Excerpts from DBS report
Analyst: Pei Hwa HO
|Orders picking up steam|
• Secured US$184m of new orders in Aug; lifting YTD wins to US$701m or 47% of full year target
• US’s recent sanction against China Shipyard Group’s 722nd Research Institute could channel some newbuild orders to non-SOE yards like Yangzijiang
• Reiterate BUY; TP S$1.40
A bargain - trading below cash of S$1.13/share and unjustifiably low 0.6x P/BV despite superior financials of 8% ROE and sustainable DPS of >4 Scts (~4% dividend yield), presenting good opportunities to longer-term investors.
Distinctive economic moat as the largest and most cost-efficient private shipbuilder in China.
Yangzijiang has demonstrated earnings resilience during downturns, bolstered by strong balance sheet with stable recurring investment income.
Key catalysts include sizeable contract flows and progress into LNG carrier market.
Valuation: Our TP of S$1.40 is based on sum-of-parts, pegged to 8x FY20F PE on shipbuilding earnings and 0.7x P/BV for investments, and 0.7x P/BV for bulk carrier/tanker fleet.
This translates to 0.8x P/BV (0.5 SD below 5-year mean of 0.9x).
|Where we differ:
Yangzijiang’s successful strategy to expand into the LNG carrier and tanker markets, and overall shipping recovery should lead to margin improvements.
Market has overpenalised Yangzijiang for its debt investments, not realising most investments are backed by collateral of 1.5-2.5x.
-- Pei Hwa Ho
Key Risks to Our View:
Revenue is denominated mainly in USD.
If the net exposure at ~50% is unhedged, every 1% USD depreciation could lead to a 1.5% decline in earnings.
Every 1% rise in steel cost, which accounts for about 20% of COGS, could result in a 0.8% drop in earnings.
Full report here.