SINGAPORE (March 15): CIMB is recommending investors "add" Yangzijiang Shipbuilding to their portfolio as the stock is trading at a significant discount to peers despite a stronger balance sheet and better profits.
Meanwhile, industry data indicators of higher BDI, stronger secondhand market and narrowing of orderbook spur hopes of better order momentum for the shipbuilder.
Pan Ocean Korea has reportedly placed an order of five units of 63,000 dwt bulk carriers from Yangzijiang at US$29.2 million ($41.3 million) per vessel, bringing total contracts to US$146 million.
Management has also seen order enquires picking up amidst an improvement in the dry bulk index and higher coal demand.
"We are forecasting YZJ winning about US$1.2 billion in new orders in 2017F, up 42% from 2016’s US$823 million," says lead analyst Lim Siew Khee in a Tuesday report.
In FY16, core shipbuilding gross margin came in at 25% compared to 19% a year ago, thanks to higher revenue from more vessels delivered as well as a stronger USD/RMB.
But in 2017 margins are expected to slip to 20% due to higher steel costs but that will still more profitable compared to margins of 8% for Singapore yards.
Meanwhile, the rebound of the Baltic Dry Index from its trough of 290 last February to 1,000 year to date could help to improve newbuild momentum.
The percentage of orderbook to global dry bulk fleet has also narrowed to 11% as at end 2016 from 17% in 2015, suggesting that the oversupply situation is easing.
As of 4Q, Yangzijiang has a cash balance of RMB7 billion ($1.4 billion) and net debt of RMB138 million as of 4Q16.
"With the potential of an improving order outlook, we believe YZJ’s core shipbuilding division should be valued at 1x CY17 P/BV," says Lim.
As at 3.29pm, shares of Yangzijiang are trading at $1.10.
