DBS Group Research analyst Ho Pei Hwa has lowered her target price (TP) for Yangzijiang Shipbuilding (Yangzijiang) to $1.38 from $2.15 previously while maintaining her “buy” call, as she believes the company is trading at an “unwarranted deep discount” to its peers.
Although Yangzijiang’s earnings and margins had “hit a bottom” in 2HFY2021, Ho estimates its 1HFY2022 earning to grow 20% year-on-year (y-o-y), with shipping rates expected to improve as they enter peak season in 3QFY2022, with demand and freight rates expected to “improve sequentially”.
“Yangzijiang’s shipbuilding related business generated about RMB1 billion ($200 million) net profit in each of 1H2021 and 2H2021 last year. We expect the company to report net profit of at
least RMB1.2 billion for 1HFY2022, on revenue growth. We see room for upside surprise and earnings upgrade post results,” says the analyst.
Her TP of $1.38 is based on 1.5x P/B, which implies a 12x FY2022 P/E. She believes the stock is “unwarrantedly undervalued”, trading at 1x P/BV and 8x PE against 13% return on equity (ROE), 4%-5% dividend yield and a three-year core EPS CAGR of 15%, with the market seems to have overlooking Yangzijiang’s earnings growth potential and structural uptrend of shipbuilding demand.
Based on its current schedule, Yangzijiang plans to deliver 70 vessels in 2022, a record high, up 19% from its recent high of 59 vessels in 2019 and 40% higher than 50 vessels last year.
“This is attributable to improved efficiency and capacity expansion from the reactivation of Changbo yard that builds mostly small-to-medium size vessels. We understand that production progress is largely on track despite some workflow adjustments during the lockdown,” she explains.
The anticipated re-rating of Yangzijiang as a pure shipbuilding play post spin-off of Yangzijiang Financial Holdings (YZJFH) at end-April has yet to come through and remains outweighed by macro concerns, Ho writes.
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She adds that she believes Yangzijiang will gradually re-rate from its current valuation towards her target of multiples of 1.5x P/B and 12x P/E as the Group delivers strong earnings growth, and the shipping market for dry bulks, tankers and LNG carriers stage a rebound from 2HFY2022.
Moving into 2023, while rates for containerships may moderate, the analyst believes the outlook for dry bulkers, tankers and LNG carriers will remain robust despite the economic slowdown as supply remains tight, continuing to drive newbuild demand for shipyards.
Ho notes that Yangzijiang’s historically high order backlog will boost its earnings visibility through 2024. “Yangzijiang’s yards are full through 2024 with an orderbook of over US$8 billion ($11.01 billion). This is expected to propel earnings CAGR of 15% in the next 3-years, driven by both revenue growth and margin expansion as 80% of its orderbook is made up of containership orders which command higher value and margins,” she writes.
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Ho notes that key risks to her outlook are that Yangjiziang’s revenue is denominated mainly in US dollars. “Assuming the net exposure of around 50% is unhedged, every 1% depreciation in the USD could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings,” she writes.
As at 3.09pm, shares in Yangzijiang were trading 0.5 cents or 0.54% up at 92 cents, with a dividend yield of 5.41%.
