Yanzijiang upgraded to Buy by UOB KH on inexpensive valuation, order outlook

An aerial view of Singapore’s portAn aerial view of Singapore’s port

UOB KayHian upgraded Yangzijiang Shipbuilding to Buy from Hold, saying recent corporate governance concerns are overblown and the shipbuilding outlook is positive over the medium term.

The brokerage also pointed to the stock’s inexpensive valuation of around 0.56 times price-to-book, well below its five-year average of 0.84 times.

That was after the brokerage met with the shipbuilder’s management for an update on the company’s operations and concerns over its chairman.

In mid-August, the shipbuilder said its Executive Chairman and controlling shareholder Ren Yuanlin had taken a leave of absence while he assists in a confidential investigation by certain Chinese governmental authorities. That weighed heavily on the company’s shares.

UOB KayHian called the corporate governance issues a “non-event” as they don’t involve the company or its funds, with Ren “assisting” with an investigation of alleged improprieties at one of his China-based charities which is managed by an individual who isn’t a Yangzijiang employee.

The brokerage noted the chairman’s son, Ren Letian, is “an extremely hands-on manager with detailed knowledge,” indicating the core business likely own’t be affected by his father’s absence.

UOB KayHian estimated the new order win for five bulk carriers announced last week would be valued at around US$250 million, bringing year-to-date order wins to US$604 million, nearing its 2019 order win forecast of US$1 billion.

The brokerage added it expected 2020 order wins to improve to US$1.5 billion on market-share gains at the expense of the South Korean yards, partly on a weaker yuan, and as shipowners need to comply with stricter environmental regulations in 2020.

Management has said newbuild enquiries in the second half of the year are stronger than in the first half, the note said.

The brokerage raised its 2019-20 earnings forecasts by 25 percent to 32 percent on more bullish order-win projections and a 1-2 percentage point increase in gross profit margin after it held up well in the first half. It raised its target price to S$1.46 from S$1.39.

Yangzijiang’s shares increased by 0.51 percent to S$0.99 by 11:04 A.M. SGT.

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