Excerpts from DBS report

Analyst: Pei Hwa HO

Don’t miss the boat!

Trading 18% below net cash of ~S$1.05/share

Yangzijiang is a bargain, trading 18% below its net cash of ~S$1.05 per share, overly penalised by macro concerns. Trading at a 40% discount to regional peers at 0.5x P/BV despite superior financials - 8-9% ROE and sustainable ~4% dividend yield – we believe the low valuation is unwarranted.

The stock is set for a rebound as:

1) A contract for 2+6 mega containerships worth up to US$880m could potentially be in the bag;

2) Yard activity level has surged this week with the government’s strong push to resume work;

3) Share buyback exercise typically resumes when share price falls below 95 Scts per share.


Yangzijiang 

Share price: 
87.5 c

Target: 
$1.50

The CEO’s recent acquisition of ~4% stake in the company is another vote of confidence on Yangzijiang’s prospects.

 

Securing ~US$880m containership orders 

Securing 2+6 units of 14k TEU containerships from Tiger Group worth up to US$880m. Tradewinds reported on 5 Mar that Yangzijiang has bagged up to eight dual-fuel 14k TEU containerships from Tiger Group at US$110m each.

This involves two firm orders plus six options.

Yangzijiang has yet to make any official release on this. If the article is true, we surmise that the contract is probably signed but pending downpayment to be effective.

This will be a remarkable win amid the COVID-19 outbreak.

It marks the first dual-fuel mega containership order for Yangzijiang, making it the third Chinese yard to build such vessels, following state-owned Jiangnan Shipyard and Hudong Zhonghua shipyard.

Assuming all options are exercised during 2020, the contracts will account for ~44% of Yangzijiang’s order target of ~US$2bn for this year.

Typically, containerships command better margins than other vessel type for Yangzijiang.

One of the world’s best-managed and profitable shipyards. Core shipbuilding revenue is backed by its order backlog of US$2.9bn (~1.5x revenue coverage) as at end 2019.

Investment segment provides stable recurring income.

As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride on the sector consolidation and shipbuilding recovery.

The company’s strategy to move up into the LNG/LPG vessel segment strengthens its longer-term prospects.



$1.50 target

pei hwa hoValuation: Our target price of S$ 1.50 is based on sum-of-parts, pegged to 8x FY20F PE shipbuilding earnings, 1x P/BV for bulk carriers and 0.9x P/BV for investments. This translates into 0.9x P/BV, which is 0.5SD below its 10-year mean of 1.4x.

-- Pei Hwa HO,
DBS analyst

Where we differ: We believe critical catalysts are Yangzijiang’s successful strategy to expand into the LNG carrier and tanker markets, and overall recovery in the shipping and shipbuilding segments leading to margin improvements.

Key Risks to Our View: USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged.

If the net exposure is unhedged, every 1% USD depreciation could lead to a 1.5% decline in earnings.

Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in a 0.8% drop in earnings.


Full report here

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