Yangzijiang Shipbuilding: A strong FY24 performance
- Record high FY24 earnings with above-guidance gross margins
- Declared better-than-expected final DPS of 12 Scts on higher payout ratio of 39% (vs 34% previously)
- Recent massive sell-off on Trump’s port fees proposal is uncalled for compared to steady performance of shipping and other shipyard stocksBUY, TP SGD3.80
The group delivered of 64 vessels, ahead of its target of 63 vessels. Management raised new order win target to USD6bn for 2025 (up from USD4.5bn last year), reflecting the group’s higher capacity from Hongyuan expansion (additional 10-20% revenue). In addition, it has also established a new subsidiary Yangzi Runze, where the manufacturing base will be located adjacent to its YAMIC (Mitsui JV shipyard) yard, for potential development of clean energy vessels, pending government approval.
Yangzijiang declared a higher-than-expected final dividend of 12 Scts/share (vs 6.5 Scts/share) at a higher payout ratio of 39% (vs 34% in FY23), demonstrating its commitment to reward shareholders. This translates to promising 4% dividend yield.
Sell-off on USTR port charges proposal seems overdone. United States Trade Representative (USTR) proposed last Friday to impose port fees for Chinese built vessels that enter US ports for every port call, sending Yangzijiang’s share price on a downward spiral. The 7-10% decline over 3 days appears unusual relative to shipping companies and major Chinese shipyards as their share price movement has been rather small. We believe the massive sell-off for Yangzijiang seems overdone: 1) the proposal is pending review on 24 Mar and materiality of the new policy is yet to be determined; 2) shipping companies are likely to pass on the additional port fees to consumers via higher surcharges; 3) Chinese shipyards account for nearly half of global shipbuilding capacity, avoid placing orders with Chinese shipyards entirely might not be plausible especially as the Korean yards are also very full while US shipbuilding is uncompetitive at 2-3x the cost of Asian shipyards. This news inevitably brings about uncertainties and may impact the new ordering sentiment. Based on the current hefty global ship order backlog, any new order placed now will be delivered from 2028 onwards which is nearing the end of Trump’s presidency term.
USTR ship charges proposal
On 21 Feb, USTR’s office has proposed charging up to USD1.5mn for Chinese-built vessels entering U.S. ports. The proposed remedies include port entrance fees of up to USD1mn per vessel owned by Chinese maritime transport operators, such as the state-owned China Ocean Shipping Co Ltd. Alternatively, the U.S. would charge USD1,000 per net ton of a vessel's cargo capacity.
Non-Chinese maritime transport operators operating Chinese-built ships would pay up to USD1.5mn per port entry, according to the notice. Those with greater than 50% Chinese-built fleets would pay USD1mn per vessel entry regardless of origin. The fee would fall to USD750,000 if the Chinese fleet percentage was between 25% and 50% and to USD500,000 if under 25%.
Based on Clarksons’s analysis, fees for individual ships could reach up to USD3.5mn per port call (for a Chinese-built
vessel with a Chinese operator with a vessel on order in China), though most ships ‘impacted’ could see fees of up to USD1-1.5mn. For example, the standard 10,000 TEU containership deployed on the Transpacific (Asia-USEC) with three port calls in the US per rotation, costs of USD1mn-1.5mn per call could equate to an additional USD400-600/TEU of effective freight cost
or 13-20% of freight rate of ~USD3,000/TEU. For now, it is believed that the incremental fees will be passed through as surcharges.
FY24 results review and briefing takeaways
Yangzijiang’s FY24 net profit surged 62% y/y to Rmb6.6bn, ~5% ahead of ours and consensus’ estimate. The strong earnings growth was driven by 10% growth in revenue and impressive 6ppt expansion in shipbuilding gross margin to 28% in FY24 (from 17.7% in 1H23 to 29.7% in 2H24)
Shipbuilding gross margin expanded to 29.7% (+3.8ppts h/h) in 2H24. This is attributable to favourable forex and steel cost. In addition, Yangzijiang progressively executed the higher value and margin contracts secured since 2021. Tanker margins were also strong, not far off from containerships. We now expect gross margin to hover around this level, supported by higher containership prices and low steel cost expected in the near term.
Higher Shipping income. Shipping segment contributed Rmb538mn gross profit in FY24. The 53%y/y increase was driven largely by the higher bulk carrier charter rates during the period, propelling gross margin to ~43%.
Raised order win target to USD6bn. Yangzijiang secured a total of 126 shipbuilding contracts in 2024 with an aggregate value of USD14.6bn, a new record high since listing. Management has raised its order win target for 2025 to USD6bn from last year’s target of USD4.5bn orders, to fill the remaining slots for 2028 and 2-year order backlog for Hongyuan facilities (expansion is expected to add c.15% to yard capacity).
Management expressed confidence in operations and ability to achieve new order wins target. While customers might adopt a wait-and-see approach currently, awaiting the outcome of the US port fee proposal review on Mar 24, the proposed fees of USD1mn per port call for example would translate to USD100/box which is small relatively to freight rates and should be able to be passed through. Hence, this should not defer the decision to place orders. Key is slot availability and newbuild prices, and the price difference is small between Korean and Chinese shipyards.
Revenue coverage of 4 years. Yangzijiang’s gross orderbook stood at all time high of USD24.4bn (YAMIC – USD3.24bn), of which 82% are clean energy vessels (e.g. LNG dual-fuel, Methanol dual-fuel, gas carriers). Based on Yangzijiang’s revenue maximum run rate of c. USD4.5bn a year, current orderbook implies over 4 years of revenue coverage, which is at higher than the usual range of 2-3x.
Yard is running at full capacity. Hence, revenue and margins should be similar this year if USD and steel cost are stable. We believe there is room for margin expansion given the lower steel cost in 1H and improving newbuild prices. In addition, there was also a one-off impairment of Rmb180mn (2.7% of profit) for the 36 Robinson office building in FY24 which will not recur in 2025.
Completion of first LNG carrier by end 2025. The first of two LNG carriers that Yangzijiang proceeded to build after contract termination last year (no revenue recognition for these projects) will be completed this year and marketed to potential buyers. This is an important milestone for YZJ to gain traction in the LNG carrier market.
Net cash of SGD1.20/share. Yangzijiang’s balance sheet has strengthened further. As of end-2024, the group has c.Rmb21.3bn net cash or ~SGD1.20 per share.
Higher-than-expected final DPS at 12 Scts/share. Management has raised the dividend payout ratio from 34% to 39% for FY24. It declared a final DPS of 12 Scts (up from 6.5 Scts in FY23), which implies c.5% dividend yield. We believe the higher payout of c.40% is sustainable, backed by strong operating cash flow and earnings growth.
| FY Dec | 2H2023 | 1H2024 | 2H2024 | % chg yoy | % chg hoh |
|---|---|---|---|---|---|
| Revenue | 12,791 | 13,049 | 13,493 | 5.5 | 3.4 |
| Cost of Goods Sold | (9,491) | (9,565) | (9,369) | (1.3) | (2.0) |
| Gross Profit | 3,301 | 3,484 | 4,124 | 25.0 | 18.4 |
| Other Oper. (Exp)/Inc | (732) | (361) | (239) | (67.4) | (33.8) |
| Operating Profit | 2,568 | 3,123 | 3,885 | 51.3 | 24.4 |
| Other Non Opg (Exp)/Inc | 0.00 | 0.00 | 0.00 | - | - |
| Associates & JV Inc | 148 | 269 | 290 | 96.2 | 7.9 |
| Net Interest (Exp)/Inc | 226 | 273 | 343 | 52.0 | 25.8 |
| Exceptional Gain/(Loss) | 0.00 | 0.00 | 0.00 | - | - |
| Pre-tax Profit | 2,942 | 3,665 | 4,518 | 53.6 | 23.3 |
| Tax | (597) | (606) | (944) | 58.0 | 55.8 |
| Minority Interest | 30.6 | (1.01) | 0.37 | (98.8) | (136.1) |
| Net Profit | 2,376 | 3,058 | 3,575 | 50.5 | 16.9 |
| Net profit bef Except. | 2,376 | 3,058 | 3,575 | 50.5 | 16.9 |
| EBITDA | 2,969 | 3,647 | 4,382 | 47.6 | 20.2 |
| Margins | |||||
| Gross Margins (%) | 25.8 | 26.7 | 30.6 | ||
| Opg Profit Margins (%) | 20.1 | 23.9 | 28.8 | ||
| Net Profit Margins (%) | 18.6 | 23.4 | 26.5 |
Source: DBS, Company
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