• Up 48% from mid Jul trough
• May continue but upside diminishing
• Pauses on share buyback

Stock Has Done Well – Up 48% From Mid Jul Trough

Having risen 38% since we reiterated our Buy on 8 Aug with our report, “All Aboard!”, the shares of Yangzijiang Shipbuilding (YZJ) are now trading close to our fair value estimate. The upward momentum of the stock has been strong, such that YZJ has appreciated close to 48% from its trough in mid Jul over a span of just two and a half months. While the momentum may continue in the near term, the upside potential for the stock is diminishing.

The stock is trading at 9.5x forward P/E (above 5-year historical mean of 8.8x) and 0.85x P/B (close to 5-year historical mean of 0.9x), which we believe are fair valuations, considering the street is forecasting earnings growth of -3% for 2019, and is forecasting ROE of ~9.2% for the next 12 months.

Share Buyback Seems to Have Taken a Pause

We also note that there has also seemed to be a pause relating to the group’s share repurchases – YZJ had started share buy backs in end May and continued till mid Jul with prices ranging from S$0.86- S$0.98/share (refer to table and chart below for more details). The last repurchase was on 17 Jul for 2m shares at S$0.86/share.

Monitoring Steel Prices, RMB and New Orders

As highlighted in our reports, the weaker RMB works in YZJ’s favour. However, higher steel prices may weigh on margins. After a significant fall in the first quarter of this year, prices have been creeping up and are now close to this year’s highs (refer to chart). As for new orders, we continue to believe that the group is likely to hit its full year target of US$1.8b by the end of this year, after securing new orders worth about US$0.98b so far.

It has an outstanding order book of US$4.1b which should keep its yard facilities at a healthy utilisation rate up to 2020. Meanwhile, we tweak our estimates and our fair value estimate rises from S$1.23 to S$1.32.

Source: OCBC Research - 3 Oct 2018