SINGAPORE (Mar 2): Mainboard-listed Yangzijiang Shipbuilding (YZJ) has been battered by waves of negative news recently, including the “disappearance” of its talismanic executive chairman and a set of FY2019 results that missed consensus estimates.
But analysts remain buoyant on the counter: Eight of the 11 research houses covering YZJ have “buy” ratings on the stock.
To be sure, more choppy waters lie ahead for YZJ.
For one, analysts forecast that the group’s 1QFY2020 earnings will be hit even harder, as its shipyard activity has plunged to 20-30% as a result of China’s lockdown to curb the spread of the novel coronavirus (COVID-19).
“YZJ needs at least 80% of its workforce to return by March to be able to hit its target delivery of 51 vessels in 2020,” notes CGS-CIMB Research analyst Lim Siew Khee in a Feb 28 report.
As it stands, Lim expects YZJ’s shipbuilding revenue to drop 60% quarter-on-quarter in 1QFY2020.
However, the brokerage is maintaining its “add” call on YZJ, albeit with a lower target price of $1.37, down from $1.45 previously.
Among the positives, Lim says, is the impending sale of its completed jack-up rig, which has a book value of US$72 million ($100 million).
The analyst estimates that YZJ could sell this new rig at around US$100-120 million, which would translate to a gain of US$28-48 million.
Further, DBS Group Research analyst Ho Pei Hwa believes the positives from the return of YZJ’s chairman Ren Yuanlin has yet to be priced in.
The stock was trading at around $1.50 prior to the negative news relating to the chairman’s assistance with an investigation involving former government official, which has now been completed,” Ho says. “The stock is [currently] unjustifiably trading below its net cash position of around $1.05 per share.”
DBS is keeping its “buy” call on YZJ, but has cut its target price to $1.50, from $1.68 previously.
“Ren Yuanlin was present at the company’s [4QFY2019] results briefing for the first time in two years,” Ho notes. “He is confident that Yangzijiang will emerge stronger despite the challenging operating environment, with strategies in place and a solid balance sheet.”
Shares in YZJ had plunged in August last year, amid rumours swirling about certain publications that Ren was caught up in investigations by Chinese authorities for alleged corruption.
Posts in certain stock investing forums had also alleged that Ren, a controlling shareholder of the company, had been “missing for over two months”.
In response to a query from Singapore Exchange (SGX), YZJ announced that Ren has been granted a leave of absence by the board since Aug 9 to focus on the investigation.
In his absence, group CEO Ren Letian assumed Ren Yuanlin’s role as a director of the company.
See: Yangzijiang confirms executive chairman Ren Yuanlin 'assisting' in investigation by Chinese authorities
The analysts also note that Ren had praised his son Letian and the senior management team for demonstrating strong capability to ensure smooth operation of shipyards during his absence.
At the same time, the analysts also express confidence in YZJ logging a healthy order book moving forward.
“YZJ is currently targeting US$2 billion in new orders for 2020 (versus our expectation of US$1.5 billion),” says UOB Kay Hian analyst Adrian Loh in a Mar 2 report. “The company commented that it had a few contracts in hand that it is close to announcing, and it has also received new enquiries from old clients who are looking to place orders.”
“Importantly, YZJ believes that its current order book as at Feb 29, 2020, totaling US$3.02 billion will not experience cancellations as their clients are not speculators but instead have business strategies to open new lines/shipping routes or renew their vessels,” he adds.
UOB is maintaining its “buy” recommendation on YZJ with a slightly lower target price of $1.40, compared to $1.46 previously.
“We have increased our earnings forecasts for 2020 and 2021 by 8% and 9% respectively as a result of the timing of revenue and profit recognition for their ship deliveries,” says Loh.
“We highlight that its one-year forward P/B multiple of 0.54 times is 13% below its -1SD level and near its all-time low of 0.51 times, while its 2020 yield is attractive at 5.7%, in our view,” he says.
CGS-CIMB’s Lim also notes that YZJ is trading at a 5-year trough of 0.6 times CY20F P/BV – a steep discount to the 1.05 times P/BV of Singapore yards.
FY2019, saw its earnings edge up just 1% to RMB 3.11 billion ($0.62 billion), on the back of higher trading volumes, while revenue rose 2% to RMB 23.6 billion.
See: Yangzijiang sails on murky waters as 4QFY2019 earnings sink 30%
“Both revenue and NPAT missed our and consensus estimates by close to 10%,” says UOB’s Loh. “The key variance was in shipbuilding margins which were lower than expected due to higher labour and raw material costs.”
However, the analysts remain confident that YZJ will stand firm against the tide.
“As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride on the sector consolidation and shipbuilding recovery,” says DBS’s Ho. “The company’s strategy to move up into the LNG/LPG vessel segment strengthens its longer-term prospects.”
Shares in Yangzijiang closed 1 cent lower, or down 1.1%, at 93.5 cents on Monday. Year-to-date, the counter has fallen 16.5%.
According to DBS valuations, YZJ is trading at a price-to-earnings (PE) of 7.0 times and a net dividend yield of 4.2% for FY2020F.
