Excerpts from DBS report

Analyst: Pei Hwa HO

Overhang removed, value emerging
What’s New
• Underperformance of 5-39% due to MSCI deletion at end-November set to reverse

Yangzijiang 

Share price: 
91 c

Target: 
$1.40

• Valuation gap should narrow to -1SD or implied share price of S$1.20 (+32% upside) in tandem with peers’recent re-rating

• Order momentum to accelerate with shipping recovery

• Conviction BUY; stock also offers 4.4% dividend yield


ship launchYangzijiang: sustainable dividend per share of >4 Scts (~4.4% dividend yield). Photo: Company
Investment Thesis:
Recent underperformance due to MSCI rebalancing offers a golden opportunity - trading at below cash of S$1.15/share and unjustifiably low 0.5x price/book value (P/BV) (2SD [standard deviation] below mean) despite superior financials of 8% return on equity (ROE) and sustainable dividend per share (DPS) of >4Scts (~4.4% dividend yield).

Distinctive economic moat as the largest and most cost-efficient private shipbuilder in China; well-positioned to ride on shipping recovery.

Yangzijiang Shipbuilding (Yangzijiang) has demonstrated earnings resilience during downturns, bolstered by a strong balance sheet with steady investment income.

Key catalysts include sizeable contract flows and progress in the liquefied natural gas (LNG) carrier market.

Valuation:
pei hwa hoPei Hwa HoOur target price (TP) of S$1.40 is based on sum-of-parts (SOP), pegged to 8x FY20F price-to-earnings (PE) on shipbuilding earnings, and 0.7x P/BV for both investments and bulk carrier/tanker fleet.

This translates into 0.8x P/BV (0.5 SD below its 5-year mean of 0.9x).

Where we differ:
Market has over-penalised Yangzijiang for its debt investments, not realising that most investments are backed by collateral of 1.5-2.5x.


Key Risks to Our View:
Revenue is denominated mainly in US Dollar (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 cost of goods sold (COGS) could result in a 0.8% drop in earnings.


Full report here. 


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