Yangzijiang Shipbuilding - OCBC Investment 2018-06-12: Valuations Now More Attractive

Yangzijiang Shipbuilding - OCBC Investment 2018-06-12: Valuations Now  More Attractive YANGZIJIANG SHIPBLDG HLDGS LTD SGX: BS6

Yangzijiang Shipbuilding - Valuations Now More Attractive

  • Given up much of 2017 gains.
  • Continues to win orders.
  • Commendable performance vs. peers.

Stock has given up much of 2017 gains; conducts share buyback

  • After gaining about 80% in 2017, the share price of Yangzijiang Shipbuilding (YZJ) has dropped by 34% YTD. Comparing from its peak of S$1.74 in Nov last year, the stock has fallen by about 44% to the current price level of about S$0.99.
  • The group recently undertook a share buyback on 30 May (5m shares at S$0.90-S$0.915/share), and stated that it is ready to conduct an ongoing share buyback exercise on price weakness with its strong cash and cash equivalents position of RMB5.6b.

Continues to clinch orders; market already expects weaker margins

  • A market concern previously was the lack of new order flows, with US$270m of orders announced in 1Q18. However, we see that the group continues to secure contracts, announcing nine effective orders on 4 Jun that are worth a total US$578m (deliveries in 2020 to 2021). This consists of five 12,000 TEU containerships, two 208,000 DWT bulk carriers and two 82,000 DWT bulk carriers.
  • With these new orders, the group has clinched a total of 18 effective shipbuilding contracts worth US$846m YTD. This compares to US$2.1b in FY17 and US$0.82b in FY16. Though margins are understandably pressured with intense competition in the industry, we have factored this in our estimates.
  • We had also previously highlighted in our earlier report that we expect a drop in shipbuilding margins in 2H18 with elevated raw material costs and a strong RMB against the USD.

In a good position to ride out the cycle

  • With the group’s strong execution abilities, net cash position of RMB1.7b and positive operating cash flows in the past four years, YZJ has delivered a commendable performance compared to its peers.
  • We update our sum-of-parts valuation with a 0.65x P/B for the group’s held-to-maturity assets (discount to the Chinese banks which are now trading at about 0.75x P/B), such that our Fair Value estimate slips from S$1.22 to S$1.18. But with the share price fall, we now see a good upside to our Fair Value and upgrade our rating to BUY. 
  • At the current price level, YZJ’s stock is trading at about 7.5x blended FY18/19F earnings forward P/B.

Low Pei Han CFA OCBC Investment | https://www.iocbc.com/ 2018-06-12
SGX Stock Analyst Report BUY Upgrade HOLD 1.18 Down 1.220