Yangzijiang to see ‘major tailwind’ from US dollar rise: Daiwa

U.S. one-dollar currency notes; taken September 2018.U.S. one-dollar currency notes; taken September 2018.

Yangzijiang Shipbuilding is set to benefit from a “major tailwind” as the U.S. dollar has appreciated against the Chinese yuan, Daiwa said in a note last week after hosting the company for a non-deal roadshow in Hong Kong.

In the core shipbuilding division, which accounts for around 60 percent of group gross profit, around 20 percent of the cost of goods are U.S. dollar denominated, while around 80 percent are denominated in yuan, Daiwa said, citing Yangzijiang’s management.

That means every 10 percent appreciation of the U.S. dollar against the yuan will result in an around 8 percent improvement in gross profit margin, it said, citing company management.

Yangzijiang’s shares may also see a rerating on efforts at product diversification, Daiwa said.

While the shipbuilder is a market leader for dry-bulk vessel construction, with the ability to build the largest vessels in that class globally, it is now focusing on increasing its construction capabilities, targeting large-sized container, larger tanker and LNG carrier vessels, Daiwa said.

“A potential joint venture with a Japanese partner to collaborate on LNGC construction could be the first step towards mounting a challenge to the Korean yards’ market stronghold,” it said.

Management also said it would aim to increase the transparency of its investment division, which might be viewed by the market as a “black box,” Daiwa noted.

Amid a lack of shipbuilding backlog, Yangzijiang’s excess funds have been directed toward investments with annual returns of around 8-10 percent, compared with bank deposits at 4-5 percent, Daiwa noted.

It added that the investment lending was entirely fixed-income based, with an average tenure of around 12 months, and backed by asset collateral of around two to three times the borrowed amount, with diversification across 80 different projects.

Daiwa raised its 2018-20 earnings per share forecasts by 9-13 percent to account for the stronger U.S. dollar against the yuan and a write-back of previous provisions at the end of 2017. It nudged up its target price to S$1.16 from S$1.13.

It kept an Outperform call.

Shares of Yangzijiang were up 2.75 percent at S$1.12 on Friday.


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