Daiwa upgraded Yangzijiang Shipbuilding to Outperform from Underperform, calling it a “bottom-fishing opportunity” amid improving fundamentals in the China shipbuilding industry.
It pointed to “gradual” improvement in the industry, with China newbuild prices, as guided by company management and confirmed by industry data, have improved since hitting bottom in July 2017, while newbuild demand is recovering. That could take some heat off shipyards which have also been hit by rising steel costs, Daiwa said in a note last week.
Management has also shown confidence in the company’s fundamentals by buying back around 9.2 million of the company’s shares since end-May, Daiwa noted.
Daiwa also pointed to Yangzijiang’s announcement earlier this month that it won US$578 million of orders in May, for US$846 million year-to-date, on track to meet its US$1.8 billion target for the full-year; it noted that the new contracts had a gross margin of around 8 percent, based on an dollar/yuan exchange rate assumption of 6.2, with the potential for “margin upside surprise” if the current dollar/yuan level of 6.4 persists.
“With the share buyback commitment from management and a sustainable 2018-20E dividend yield of around 5 percent, we believe upside potential at the current price level outweighs the downside risk,” Daiwa said.
But it cut its target price to S$1.04 from S$1.08 after rolling its valuation basis to an average of 2018-19 earnings per share, from 2018’s previously.
The stock ended Friday up 1.06 percent at S$0.95.