Excerpts from UOB KH report
Analyst: Adrian Loh
Recent Concerns Overblown – Near-term Order Wins May Take Centre Stage
|We recently met with YZJ’s management for an update on the company’s operations and commentary regarding its chairman.
Its inexpensive valuation of 0.56x P/B (-2SD below 5-year average) and potential near-term newsflow on order wins has led us to upgrade YZJ to a BUY with a P/B-based price target of S$1.46.
• “Corporate-governance issues” largely a non-event in our view. A news report that the company’s executive chairman Mr Ren Yuanlin was “assisting” Chinese authorities in an investigation led to a 42% slump in the company’s share price over the 2-15 August 19 period.
Yangzijiang (YZJ) pointed out that neither Mr Ren himself nor the company is under investigation – instead he is assisting the authorities as there is alleged financial impropriety at one of his China-based charities, managed by an individual who is not an employee of YZJ.
As a result, Mr Ren is on leave from YZJ and presently does not have an active role in the company.
• Current management has the experience and expertise. Mr Ren Letian, the CEO of YZJ for the past five years and the son of Mr Ren Yuanlin, has been with the company since 2006 in various roles and importantly, he headed the company’s Yangzi Xinfu shipyard.
We understand that he is an extremely hands-on manager with detailed knowledge of shipyard and shipbuilding operations, and thus the core business will not be affected in the absence of the company’s chairman, in our view.
• Positive shipbuilding outlook in the medium term. Last week, YZJ announced a new order win for three 82,000DWT bulk carriers and two 325,000DWT bulk carriers.
While no contract value was disclosed, we estimate this order at approximately US$250m.
Ytd order wins now total US$604m and is comfortably approaching our 2019 order-win estimate of US$1b.
We forecast that order wins will improve to US$1.5b in 2020, driven by:
|a) marketshare gains at the expense of Korean yards, helped to some extent by the cheaper renminbi, and
b) shipowners complying with stricter International Maritime Organisation (IMO) environmental regulations that come into force in 2020.
YZJ noted that newbuild enquiries in 2H19 has been stronger compared to that in 1H.
• Upgrade earnings forecasts. We have upgraded our earnings forecasts by 25-32% for 2019-20 to take into account more bullish assumptions for new order wins as well as 1-2ppt increases in gross profit margin which held up well in 1H19.
• We resume coverage on YZJ with an upgrade to BUY recommendation with a higher price target of $1.46, in line with YZJ’s 5-year historical P/B of 0.84x.
Due to the recent slump in YZJ’s share price, it is currently trading at a 2019F P/B of 0.55x which we view as inexpensive as it is nearly -2SD below the company’s 5-year historical P/B. We highlight that YZJ has never traded below 0.52x P/B.
• Positive earnings revision momentum. Consensus has increased YZJ’s 2019 and 2020 earnings estimates by 14% and 10% respectively since the start of this year.
SHARE PRICE CATALYSTS
• New ship-building order announcements, specifically from Japanese shipowners due to the positive synergistic effects of the Mitsui JV.
• News that the chairman is no longer assisting in the Chinese authorities’ investigations.
Full report here.