45.