Brokers take: CGS-CIMB expects Yangzijiang margins to improve as ship prices rise, steel falls

1H23 net profit above. Yangzijiang&rsquo s net profit rose 26% y-o-y to Rmb1.73bn in 1H23, ahead of expectations of around Rmb1.5-1.6bn, thanks to the stronger revenue growth of 16% and 4.9ppt h-o-h margin expansion. Results were also boosted by Rmb90m gains from vessel disposal. The group delivered of 31 vessels in 1H23, on track to meet its full year target of 57 vessels.

Shipbuilding gross margin expanded to 17.7%  in 1H23, from 13.5% in 2H22, and trough of 10.8% in 2H21. This is attributable to favourable forex and steel cost. In addition, Yangzijiang has progressively executed the higher value and margin contracts secured since 2021. Revenue and margins are expected to expand further as it recognizes the bulk of the profit margin closer to delivery of these vessels. In addition, the favourable steel cost hovering around Rmb4,000/t also bodes well for further margin expansion in 2H23. The bulk of these orders has factored in high steel prices of over Rmb6000/t and the company has hedged its USD exposure at~ Rmb6.8 with 20-30% net exposure. Management believes that 20% gross margin could be achievable.

Lower Shipping income.  Shipping segment contributed Rmb179.9m gross profit 1H23. The 20% y-o-y decline is widely expected given weaker freight rates. Gross margin remains rather healthy at ~34%.

Secured US$5.76bn new orders in 1H23.  Yangzijiang has clinched orders for 72 vessels valued at ~US$5.76bn. As it is already filling up delivery slots for 1H27, we believe Yangzijiang would be more selective on orders ahead given the relatively full order backlog and potential to negotiate for higher newbuild prices.

Revenue coverage of over 4-years.  Yangzijiang&rsquo s orderbook stood at all time high of US$14.7bn, of which 56% are clean energy vessels. Based on Yangzijiang&rsquo s revenue maximum run rate of c. US$3.3bn a year, current orderbook implies over 4-years revenue coverage, which is at higher than the ideal range of 2-3x.

Net cash of ~27 Scts.  Yangzijiang&rsquo s balance sheet remains very healthy post spin-off of its investment arm. As of end Jun-2023, the group has c.Rmb6bn net cash or ~27Scts per share. The group has collected or sold the entire Rmb1.5bn legacy non-performing debt investment at book.

Earnings revisions. The strong 1H23 results reinforced our positive views on Yangzijiang&rsquo s earnings growth. We have tweaked our assumptions on revenue, margins and interest income. As a result, our FY23/24F earnings forecast are raised by 14% and 5% respectively. We have also introduced FY25F forecasts. Our new forecasts imply 3-year CAGR of 15%.

DPS raised to 6-7 Scts/share.  We have raised our DPS expectations from 5.5-6.0 Scts to 6.0-6.5 Scts for FY23/24F and expect all-time high payout of 7.0 Scts for FY25F in anticipation of record high profit on ~33-34% payout. This translates to 3.8-4.4% yield. We believe there is room to raise the payout ratio. Assuming 40% payout, DPS could be lifted to 7.0-8.5 Scts during the period, implying 4.4-5.3% dividend yield.