Among the blue-chip stocks, Yangzijiang Shipbuilding (SGX: BS6), or YZJ, has delivered one of the best performances this year.
Shares of the Chinese shipbuilder have soared close to 55% year to date.
The group’s business has been on a roll in the past two years.
For its fiscal 2021 (FY2021), YZJ saw revenue increase by 13% year on year to RMB 16.8 billion while net profit surged by 47% year on year to RMB 3.7 billion.
It also chalked up an order book of US$8.5 billion for 157 vessels as of 31 December and raised its dividend from S$0.045 in FY2020 to S$0.05 in FY2021.
Elsewhere, the shipbuilder also spun out its financial division Yangzijiang Financial Holding Ltd (SGX: YF8), with shareholders of YZJ receiving a dividend-in-specie.
Investors may be curious to know if the group can raise its dividends again this year.
A strong set of earnings
YZJ’s financial momentum has continued into this year.
For its fiscal 2022’s first half (1H2022), revenue surged by 70% year on year to RMB 9.7 billion.
The better numbers were tied to the delivery of 35 vessels in 1H2022 compared to just 23 in the prior year.
Revenue also rose because of the group’s expanded charter fleet and higher charter rates.
Gross margin remained constant year on year at 15% and the group’s net profit climbed 32% year on year to RMB 1.2 billion.
Meanwhile, YZJ also generated RMB 886.3 million of free cash flow, giving investors confidence that it can sustain its dividend payments.
Growing its order book further
YZJ has also demonstrated its ability to capture new order wins to bolster its order book.
As of 7 August, the group had secured new orders of US$1.09 billion for the year for a total of 18 vessels.
These contracts have resulted in an order book of US$8.13 billion for 134 vessels, with deliveries slated from this year till 2025.
The majority of YZJ’s order book (100 units) comprises containerships, while the remainder consists of bulk carriers (28 units) and LPG/LNG and chemical tankers (six units).
Of its total order book as of 7 August, more than half (57%) comes from the US with a third coming from Australia and Asia.
The remaining 9% are European orders.
The group has done a great job in growing its order book since the start of the pandemic.
Back in March 2020, YZJ’s order book stood at just US$2.9 billion but this has more than doubled in a little over two years.
YZJ targets to win US$2 billion in orders for 2022 and to deliver a total of 70 vessels this year.
Increased vessel complexity
Executive chairman and CEO Ren Letian has also emphasized that YZJ had recently won the contract to build four units of 8,000 TEU LNG dual-fuel containership, a type of green vessel.
While this space has traditionally been the domain of Korean shipyards, the group has acquired the technology to compete profitably in this sub-sector.
The CEO is confident of the group’s ability to move up the value chain and progressively build larger and more complex vessels.
By doing so, it will give YZJ an edge over its competitors and allow it to broaden its portfolio of vessel types to further boost its order book.
Bright outlook for shipping
The shipping industry is expected to remain resilient due to supply chain congestions along with continued demand from both Europe and China.
Clarkson Research Services, a unit of Clarkson PLC (LON: CKN), has disclosed that its ClarkSea Index* has risen from just US$12,144 per day in 2018 to US$38,884 per day in 1H2022.
*Note: The ClarkSea Index presents a weighted average index of earnings for tanker, bulk carrier, containership and gas carriers managed by Clarkson Research Services.
These numbers show that earnings for companies within the shipbuilding sector have more than tripled in less than four years.
In the dry bulk market, demand is expected to grow by 1.9% in 2023 and outstrip the pace of supply growth, which will only expand by 0.7%.
These data points indicate that YZJ’s business can continue to prosper, barring unforeseen circumstances.
Get Smart: Dividends should rise with profits
Given the sanguine outlook and the strong financial results, it seems likely that YZJ can, once again, raise its dividends.
However, investors need to also keep a close watch on the risks as shipping is a cyclical industry.
But for now, the coast looks clear for the shipbuilder to continue to grow both its profits and order book.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.