Excerpts from CGS International report
Yangzijiang Shipbuilding (SGX: BS6)
- The containership contracts that Yangzijiang Shipbuilding is in arbitration with a customer, worth US$900m, were never included in its order book (1H24: US$20.2bn).
- The claim amount by the customer is US$835m, comprising loss of bargain, loss of profits and refund of payments made.
- Yangzijiang Shipbuilding’s legal advisors say there is no merit to the claims and that the suit is highly improbable to succeed. No provision has been made.
Reiterate Add and TP of S$3.20, still based on 11x CY26F P/E, in line with regional peers.
Arbitration for 10 containerships filed in 2022
Yangzijiang Shipbuilding announced that a client had commenced arbitration proceedings at an arbitration tribunal in London in June and Sep 2022 over alleged breach of contracts for 10 containership contracts worth US$900m.
The proceedings were filed against three subsidiaries – Jiangsu Tianchen Marine Import & Export Co., Ltd. (Unlisted), Jiangsu Yangzi Xinfu Shipbuilding Co., Ltd. (Unlisted) and Jiangsu New Yangzi Shipbuilding Co. (Unlisted).
The 1st tranche of arbitration hearings is scheduled for Nov 2024F. The contracts were entered into by Yangzijiang Shipbuilding and its subsidiaries in Nov and Dec 2021 but were subsequently terminated by the client in Mar and May 2022.
The claim amount is c.US$835m, calculated based on current market ship prices, comprises loss of bargain, loss of profits and refund of the payments made by the client (US$3.32m).
Following consultation with its legal advisors and an evaluation of the claims, YZJSB was advised by its legal advisors that there was no merit to the suit and that it was highly improbable to succeed.
No financial impact for FY24F
Yangzijiang Shipbuilding is of the view that the claims will not have a material adverse impact on the company’s financial position for FY24F.
We understand from management that the contracts were never effective, with no downpayment made, and were hence not included in its order book.
3Q24F business update: 7 Nov 2024F
Yangzijiang Shipbuilding will announce its 3Q24F business update on 7 Nov 2024F. As usual, no detailed financials will be disclosed but we believe order wins/order book and potentially yard expansion plans will be addressed.
We believe the focus of the business update will be on steel price appreciation given China’s fresh stimulus that could lead to higher demand. We understand that steel accounts for 25%/30% of containership and bulk carrier costs for YZJSB.
Every 10% increase in steel price could impact gross margins by 2-4%. We keep our FY24F/FY25F/FY26F shipbuilding gross margins unchanged at 26.5%/27%/25%.
Yangzijiang Shipbuilding said it has steel inventory on hand for c.3-4 months of its requirement. 2025F deliveries were largely clinched in 2022 when steel prices averaged Rmb4,400/tonne.
Re-rating catalyst: stronger-than expected order wins; we project US$11bn in 2024F (YTD: S$8.5bn). Downside risks: surge in steel costs, order cancellations.
You can find the full report here and the company website here.
