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Yangzijiang Shipbuilding - DBS Research 2021-08-06: Strategic Review Of Investment Arm Cheers Market

YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6) | SGinvestors.io YANGZIJIANG SHIPBLDG HLDGS LTD (SGX:BS6)

Yangzijiang Shipbuilding - Strategic Review Of Investment Arm Cheers Market

  • Proactive ESG initiatives to build cleaner ships and hive off investment arm will help to further re-rate the stock.
  • 2Q21 beat expectations despite steel cost pressure.
  • Raise Yangzijiang Shipbuilding's FY21-23F net profit forecast by 10-13% to reflect Xinfu acquisition and higher order wins in 2021.
  • Reiterate BUY, target price lifted target price S$1.95. Upside potential to current 4% dividend yield.



Investment Thesis:


Undervalued and best proxy for newbuild supercycle.

  • Yangzijiang Shipbuilding (SGX:BS6) has secured record-high order wins of US$6.7bn in 7M21, 34% higher than the last boom of US$5bn annual orders in 2007. The recent wave of newbuilding activities for containerships marks the beginning of a new supercycle since 2007. Next wave of orders is expected to come from bulk carriers in 2H21, followed by tankers in 2022.

Lifting target price to S$ 1.95; raising orders wins and earnings growth projections.

  • We have raised our order win assumption for 2021 to US$7.5bn (from US$5.2bn), propelling 3-years earnings CAGR of 20%. Yangzijiang's dividend should rise to 5.0-6.5 cents (3.5-4.5% yield) in tandem with earnings growth. While Yangzijiang's Share Price has risen ~50% year-to-date, the stock remains undervalued at 0.8x P/BV, relative to historical upcycle and peer valuations.
  • Catalysts to drive share price closer to our target price include:
    1. optimism on macro economy and shipping market;
    2. buoyant contract flows and improving pricing power;
    3. sequential earnings growth underpinned by revenue and margin expansion;
    4. potential increase in dividend payout;
    5. improving ESG score – potential spin-off of investment arm and gaining traction in dual fuel and liquefied natural gas (LNG) carrier market.


Valuation:


Where we differ:

  • Market has over-penalised Yangzijiang Shipbuilding for its debt investments, most of which are backed by collateral of 1.5-2.5x.


Key Risks to Our View:

  • Revenue is denominated mainly in US dollars. Assuming the net exposure of ~50% is unhedged, every 1% US$ depreciation could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings.





Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2021-08-06
SGX Stock Analyst Report BUY MAINTAIN BUY 1.95 UP 1.500



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