Yangzijiang Shipbuilding (SGX:BS6) is up more than 35% this year and more than 80% in the last 12 months.
YZJ Shipbuilding spun off its investment segment in April 2022 and commenced trading as a pure shipbuilder play at $0.80 on 22 April 2022. On that day, the company closed the trading day at $0.96. Now it is trading around $1.70 and carries a market cap of $6.8 billion.
Is that the key reason for Yangzijiang’s surge? And should you invest in the company now? Let’s find out:
Why did Yangzijiang’s price rise?
1) Yangzijiang Generates Higher Revenue and Profits
After spinning off YZJ’s investment segment, the Shipbuilding entity now generates more than 90% of its revenue from construction activities or shipbuilding. The remaining 10% of its revenue are attributed to shipping revenue from the 29 vessels owned by YZJ Shipbuilding with a total capacity of nearly 1.8m DWT and 3600 TEUs.
In 1H23, YZJ Shipbuilding saw 16% increase to revenue as it delivered 31 vessels, amounting to 54% of its FY23 target of 57 vessels. In comparison, YZJ Shipbuilding delivered 35 vessels in 1H22. However, in the current half year, more containerships which are of higher value were delivered as compared to 1H22 where more bulk carriers were delivered.
Gross margin expanded by 4%, increasing from 14.6% in 1H22 to 18.6% in 1H23, substantially more than the increase in revenue. This was attributed to the weaker RMB as well as lower material costs.
Consequently, net profits increased by 48%, in line with the increase in gross profits and return on equity increased from 14.2% to 19.0%.
Earnings per share for 1H23 stood at 43.69 RMB cents per share as compared to 29.76 RMB cents per share in 1H22.
YZJ Shipbuilding also maintained a net cash position of RMB 5.7 billion, equivalent to approximately 15% of its market capitalisation. This net cash position not only strengthens the company’s image with a robust balance sheet but also provides for significant levels of interest income in the current interest rate environment as some of the cash are held in USD.
2) Yangzijiang wins new orders, highest ever orderbook size
YZJ Shipbuilding has secured new orders for 70 vessels worth approximately USD5.7 billion in the year to date, exceeding its year 2023 target of US$3.0 billion, achieving the highest ever total outstanding orderbook value of US$14.7 billion for 181 vessels.
Orders for Clean energy vessels such as the LNG dual fuel vessels account for approximately US$8.4 billion or 56% of order book value.
Dark clouds may lie ahead
Shipping firms have enjoyed a windfall over the past two years on an industry-wide surge in demand for consumer goods and freight rates during Covid. But that’s waning, with economic uncertainty driving a slump in global shipping.
The Baltic Dry Index (BDI) is a shipping freight cost index which is issued daily, it serves as a proxy for dry bulk shipping stocks as well as an indicator of the general shipping market.
The bad news? The BDI has fallen significantly, from a high of more than 5,500 in Sep 2022 to 1,063 currently. That’s ~5x drop!
Two of the world’s biggest shipping firms, Evergreen and Yang Ming is expected to see earnings plunge 94% and 99% respectively. Lower earnings will surely lead to a reduction on capital expenditure by these shippers.
YZJ Shipbuilding well positioned for green evolution in shipping
While a decline in profits by the shippers will affect their capital expenditure for sure, YZJ Shipbuilding is still at the forefront of the transition to green environmentally friendly ship.
The shipbuilding industry is focused on fleet decarbonisation due to requirements set in place by the International Maritime Organisation on ship owners. There is a timeline set in place to achieve net zero by year 2050 with indicative check points in year 2030 and 2040.
YZJ Shipbuilding has done well to position itself in this green evolution. The large-scale LNG carrier market has traditionally been led by Korean shipyards, YZJ Shipbuilding has successfully made a breakthrough and has become the first private shipbuilding enterprise in China to enter this field.
In addition. YZJ Shipbuilding also intends to build LNG filling and storage facilities. Together with the terminal service, YZJ Shipbuilding aims to build up an integrated LNG supply chain including complete terminal service, LNG filling, storage and distribution in the upstream Yangtze River region, which will serve as a LNG logistics hub.
Should Yangzijiang Shipbuilding be in your portfolio?
YZJ Shipbuilding has a sizable orderbook that will support its revenue for the next 5 years to 2028. The current gross margin is also robust due to factors such as favourable USD/RMB exchange rates and cheaper material costs. However, one has to be wary that this may not last.
With 181 vessels to be delivered, YZJ Shipbuilding is looking at multiple ways of improving operational efficiency and overall project management.
Since YZJ shipbuilding won its first LNG ship contract in October 2022, it has won many more and now have an orderbook of more than 40 vessels. YZJ Shipbuilding will also continue to benefit from the net zero target laid out by the International Maritime Organisation which for global ship liners.
In this regard, YZJ Shipbuilding also expects sustained demand for clean fuel vessels for the years ahead.
That said…
The share price is up more than 30% YTD and more than 80% in the last 12 months. Coupled with a potential industry slowdown, some investors may feel that orderbook growth is likely to be limited in the upcoming months despite YZJ Shipbuilding’s strength in the clean fuel segment.
While the current orderbook of US$14.7 billion (equivalent to more than RMB 100 billion) should be able to sustain the company’s profitability for the coming years, experienced investors are aware that order book wins tend to have a bigger impact on share prices.
To this end, we will be wary of investing in YZJ Shipbuilding in hopes of short-term gains.
