Encouraging outlook as ocean freight spot rates continue uptrend

CGS-CIMB analyst Lim Siew Khee has maintained her “buy” call on Yangzijiang Shipbuilding (YZJ) with an unchanged target price of $1.37.

In a report dated Oct 16, Lim said that there was a “strong uptrend for transpacific spot rates”, which suggests that demand is matching capacity deployment.

In September, riding on the traditional year-end peak season, the SCFI (Shanghai Containerised Freight Index) Shanghai to West Coast America rose about 170% y-o-y to an all-time high of US$3,831 ($5,202) per forty-foot equivalent unit (FEU), the highest since 2009.

The SCFI for Shanghai to East Coast America also went up about 87% y-o-y, reaching a high of US$4,590 per FEU since 2015.

Shipments to other regions were encouraging as well, with Shanghai to Europe reaching a modest high of US$1,085 per FEU, while Panamax grain bulk carriers staged a recovery to the pre-Covid-19 average of US$32.3 per tonne in September.

Lim also cited an encouraging rise in ocean rates and positive outlook by liners, which could spur new build orders.

YZJ’s orderbook of US$700 million year-to-date is on track to hit US$1.1 billion, up 33% y-o-y which is “defying the disruptions of Covid-19”, she noted.

From the 2020 orders, she sees that there are options for another 22 vessels, amounting to about US$1.29 billion to be exercised in 2020 and 2021, and improving earnings among shipowners could accelerate these options.

As YZJ’s yard operations remained unchanged q-o-q, she expects YZJ to deliver at least 15 vessels in 3QFY2020 and a steady q-o-q net profit of RMB700 million to RMB 750 million (between $141 million to $151 million), relatively stronger than its Singapore peers.

Shipbuilding gross margin also appears likely to normalise to about 16% to 18% in 3QFY2020, in the absence of vessel resale gains which were present in 2QFY2020.

Lim also noted its strong net cash of RMB4.4 billion (at 22 cents per share) as at end June should sustain an above market yield of 4.3%, and it is currently trading at a new trough and undemanding valuations of 0.56 times 2020 P/B. —