YANGZIJIANG: Unwarrantedly undervalued, trading at 0.7x P/Bv and 8x PE

Excerpts from DBS report

Analyst: Pei Hwa HO

Pullback presents buying opportunity

Investment Thesis:
Reiterate BUY; TP S$1.95.

Recent price weakness following the 3Q business update presents a buying opportunity.

Yangzijiang
Share price: $1.29	Target: $1.95

The stock is unwarrantedly undervalued, trading at 0.7x P/Bv and 8x PE against 10% ROE and 3-year EPS CAGR of 18%, and is yet to fully reflect the current shipbuilding supercycle.

Share price re-rating during an upcycle is typically driven by order momentum, followed by conversion of these orders into earnings growth.

shiponsea homepage

Best proxy to newbuild supercycle. After record-high order wins of US$7.4bn YTD (48% higher than US$5bn in the last boom in 2007), Yangzijiang’s yards are full through 2024.

While order momentum should slow down, it is expected to stay at elevated levels of US$2.5-3.0bn per annum.

Earnings are set to grow at a 3-year CAGR of 18%, backed by a US$8.9bn record orderbook with gross margin improvement to 20% (from 13% in 3Q21).

Catalysts to drive share price closer to our TP include:

Pei Hwa Ho, analysti) optimism on the macro economy and shipping market;
ii) sequential earnings growth, underpinned by revenue and margin expansion;
iii) a potential increase in the dividend payout; and
v) an improving ESG score – potential spin-off of investment arm and gaining traction in the dual fuel and LNG carrier markets.

Valuation:
Our target price (TP) of S$ 1.95 is based on sum-of-parts (SOP), pegged to 10x PE on FY21F shipbuilding earnings, 0.8x P/BV for investments and 1.0x P/BV for its marked-down bulk carrier/tanker fleets.

This translates into 1.08x P/BV (0.5 SD above its 5-year mean of 0.9x).

Where we differ:
Market has over-penalised Yangzijiang for its debt investments, most of which are backed by collateral of 1.5-2.5x.

Key Risks to Our View:
Revenue is denominated mainly in US dollars. Assuming the net exposure of ~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.

YANGZIJIANG: Unwarrantedly undervalued, trading at 0.7x P/Bv and 8x PE

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