Yangzijiang Shipbuilding’s recent performance came as a surprise. It raised huge dividends – up 82% y/y.
Revenues, net profits and free cash flow were also up.
Put it this way, the third largest shipbuilder in the world seems to be benefiting from a strong shipbuilding cycle.
Why Yangzijiang shares fell?
Yet, shares were sold-off after the US proposed up to US$1.5 million fees on Chinese-built vessels entering the US.
The US also proposed mandating a portion of US exports to be shipped on US-built vessels.
Question: is this a good time to buy Yangzijiang shares? Was I wrong about Yangzijiang’s dividends in my last article?
Well, let’s dive in!
Yangzijiang – world’s biggest private shipbuilder in China
At S$9.2 billion market cap, Yangzijiang is the world’s biggest private shipbuilder in China.
The shipbuilder giant has remained profitable even during industry downturns. Between 2014 and 2022, its revenues grew 65% to S$26.5 billion, while net profits grew 175% to S$6.6 billion over the period.
Meanwhile many global shipyards struggled and were forced to close down.
Despite recent sell-off, Yangzijiang shares 255% and have compounded at a 12% per year since 2014. Actually, not too bad.
Yangzijiang had a blowout 2024 results – what’s driving strong earnings?
Here’s the interesting bit from last year’s results:
- Revenues rose 10% to CNY26.5 billion
- Net profits grew 61% to CNY6.6 billion
- Free cash flow grew to CNY11.8 billion
Now, a closer look tells me two things.
First, Yangzijiang won a bulk of new orders, hitting 126 bookings worth US$14.6 billion.
Next, Yangzijiang’s orderbook to date was very strong.
The company delivered 64 vessels last year, including three vessels built for its own fleet.
And have orderbook visibility up till 2028.
A couple of reasons for this. Globally, there’s limited shipbuilding capacity. Many shipyards were forced to close over the past years. This was since the last global shipping cycle during the global financial crisis of 2008-2009.
And thus reduced global supply.
At the same time, shipping companies have to replace their aging fleet. What’s more, global trade re-opened after the COVID-19 pandemic, which led to massive supply chain disruptions in 2022.
Lastly, geopolitical tensions in the Red Sea have driven rising demand for new orders.
In fact, management said: “Over the past two years, multiple factors, such as fleet renewal demand, maritime decarbonisation, and rising trade volumes, have driven shipbuilding newbuild orders to record highs. In 2024, the industry registered a total order intake of US$204 billion in contract value and US$66 million in terms of compensated gross tonnage (“CGT”), reaching the highest in 17 years.”
These orders included LNG carriers, tankers, cruise ships – and at record prices.
Yangzijiang gross margins went up.
And it paid huge dividends.
Can dividends continue to grow?
So far, shipping orderbooks have hit the highest level. And has yet to reach the peak in 2008-2009. I’m convinced we could be in the midst of another shipping cycle.
But here’s the big problem.
From what I know, shipbuilding is highly competitive. It’s highly cyclical.
Today, Chinese shipbuilders dominate the market. But history shows this can change.
In the 1970s, Japan was the top shipbuilder. By the 1980-1990s, Japan shipbuilders had to restructure three times.
Since then, Korean shipyards have taken over.
What’s more, Japanese and Korean shipbuilders are now facing higher labour and raw material costs. This allowed Chinese shipbuilders like Yangzijiang continue to dominate the global shipbuilding market – cornering at least half of newbuild contracts.
The thing is, industry cycles can be an unforgiving beast. An unexpected downturn could wreck shipbuilders, leaving them with unfinished projects and high debt.
If the downturn hits before ship deliveries, customers may cancel or even delay orders – exactly like 2008-2009.
Peak orders came in 2024. But I also find such massive growth is unlikely to continue. At some point, there will be a flood of new supply, growth stalls and the rate of dividend growth slows.
The good news is, Yangzijiang has pretty large orders – lined up for the next four years.
This gives plenty of revenue stability.
This gives Yangzijiang a reliable stream of higher profits – and higher dividends – compared to pre-pandemic levels.
My final thoughts
I believe Yangzijiang is benefiting from a strong shipping cycle. Revenue and profits are growing. Its order book provides visibility.
For long-term dividend investors, the current 5% yield is appealing. And I expect payouts to be stable. Since new orders should stay above pre-pandemic levels.
However, what I’m concerned about Yangzijiang is that it’s in a highly competitive and cyclical industry – pretty much like automakers and airlines. Chinese shipyards dominate now. But past cycles show how the industry can change over time.
Orderbook growth will moderate with the rush of new ship supply.
I admit, Yangzijiang appears to have exceeded my expectations as a good dividend stock. But expecting rapid dividend raises may not be realistic.
Perhaps, the more I think about this, the more I believe Yangzijiang is a stable income play, rather than a strong dividend grower.
What are your thoughts?
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan
