■ 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.
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