Excerpts from UOB KH report
Analyst: Adrian Loh
Yangzijiang Shipbuilding (Holdings) (YZJSGD SP)
After The Containership Boom, LNG Carriers May Be The New Hope
We highlight that YZJ could announce over US$2.4b worth of shipbuilding orders in the near term. In addition, we believe that it is in the running for a large LNG carrier order after it obtained a licence for membrane technologies.
Maintain BUY. Upgrade target price to S$1.44. |
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WHAT’S NEW
• LNG carriers – The new hope. In early-Sep 22, Yangzijiang Shipbuilding (YZJ) announced that it had obtained a licence from Gaztransport & Technigaz (GTT) for the construction of vessels using GTT’s Mark III membrane technologies. The technology involves cargo or fuel containment and insulation and, being widely used in the LNG shipping industry, will now enable YZJ to compete in the international market to construct LNG vessels.
| "According to shipping industry sources, YZJ could be well placed to win new LNG carrier orders given that the Korean yards are full, and European shipowners have been looking for shipbuilding capacity." -- UOB KH report |
• New order outlook. As at 1H22, YZJ’s orderbook totaled US$8.13b with deliveries stretching into 2025, with ytd order wins of US$1.1b. Importantly, YZJ disclosed that it still has slots for large-vessel deliveries in 2024 and thus expects to capitalise on this.
As shown in the chart above, YZJ has >US$2.4b worth of orders that it has yet to announce, on top of which Celsius Tankers could place an order for >10 newbuild LNG carriers.
• Background of Celsius Tankers. The company currently owns four LNG carriers with another nine being built at Samsung Heavy Industries’ yard with delivery between 2023-25, thus bringing its fleet to 13 vessels.
In Oct 21, the company had disclosed a 2025 target of 20 LNG vessels; however this appears to have been revised upwards as the global LNG trade has increased materially due to higher demand for LNG as a result of the Russian invasion of Ukraine.
STOCK IMPACT
• Would LNG carriers be a profitable segment for YZJ? Given that YZJ is a relatively new entrant in the LNG carrier market, it will likely need to sacrifice some gross margin in order to secure orders from LNG shipowners, in our view. We note that on 25 Sep 22, China Merchants ordered two 175,000cbm LNG carriers from its sister company Dalian Shipbuilding Industry Co. with an option for another four.
Notably, the price of US$200m per vessel is lower than that seen at Korean yards and thus YZJ will likely need to follow suit. Given the licence from GTT, coupled with its known shipbuilding prowess, there should be minimal execution issues from YZJ – however gross shipbuilding margins could see minor downside risk in the near to medium term.
• Resurgent LNG orders, partially due to the conflict in Ukraine. As at end-1H22, orders for large LNG carriers (>140,000m3) were the highest in 22 years according to Clarksons. Currently, the global orderbook – filled largely by Korean shipyards – stands at 255 gas carriers with 100 of those vessels having been ordered in 2022 vs 86 orders in all of 2021.
With 77 vessels expected to be delivered 2024 and a further 71 in 2025, this would substantially surpass the prior annual delivery record of 59 orders seen in 2021. In our view, a significant number of these vessels were ordered on the back of heightened sovereign risk in Russia, and thus higher risk of gas-supply disruption, due to its invasion of Ukraine.
A substantial amount of LNG contract volumes have been signed in 2022 (see chart on RHS) and with the bulk of these starting up in 2026, the LNG vessels will need to be ordered in the next 12+ months in our view.
• Still holding a lot of cash. As at end-1H22, YZJ had net cash of Rmb3.7b, equating to S$0.19/share.
While the company’s capex in 2022 may increase slightly given its Rmb6m investment in the Jianying LNG terminal, management has stated that it will also look to return cash to its shareholders. However, this return of cash to shareholders may take the form of either a share buyback or a higher dividend payout ratio for its full year dividend.
EARNINGS REVISION/RISK
• None.
| VALUATION/RECOMMENDATION • Maintain BUY with a higher target price of S$1.44. Our new target price is based on a target PE of 9.0x which is applied to our aggregate 2022 and 2023 EPS forecasts.  Adrian Loh, analystOur target PE multiple is 1SD above YZJ’s past five-year average of 6.7x (see chart on RHS).While this might be seen as aggressive given global economic headwinds, we highlight the company’s earnings growth in 2023, as well as the stability of its earnings given its US$8.13b orderbook at present. We have switched to a PE-based methodology from our prior SOTP methodology as we believe the former more accurately reflects YZJ’s earnings growth. We highlight that should YZJ maintain a payout ratio of 25% for 2022 (2021: 26%), the stock would yield 4.0%, thus providing some downside support to the share price. |
SHARE PRICE CATALYST
• Evidence of margin expansion from 2H22 onwards.
• New orders in the higher-margin shipbuilding segments, eg dual-fuel containerships, LPG tankers or large LNG carriers.
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