Date: October 14, 2024
Broker: CGS International Securities

Arbitration Proceedings and Potential Impact

Yangzijiang Shipbuilding (YZJSB) is currently involved in arbitration over containership contracts worth US$900 million with a customer. These contracts, which are under dispute, were never included in YZJSB’s order book (1H24: US$20.2 billion). The claim amount of approximately US$835 million comprises several components, including loss of bargain, loss of profits, and a refund of payments made by the customer.

The arbitration involves 10 containership contracts that were terminated in March and May 2022. Hearings for the arbitration began in November 2024, and the contracts were initially agreed upon in November and December 2021. Despite the legal proceedings, YZJSB’s legal advisors believe there is no merit to the claims, and it is highly improbable that the suit will succeed. As a result, no financial provision has been made for the claims, and YZJSB does not anticipate any material adverse impact on its financial position for FY24F.

Financial Outlook

Despite the arbitration, YZJSB remains optimistic about its business outlook. It reported no downpayment for the disputed contracts, and hence, they were not included in the company’s order book. The company expects no significant financial impact from the arbitration.

YZJSB will provide its 3Q24F business update on November 7, 2024. The update is expected to focus on steel price appreciation, which could affect shipbuilding costs. Steel accounts for 25-30% of containership and bulk carrier costs for YZJSB, and a 10% increase in steel prices could impact gross margins by 2-4%. YZJSB, however, maintains its shipbuilding gross margins forecast at 26.5%, 27%, and 25% for FY24F, FY25F, and FY26F, respectively.

Stock Performance and Financials

As of October 14, 2024, YZJSB’s stock price was S$2.50, with a target price of S$3.20, representing an upside of 28%. The company has been performing well, with a 12-month stock performance showing a 56.3% increase. YZJSB’s market capitalization stands at US$7.56 billion (S$9.88 billion), with a free float of 61%.

Key financial projections for YZJSB include net profit forecasts of RMB 5,763 million, RMB 6,333 million, and RMB 6,302 million for FY24F, FY25F, and FY26F, respectively. Core EPS growth is expected to reach 40.5% in FY24F and 9.9% in FY25F. The company is currently trading at a forward P/E of 9.27x for FY24F, with an anticipated dividend yield of 3.45%.

Industry Outlook and Key Risks

YZJSB is projected to achieve US$11 billion in order wins in 2024F, with YTD orders at S$8.5 billion as of October 2024. Steel price fluctuations remain a key risk for the company. Steel prices have risen approximately 15% month-on-month since September 2024, and any further increase could squeeze YZJSB’s margins.

Re-rating catalysts for the company include stronger-than-expected order wins. However, downside risks include a potential surge in steel costs and order cancellations. Nonetheless, YZJSB’s solid financial foundation, substantial order book, and stable earnings outlook make it a resilient player in the shipbuilding industry.

Major Shareholders

Yangzi International Holdings Ltd holds a 21.5% stake in YZJSB. The company has 3,951 million shares outstanding, and its average daily turnover is US$43.42 million (S$56.96 million).

This report reflects the company’s standing as of October 14, 2024, according to CGS International Securities.