Yangzijiang Shipbuilding Holdings (SGX: BS6), or YZJ, is on a roll this year.
The Chinese shipbuilder has seen its share price shoot up slightly more than 50% year-to-date to touch its all-time high of S$2.32.
This share price significantly exceeds the previous peak of S$1.47 achieved back in October 2007.
Can this blue-chip shipbuilder continue its fabulous run?
We dig deeper into its business to find out.
Stellar financials
YZJ reported an impressive set of financials for 2023.
Revenue grew 16.5% year on year to RMB 24.1 billion with gross profit leaping by 69.2% year on year to RMB 5.4 billion.
The firm’s gross margin expanded by seven percentage points from 15.4% to 22.4%.
This revenue surge was contributed by the commencement of the construction of vessels of larger size along with improved pricing.
Net profit soared by 57% year on year to RMB 4.1 billion.
The Chinese shipbuilder also generated a positive free cash flow of RMB 7.2 billion, nearly double the RMB 3.7 billion that was churned out a year ago.
A final dividend of S$0.065 was declared and paid out, a 30% increase from the S$0.05 paid out in 2022.
A growing order book
YZJ’s growing order book is a clear testament to its ability to clinch contracts.
For 2023, the group reported an order win of US$7.05 billion, more than double its target of US$3 billion.
Back then, its outstanding order book stood at US$14.5 billion as of 31 December 2023.
For its latest business update for the first quarter of 2024 (1Q 2024), YZJ’s order win momentum has continued.
As of 24 May 2024, YZJ has clinched a total of US$3.3 billion of order wins, making up nearly three-quarters of its annual target.
Its order book now stands at a record US$16.08 billion.
YZJ’s order book trend is impressive, going from US$3.1 billion in 2020 to US$16.1 billion in 1Q 2024, more than five times higher.
As the group’s order book is a leading indicator as to how the business will perform, a larger order book will translate into better prospects.
Contracts for new vessel types
The shipbuilder has been proactive in seeking out business for new vessel types to augment its order book.
These new vessels are in high demand and YZJ’s ability to construct them gives the group an edge over its competition.
Back in October 2022, the group clinched its maiden order for two liquefied natural gas (LNG) carriers.
The order, placed by a European customer, is scheduled to be delivered between 2025 to 2026.
YZJ recognised the changing landscape and the industry’s increased focus on green shipping and decided to pursue more contracts in this area.
In June 2023, the group secured its first order win for methanol dual-fuel containerships.
The contract, signed with shipping giant Maersk, involves the construction of six 9,000 TEU methanol dual-fuel containerships to be delivered between 2026 and 2027.
Green methanol is reported to reduce nitrogen oxide by around 45% and sulphur oxide by around 8% compared with conventional fuels.
Another six units of such containerships were secured in January this year for Ocean Network Express Pte Ltd to be delivered from 2027 onwards.
Catalysts for further growth
Management sees healthy demand for oil tankers and gas carriers that should fuel the group’s continued growth.
The containership market should see growth of 9.5% this year as shipping companies undertake fleet renewal.
LNG carriers should also see a compound annual growth rate (CAGR) of 3.6% by 2029, driven by the global energy transition to cleaner fuels along with major industrial coal-to-gas switching in China.
Crude oil tankers should also grow at a CAGR of 2.5% ill 2029 with catalysts being fleet renewal and longer sailing distances caused by geopolitical disruptions to shipping routes.
Finally, the liquefied petroleum gas (LPG) carrier market is projected to grow by 5.5% CAGR by 2029 boosted by strong growth in shale gas production coupled with rising demand for LPG for heating and ventilation.
The numerous catalysts outlined above should stand YZJ in good stead to continue clinching contracts and building its order book.
Get Smart: Cyclicality is a risk
While the catalysts above point to better times ahead for YZJ, investors should note that the shipping industry is inherently cyclical.
Companies are ordering new ships now because of fleet renewal and strong demand that exceeds supply.
With new ships delivered, there is a risk that the cycle could turn and that supply will exceed demand.
Should this happen, ship values will decline and shipowners may default, thus affecting YZJ’s order-clinching ability and the collectability of debts.
A major economic or geopolitical event may also depress demand and result in shipping companies delaying new builds, thus posing another risk to YZJ.
Barring the above risks, prospects look bright for the group to continue growing its order book.
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Disclosure: Royston Yang does not own shares in any of the companies mentioned.
