Yangzijiang Shipbuilding - DBS Research 2020-12-04: Overhang Removed, Value Emerging, Conviction BUY


Yangzijiang Shipbuilding - Overhang Removed, Value Emerging, Conviction BUY

  • Yangzijiang Shipbuilding's underperformance of 5-39% due to MSCI deletion in end November set to reverse.
  • Valuation gap should narrow to -1SD or implied share price of S$1.20 (+32% upside) in tandem with peers’ recent re-rating.
  • Order momentum to accelerate with shipping recovery.
  • Conviction BUY; Yangzijiang Shipbuilding also offers 4.4% dividend yield.

MSCI overhang removed

Yangzijiang has underperformed its regional peers by 5-39% since early November; dragged by selling pressure from MSCI rebalancing.

  • Yangzijiang Shipbuilding (SGX:BS6) has been left out in the recent equity rally and rotational interests into cyclicals to position for economic recovery following positive news on vaccine progress. Instead, Yangzijiang's share price fell 1%, underperforming the Straits Times Index (STI) by 17% and regional shipyards by up to 39%. We believe this is due largely to overhang and selling pressure resulting from the MSCI deletion.

MSCI overhang has been eliminated post rebalancing on November 30.

Yangzijiang trades at 2SD below mean vs its Singapore and Chinese peers’ 0.5-1SD below mean and Korean peers’ 0.5- 1.5SD above mean.

  • In our view, Yangzijiang Shipbuilding is undervalued and probably mispriced, trading at merely 0.5x P/Bv which is 2SD below its 5-year mean, a steep discount to its peers despite a much stronger balance sheet, profitability and dividend yield.
  • Valuation gap poised to narrow; 1SD below mean or S$1.20 (+32% upside) should better reflect current fundamentals. While Chinese state-owned enterprise (SOE) yards demand valuation premium and Korean peers are buoyed by Qatar’s massive LNG orders and revived interests in containership orders, the gap should narrow to 1SD below mean or 0.7x P/Bv to reflect Yangzijiang Shipbuilding's improved fundamentals for shipbuilding in tandem with recent re-rating for industry peers. See the peers comparison table in PDF report attached below.

Buoyant shipping markets bode well for newbuild orders

Rising shipping rates bode well for newbuild orders.

  • Historically, Yangzijiang's share price has tracked shipping market, a leading indicator for ship orders. However, the correlation has broken down the past 6-months as its share price has remained muted despite shipping rates trending up since mid-2020.

Order momentum could be stronger than expected in 2021...

  • China (Export) Containerized Freight Index (CCFI) climbed to ~1,200 points, a level not seen since March 2015 The Baltic Dry Index (BDI) also tripled to ~1,200 points from its lows in May-2020. These should incentivise ship owners to press ahead with newbuild orders for containerships and bulk carriers which have been held back due to the implementation of International Maritime Organisation 2020 (IMO 2020) ruling and COVID-19 pandemic this year. Against this backdrop, ordering activities could offer upside surprise going into 2021.

… and catalyse re-rating.

  • Recall that in 2017, Yangzijiang's share price doubled in 6-months in response to robust order flow from ~US$800m in 2016 to > US$2bn in 2017. In our view, its remarkable year-to-date (YTD) wins of US$1.26bn, higher than US$830m in 2019, despite COVID-19 challenges have not been fairly reflected in its share price performance.
  • See the summary of Yangzijiang Shipbuilding's order wins in PDF report attached below.
  • Besides options worth over US$1.4bn, Yangzijiang Shipbuilding has also reportedly signed LOI with MSC for ultra-large containership sized 23k TEU worth up to US$888m, that could be translated into firm orders in the coming months.

Management’s vote of confidence

Share buyback since September 2020.

  • Yangzijiang Shipbuilding's management launched a share buyback exercise in September, accumulating 48.2m shares or approximately 1.23% of its outstanding shares. This nearly doubles the 0.6-0.7% shares acquired in 2018 and 2019.
  • In 2019, Yangzijiang Shipbuilding activated the share buyback mandate following a price plunge on concerns over the company’s Chairman providing assistance in investigations on a former government official. Similarly, in 2018 the company also bought back shares as its share price dipped to ~90 cents. In both years, Yangzijiang's share price bottomed out a few months after the share buybacks.

We take comfort from the management’s confidence in its operations.

  • Yangzijiang Shipbuilding's CEO bought 4% stake in company in March 2020. Chief Executive Officer (CEO) Ren Letian’s acquired ~4% of Yangzijiang Shipbuilding from initial public offering (IPO) investor Hengyuan Asset Investment (Hengyuan). Hengyuan’s 11% was issued during the IPO in 2007 in exchange for its minority interest in New Yard. The investor has pared down its stake over the years for reinvestment.

Where we differ:

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2020-12-04
SGX Stock Analyst Report BUY MAINTAIN BUY 1.400 SAME 1.400