SINGAPORE (July 1): UOB Kay Hian (UOBKH) is maintaining its “buy” call and target price on Yangzijiang Shipbuilding at $1.22. This gives the counter a 27.1% upside from its 96-cents close on June 26, analyst Adrian Loh says in a June 30 note.
“While share price drivers appear to be thin on the ground at present, we believe the business conditions faced by YZJ will trough over the next four months,” he elaborates.
“We believe its current share price up to at least S$1.10 should be protected by its 2020F yield of 4.6%, which we view as reasonably secure”.
Loh’s optimism follows the shipbuilder’s win of four new vessels amounting to US$102 million ($142.2 million). The orders include two LNG-tank carriers and two 56,000 DWT bulk carriers placed by Hong Kong’s Tiger Gas and Shanghai Ganglu Shipping Co respectively.
See: Yangzijiang secures four new orders worth a total of $142.2 mil
While this is “admittedly small” relative to its wins in the past, Loh says “it is still positive to note that the company continues to add to its orderbook in a difficult year”.
He adds that the company’s ability to physically deliver vessels – a concern flagged previously due to the Covid-19- related travel restrictions – has not been compromised on.
The company’s 2020 deliveries of 45 vessels are on track, mainly due to special permissions on travels of shipbuilders.
Presently, Yangzijiang’s total orderbook for 2020 stands at US$517 million. This excludes 16 options for dual-fuel vessels from Tiger Group, the parent company of Tiger Gas. If all 16 options are exercised, the shipbuilding’s orderbook is looking to gain US$1.168 billion this year.
“In management’s view, chances of Tiger exercising its options are high, given that it has a good track record,” observes Loh.
“[Tiger’s] strategy is to market its existing two vessels to end users and once the end customers are keen, the remaining eight options will then be exercised. We expect Tiger to exercise the options two at a time,” he adds.
As such, he is looking at Yangzijiang’s orderbook coming in at US$1 billion in 2020, slightly more conservative than the company’s US$2 billion target.
Meanwhile, Loh believes the “minor overhang” caused by the company’s non-core business of investing its excess cash in debt instruments – is no longer a cause for concern.
“The worry at the start of the COVID-19 pandemic was an increase in non-performing loan (NPL) rates, however, the Chinese government’s efforts to shore up the economy has led to plentiful liquidity in its financial system and thus NPLs are not a concern, in our view,” he elaborates.
Still, he cautions that the excess liquidity has driven down rates of debt instruments to 10% per annum, from over 12% historically.
Looking ahead, Loh expects the shipbuilder’s profits to plummet 17.7% year-on-year in 2020. However, he does not anticipate dividends to deviate from the 4.5 cents/share paid out in FY2019 ended December.
This translates to a yield of 4.7% of the counter’s current price.
As at 12.25pm, shares of Yangzijiang was up a cent or 1.075% to 94 cents.
