DBS: Pullback in Yangzijiang shares is a buying opportunity

Yangzijiang Shipbuilding’s shares have pulled back sharply on profit-taking and concerns over order wins, but that offers a buying opportunity as the longer-term prospects remain intact, DBS said in a note this week.

“We believe the current price is a good entry point,” DBS said, noting that the stock is trading at around 0.85 times its 2018 price-to-book value, a 15 percent discount to global shipyard peers’ average of 1.0 times.

That’s despite Yangzijiang having “superior” return on equity of 10 percent compared with the industry average of 4 percent, DBS said.

“It is one of the most profitable shipyards in the world and among a handful with solid balance sheets, sitting on net cash (including HTM investments) of 91 Singapore cents per share and representing 77 percent of its market cap,” DBS said.

While the market was concerned about slow order wins, DBS noted that they tend to be lumpy in general and shouldn’t be a cause for concern. It estimated third quarter orders were around US$200 million, compared with US$268 million and US$713 million in the first and second quarters.

“Historically, Yangzijiang tends to be more selective on order taking when its yards are close to full with a revenue coverage of greater than two years. In addition, competitors might have been more aggressive in pricing given the strong U.S. dollar,” DBS said.

DBS forecast that the shipbuilder would report third quarter earnings of 700 million to 800 million yuan, stronger than its usual around 600 million yuan a quarter, on deliveries of mega-vessels and write-backs of 130 million to 150 million yuan. Earnings are due 7 November.

DBS rates the stock at Buy with a S$1.84 target price.

Last week, JPMorgan had expressed concern that Yangzijiang’s order flow, which it said it expected was weak in the third quarter, with what it projected from shipping-sector researcher Clarksons data were for only six bulkers and two containerships between 1 July and 15 October.

The stock closed Thursday down 1.67 percent at S$1.18, while the Straits Times Index shed 0.82 percent.

Get the Shenton Wire morning briefing in your inbox