DBS Group Research analyst Ho Pei Hwa is keeping her “buy” call on Yangzijiang Shipbuilding after the Mainboard-listed group obtained a technical assistance and license agreement with French naval engineering company, GTT, on Sept 8.
Global market leader license ‘important breakthrough’ for Yangzijiang’s entry into LNG carrier market
GTT is the global market leader in containment system technology for liquefied natural gas (LNG) carriers.
The license, says Ho, is probably the “most important breakthrough” that paves the way for Yangzijiang’s entry into the LNG carrier market.
Yangzijiang is the first non-state-owned enterprise (SOE) Chinese shipyard to obtain a license from GTT. Including the group, there are currently 29 GTT licensed shipyards globally, for both commercial vessels and offshore platforms, the analyst notes. There are eight GTT licensed yards in China alone, with Hudong Zhonghua being the most prominent Chinese LNG carrier builder with 30 units, representing about 11% of the market share.
On the group’s obtaining of the license, Ho says it “showcases Yangzijiang’s technical capability to build large LNG carriers”. “The space is currently dominated by Korean shipbuilders, who have 80-90% of market share,” she adds.
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Following Yangzijiang’s license, Ho now believes that the group is “well positioned” to secure its maiden LNG carrier order with this GTT accreditation and their earlier delivery slots in 2025.
Yangzijiang poised to re-rate from current valuations of 1x P/B and 7x FY2022 P/E
On the group itself, Ho sees Yangzijiang as a “pure proxy” to the shipbuilding upcycles and trends towards cleaner vessels.
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“We believe Yangzijiang is poised to re-rate from the current [estimated] 1x P/B and 7x FY2022 P/E towards our target multiples of 1.5x P/B and 12x P/E as the group delivers strong earnings growth, and the shipping market for dry bulk and tankers stage a rebound from 2HFY2022,” she writes.
“The recent GTT accreditation is a testament to Yangzijiang’s technical capability to build large LNG carriers, a big leap in its clean vessel transformation,” she adds.
The group is also slated to benefit from the “intact” recovery of the shipping market.
“As we enter the peak season for the shipping market in 3Q, demand and freight rates are expected to improve sequentially. Moving into 2023, while rates for containerships may moderate, the outlook for dry bulkers, tankers, and LNG carriers remains robust, despite the economic slowdown, as supply remains tight. This will continue to drive newbuild demand for shipyards,” says Ho.
High order backlog
Yangzijiang’s yards are currently full through 2024 with an orderbook of over US$8 billion ($11.19 billion). This is expected to propel an earnings compound annual growth rate (CAGR) of 15% in the next three years, the analyst notes.
The earnings CAGR will be driven by both revenue growth and margin expansion, as 80% of its orderbook is made up of containership orders that command higher value and margins, she adds.
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“We expect further uplift in its order book, boosted by potential orders for large LNG carriers,” continues Ho.
Target price of $1.40
Ho, who has kept her target price unchanged at $1.40, calls Yangzijiang’s current share price weakness “unwarranted”.
Her current target price is based on a P/B of 1.5x, which implies an FY2022 P/E of 12x.
“The stock is undervalued, trading at 1x P/BV and 8x P/E against 13% return on equity (ROE), 5% dividend yield, and three-year core earnings per share (EPS) CAGR of 15%,” says Ho.
“The market seems to have overlooked Yangzijiang’s earnings growth potential, the structural uptrend of shipbuilding demand, and the segment’s transformation into a clean vessel space,” she adds.
However, she points out that Yangzijiang could suffer from currency fluctuations, as its revenue is denominated mainly in US dollars (USD).
“Assuming the net exposure of [around] 50% is unhedged, every 1% depreciation in the USD (against the RMB) could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for [around] 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings,” says the analyst.
Shares in Yangzijiang closed 3.5 cents higher or 3.89% up at 93.5 cents on Sept 9.
