SINGAPORE (May 4): Year to date, shares in Yangzijiang Shipbuilding have tanked 17%. And according to analysts, the counter’s current low valuation is “unjustified” as the group has demonstrated resilience during industry downturns with “decent profits and dividends”.
In its latest earnings call on Apr 30, the group reported a 51% decline in earnings to RMB403.8 million ($80.6 million) for 1QFY2020 ended March from RMB824.1 million a year ago.
This was attributable primarily to government-mandated lockdowns in China due to the Covid-19 outbreak, which had in turn led to a 44% fall in Yangzijiang’s revenue figures to RMB3.5 billion from RMB6.3 billion last year.
See: Yangzijiang Shipbuilding's 1Q earnings halved to $80.6 mil as China lockdown stalls revenue
Despite the decreases in Yangzijiang’s topline figures, market watchers are confident this is a stumble, and the group remains poised to navigate through the rough waters.
DBS Group Research, for one, points out that the group is one of the world’s best-managed and most profitable shipyards.
“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 analyst Ho Pei Hwa in a Friday report.
“The company’s strategy to move up the value chain into the LNG/LPG vessel segment strengthens its longer-term prospect,” adds Ho.
Yangzijiang’s order book currently stands at some US$2.9 billion, similar to the corresponding quarter last year. Analysts say this gives the group revenue coverage of 1.5 years.
CGS-CIMB analyst Lim Siew Khee agrees. Although the group’s shipbuilding revenue for the quarter fell 33%, Lim opines that the group’s plan for FY2020 remains unchanged as operations have swiftly caught back up to normal as at end-March.
Although Lim acknowledges that the broader market could face challenges, she identifies how Yangzijiang is placed in a “manageable” position with minimal equipment imported from Europe and none from the US.
“Steel plates are generally purchased in China so we do not see delays. Equipment is largely imported from Japan and Korea so operations are not affected,” says Lim. “ However, the market could face challenges, with negotiation of orders postponed due to Covid-19,” she adds.
Looking ahead, DBS’s Ho identifies the group’s investment segment as the one to watch. The way he sees it, investors can expect a distribution yield of 4% in the coming quarters as this segment alone is enough to sustain a dividend payout of 4 cents.
“Management reiterated that their investment segment is relatively safe, lending mostly to government or government-related projects and large corporates with collaterals,” says Ho.
“Hence, default risks have been low and the principal amounts can be recouped through the disposal of collaterals in the event of default,” he adds.
Ho shares that Yangzijiang has adopted more prudent provisions and accounting policies in light of the impending financial crisis. Its moves include the extension of warranty provision from one year to three, which would boost the group’s margins effectively.
In addition, the group is also exploring M&A opportunities for long-term growth. Ho identifies how the group has emerged stronger in the past few cycles with executive chairman Ren Yuanlin at the helm.
“Further consolidation is underway, probably ending with 20-30 survivors, and Yangzijiang will surely make the list,” says Ho.
“Yangzijiang is gaining a good foothold in the “high-spec” vessel space, which has long been dominated by its Korean peers,” he adds.
On the whole, both brokerages remain bullish on the prospects of the group. DBS is reiterating its “buy” call on Yangzijiang with a target price of $1.40, while CGS-CIMB is maintaining its “add” call on the group with a target price of $1.37.
As at 11.35am, shares in Yangzijiang are trading two cents lower, or 2% down, at 96.5 cents. This translates to a price-to-earnings ratio of 7.1 times and a dividend yield of about 4% for FY2020F according to DBS valuations.
