Date: October 14, 2024
Broker: CGS International Securities

Arbitration Update

Yangzijiang Shipbuilding (YZJSB) is currently facing arbitration proceedings with a customer over contracts for 10 containerships, valued at US$900 million. These contracts were terminated by the client in March and May 2022, and the arbitration was filed in June and September 2022. The client is claiming US$835 million, citing losses from the termination, including loss of profits and refund of payments.

Despite the arbitration, YZJSB’s legal advisors believe that the claim has no merit, and it is highly improbable that the arbitration will succeed. No provisions have been made for the claim, and YZJSB expects no material impact on its financial position for FY24F, as the contracts were never included in the company’s order book.

The first tranche of arbitration hearings is scheduled for November 2024.

Order Book and Business Update

As of 1H24, YZJSB’s order book stands at US$20.2 billion. The arbitration contracts worth US$900 million were never part of this figure, reflecting the company’s strong business despite the ongoing dispute. The company continues to project significant growth in order wins, with a forecast of US$11 billion in 2024, up from US$8.5 billion YTD.

YZJSB will announce its 3Q24 business update on November 7, 2024. The update is expected to focus on order wins, the company’s order book, and potential yard expansion plans. Management has indicated that steel price appreciation will likely be a key topic, given China’s new stimulus measures that may increase demand for steel.

Steel Prices and Impact on Margins

Steel accounts for approximately 25%-30% of YZJSB’s containership and bulk carrier costs. A 10% increase in steel prices could impact the company’s gross margins by 2%-4%. Despite recent increases in steel prices, YZJSB has a sufficient steel inventory to cover 3-4 months of its requirements. Most contracts for 2025 deliveries were secured in 2022, when steel prices averaged Rmb4,400/tonne.

The company expects gross margins to remain stable at 26.5% for FY24F, 27% for FY25F, and 25% for FY26F.

Financial Outlook and Key Metrics

YZJSB’s financial outlook remains positive, with projected net profits of Rmb5.76 billion for FY24F, Rmb6.33 billion for FY25F, and Rmb6.30 billion for FY26F. The core earnings per share (EPS) is expected to grow by 40.5% in FY24F, reaching Rmb1.46. The company’s recurring return on equity (ROE) is forecasted at 25.2% for FY24F, 23.4% for FY25F, and 20.1% for FY26F.

YZJSB maintains a target price of S$3.20, based on 11x CY26F price-to-earnings ratio (P/E), which aligns with its regional peers. The stock currently trades at S$2.50, offering an upside of 28.0%.

Risk Factors

While the company’s performance remains strong, there are potential downside risks, including:

• A surge in steel prices could squeeze margins.
• Any unexpected order cancellations could affect the company’s revenue projections.

Shareholders and Market Performance

As of the report date, Yangzi International Holdings Ltd holds a 21.5% stake in YZJSB, and 61.0% of the company’s shares are in free float. The stock has demonstrated a strong market performance, with a 56.3% increase in absolute terms over the past 12 months, outperforming the index by 36.3%.