DBS: Yangzijiang shares are a ‘steal’ as a proxy for shipbuilding recovery

China yuan coins

Shares of Yangzijiang Shipbuilding are a “steal” as they’re trading near net cash of 91 Singapore cents, with “soaring” second quarter earnings offering a “confidence booster,” DBS said in a research note.

The stock is undervalued at 0.7 times price-to-book-value, an around 20 percent discount to global peers, despite a “more attractive” return on equity of 10 percent and a 5 percent yield, DBS said in a note on Friday.

“The astounding second quarter profit soaring 67 percent quarter-on-quarter serves as a confidence booster on Yangzijiang’s shipbuilding profitability. It is a prime beneficiary of stronger U.S. dollar and among the best proxies for shipping and shipbuilding recovery,” DBS said.

Yangzijiang Shipbuilding reported earlier this month that its second quarter net profit rose 38 percent on-year to 994.9 million yuan as revenue more than doubled amid the delivery of 20 vessels. DBS said the results beat its expectations.

“It is the largest and most cost-efficient private shipbuilder in China; Yangzijiang is well positioned to ride sector consolidation and shipbuilding recovery,” the bank said, adding the company’s strategy to move into the LNG/LPG vessel segment with a Japanese partner strengthens the shipbuilder’s longer-term prospects.

“The shipping demand growth could outstrip supply growth in 2018-2019. Profitability improvement of shipping companies should drive
demand for newbuild vessels and higher newbuild prices,” DBS said.

It noted that Yangzijiang secured 13 new orders worth around US$710 million in the second quarter for a total of around US$980 million year-to-date. DBS said the company appeared on track to meet the bank’s full-year expectation of US$2 billion order wins this year and might even surprise on the upside.

“We sense that management appears more upbeat on shipbuilding outlook. While competition remains keen, shipping companies are
more eager to take deliveries now than before in anticipation of demand growth,” DBS said.

To be sure, DBS pointed to some risks for the company, particularly from potential U.S. dollar depreciation and any increase in steel costs. If Yangzijiang’s net exposure is unhedged, every 1 percent U.S. dollar depreciation could lead to a 2 percent decline in earnings, while every 1 percent rise in steel costs, which accounts for around 20 percent of cost of goods sold, could cause an 0.8 percent drop in earnings, DBS estimated.

It kept a Buy call with a S$1.82 target price.

The stock was up 1.94 percent at S$1.05 at 4:41 P.M. SGT on Tuesday.

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