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


Share price: 
91 c


• 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.

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.