Excerpts from DBS Group report

Analyst: Pei Hwa HO

Beneficiary of strengthening USD
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.


Share price: 
88 c


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.

pei hwa ho"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."

-- Pei Hwa HO (photo), 
Analyst, DBS Bank

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.

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.

Valuation: 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.

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.

Full report here. 

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