Should Investors Buy Yangzijiang Shipbuilding Stock Now?

October 7, 2022

Chinese firm Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) has secured new orders of another 22 vessels, raising its total order book value to-date to a record high of US$10.27 billion.

The new orders will also extend its earnings visibility until the middle of 2025.

The new orders clinched comprise of six 66,000 deadweight tonnage (DWT) bulk carriers, four 32,000 DWT bulk carriers and 12 16,000 20-foot equivalent unit (TEU) liquefied natural gas (LNG) dual-fuel containerships.

Strong order book wins surpass pre-COVID level

Year-to-date, Yangzijiang secured total orders of 44 vessels with a total value of US$3.6 billion, surpassing its Financial Year 2022 (FY2022) target of US$2.0 billion.

Aside from that, the order book wins have surpassed its pre-COVID level (2009-2020) historical average annual order win of US$1.4 billion.

Margin will benefit from lower steel prices

The recent decline in steel prices will also boost Yangzijiang’s margin.

By the end of September, steel prices were down by 40% year-on-year (yoy) to an average of around RMB 4,000 per metric tonne.

The ease in cost pressures and the execution of higher value contracts won in 2021 will benefit Yangzijiang’s earnings.

More LNG vessel order wins could be in the pipeline

Yangzijiang obtained a license from France-based Gaztransport & Technigaz (GTT) on 8 September 2022.

This will enable Yangzijiang to construct LNG vessels using GTT Mark III membrane technologies.

With this license, the company will have the capacity to build large LNG carriers of more than 100,000 cubic meters (cbm).

There is no GTT requirement for LNG carriers below 100,000 cbm.

Korean shipbuilders command the largest market share of LNG carriers followed by Chinese shipbuilders, at 67% and 22% respectively.

Since the Korean peers have large LNG vessel deliveries scheduled for 2025 and 2026, this should give Yangzijiang an advantage to secure new orders given its availability in 2025.

Beneficiary of stronger dollar

Another positive for Yangzijiang is the stronger US dollar.

This is as the company’s revenue is predominantly in the greenback while reporting is done in RMB.

There is a natural hedge against the foreign exchange (forex) volatility as 30% of its costs are procured in US Dollars.

Attractive valuation against peers

Yangzijiang is currently trading at 7.1 times its price-to-earnings (PE), based on its expected earnings in 2023. It is significantly lower than the Chinese shipbuilder average PE of 33 times.

Similarly, Korean shipbuilder have a PE average of around 12 times while Singapore offshore players are trading at 15 times PE.

The attractive valuation of Yangzijiang, as well as the announcement of new contract wins, will boost interest in the company’s shares.

Beware of risks

Despite the positive aspects, downside risks remain for investors amid global economic uncertainty and persistent inflationary pressure.

If the global economy falls into a recession, the risk of order cancellations would increase. Inflationary pressure is also another concern and could affect margins for the company.

Nonetheless, with another contract win and positive technical indicators, investors will find Yanzijiang to be among the few winners in 2022.

Year-to-date, Yangzijiang’s share price is up by 57.1% as compared to the Straits Times Index, which has been relatively flat.

Disclaimer: ProsperUs Investment Coach Billy Toh doesn’t own shares of any companies mentioned.

Billy Toh

Billy is deeply committed to making investment accessible and understandable to everyone, a principle that drives his engagement with the capital markets and his long-term investment strategies. He is currently the Head of Content & Investment Lead for Prosperus and a SGX Academy Trainer. His extensive experience spans roles as an economist at RHB Investment Bank, focusing on the Thailand and Philippines markets, and as a financial journalist at The Edge Malaysia. Additionally, his background includes valuable time spent in an asset management firm. Outside of finance, Billy enjoys meaningful conversations over coffee, keeps fit as a fitness enthusiast, and has a keen interest in technology.

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