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Yangzijiang Shipbuilding - Beneficiary of strengthening USD

Shared By Stock Fanatic on Tuesday, July 3, 2018 | 3.7.18

■ Share price has unjustifiably halved from its high in Nov-17 due to overblown concerns on forex and steel cost as well as US-China trade war

■ Strengthening USD to above Rmb6.65 bolster profits in FY18-19

■ Share buyback exercise reaffirms confidence

■ Attractive entry point at 7x PE, 0.6x PB and 5% yield; generating 8-9% ROE; reiterate BUY with S$1.82 TP

Poised for rebound; Reiterate BUY; TP unchanged at S$1.82. Yangzijiang’s share price is set to stage a rebound, after falling 50% YTD, due to overblown concerns on forex and steel cost as well as trade war. Recent strengthening of USD will benefit Yangzjiang with every Rmb0.10 leading to Rmb300m writeback. There is a window of opportunity to buy the quality shipyard at a rock bottom valuation of 0.6x P/BV, which is at a ~30% discount to global peers’ average P/BV of 0.9x, notwithstanding its attractive 5% yield and higher ROE of 8-9% vs peers’ 4-5%. Yangzijiang also has a solid balance sheet, sitting on net cash of 76 Scts/share (including financial assets), representing ~52% of NTA as opposed to shipyard peers that are mostly heavily indebted.

One of the world’s best-managed and profitable shipyards. Core shipbuilding revenue is backed by its healthy order backlog of US$4.5bn (~2x revenue coverage) as at end-Mar 2018. Better returns from the investment segment provides a cushion to its recurring income stream. It is the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride sector consolidation and shipbuilding recovery. Its strategy to move up into the LNG/LPG vessel segment with a Japanese partner strengthens the longer-term prospects of the company.

Where we differ: We have been more bullish on the sector’s recovery and believe Yangzijiang deserves to re-rate, catalysed by order wins and newbuild price increases eventually. The shipping demand growth could outstrip supply growth in 2018-2019. Profitability improvement of shipping companies should drive demand for newbuild vessels and higher newbuild prices.

We value Yangzijiang based on sum-of-parts (SOP) methodology. We arrive at a target price of S$1.82, after applying 14x FY18F PE on shipbuilding earnings, 1.5x P/BV for bulk carriers and 1.3x P/BV for investments. Our TP translates into 1.25x P/BV, which is approximately 0.4SD below historical mean (2.0x) since listing.

Technical Analysis
Daily Chart
Key Risks to Our View:
USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged. If the net exposure is unhedged, every 1% USD depreciation could lead to a 2% decline in earnings. Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in 0.8% drop in earnings.

Source : DBS Group Research
(Read Report)

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Posted on Tuesday, July 3, 2018 | 3.7.18
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