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Simons Trading Research

Author: simonsg   |   Latest post: Fri, 15 Nov 2019, 12:20 PM

 

Yangzijiang Shipbuilding - Pullback Is a Buying Opportunity

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  • Yangzijiang's share price corrected 14% on Friday on high volume on profit taking and worries over order wins.
  • On profit taking and concerns over order wins.
  • Not a cause for concern; longer-term prospects intact.
  • Undemanding valuation at 0.85x PB; reiterate BUY and Target Price S$1.82.

What’s New

Recent sell-off presents buying opportunity.

  • We believe Yangzijiang deserves to trade above its FY18F BVPS of S$1.40 on the back of 10% ROE and 4% yield. It is one of the most profitable shipyards in the world and among a handful with solid balance sheets, sitting on net cash (including HTM investments) of 91 Scts per share and representing 77% of its market cap.
  • Our Target Price of S$1.82 implies 1.3x P/BV, in line with its mean multiple since 2009.

Yangzijiang shares were sold down last Friday

  • Yangzijiang shares were sold down last Friday on concerns over a slowdown in order wins. The stock corrected 14% from its recent high of S$1.37 to S$1.18 on heavy volume. See Yangzijiang's Share Price History.
  • We believe the current price is a good entry point; the stock is trading at ~0.85x FY18 P/BV, which is a 15% discount to global shipyard peers’ average of 1.0x despite its superior ROE (10% vs industry average of 4%) and balance sheet.

Contract wins tend to be lumpy by nature.

  • The slowdown in orders in 3Q18 to around US$200m (vs US$268m in 1Q18 and US$713m in 2Q18) based on our estimate taking a cue from Clarkson’s data, should not be a cause for concern. It is neither a sign of an industry slowdown nor loss of Yangzijiang’s market share. Historically, Yangzijiang tends to be more selective on order taking when its yards are close to full with a revenue coverage of > 2 years. In addition, competitors might have been more aggressive in pricing given the strong USD.

Upcoming 3Q18 results due on 7 Nov should be healthy.

  • We expect Yangzijiang to report earnings of Rmb700-800m, stronger than usual of around Rmb600m a quarter, driven by deliveries of mega vessels and write-backs of Rmb130-150m.

 

Source: DBS Research - 22 Oct 2018

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