Excerpts from DBS Research report
Pullback a buying opportuninty
Yangzijiang corrected 8% last week to S$1.48 as of last close, from S$1.61 a week ago. There were no negative company development that we are aware of.
i. Freight rate freeze. Leading container shipping companies - CMA CGM and Hapag-Lloyd, announced last week that it will halt all spot rate increases in order to prioritise its long-term relationships with customers.
We do not find this alarming at this juncture as containership freight rates have risen 5-fold in a year.
Order flow for containership is expected to slow down anyway after historical high order wins the past 1-year that keeps Yangzijiang’s yard busy through 2024.
Next wave of orders is expected to come from bulk carriers and tankers.
Even if container freight rate starting to fall, it shall not affect delivery as balance sheet of shipping companies have improved vastly in this super upcycle and rates are expected to stay at elevated levels in the next few years with moderate new supply in view of the healthy orderbook-to-fleet ratio at <20%.
ii. Evergrande’s debt crisis. China indebted developer – Evergrande’s debt crisis might have raised concerns on impairment risks of Yangzijiang’s investment segment.
We verified with management that Yangzijiang has no direct exposure to Evergrande.
Its investment segment is backed by collaterals at average coverage of 1.6x. Largest investment by collaterals are Land (29%), Shares (22%) and Others (43%, which is largely government guarantee) at coverage ratio of 2.6 / 1.8 / 1.0 as of end-Jun 2021.
Hence, in the event of default, aka missed interest payments, Yangzijiang will file for court proceedings to liquidate the collaterals and recoup its principal and interest payments. Though, there might be “loss of income” for the investment as whole process may take over a year.
iii. China sentiment. While Yangzijiang’s business is correlate to global shipping and shipbuilding markets, it is often perceived as a China proxy on SGX.
Recent regulatory crackdown on education and tech sectors have weighed on sentiment of Chinese companies, though, we think sectors like energy, shipping and shipbuilding are of relatively low risks.
In addition, there is also market fear on broader implications of Evergrande incident on China economy. Though, it is widely believed that it should be temporal and kept in check by government.
We believe recent pullback presents a good buying opportunity. Reiterate BUY on Yangzijiang. Stock remains undervalued at 0.8x PB vs peers and historical upcycle valuation.