Yangzijiang shares’ pullback is buying opportunity: DBS

The recent price weakness in Yangzijiang Shipbuilding‘s shares, which came after its third quarter business update, is a buying opportunity, as the stock doesn’t yet fully reflect the current shipbuilding supercycle, DBS Group Research said in a note Friday.

The stock is “unwarrantedly undervalued” at its 0.7 times price-to-book value and 8 times price-to-earnings, compared with a 10 percent return on equity and three-year earnings per share (EPS) compound annual growth rate of 18 percent, DBS said.

Yangzijiang is the best proxy to the newbuild supercycle following record-high order wins of US$7.4 billion year-to-date, up 48 percent from the US$5 billion during the last boom in 2007, DBS said, adding the company’s yard is full through 2024.

“Yangzijiang continues to receive enquiries for containership delivery from 2025 but there is no time pressure to firm up orders. On the other
hand, enquiries for bulk carriers have picked up. Yangzijiang is able to slot in some bulk carrier orders for the next three years and is cherry-picking orders that are able to fetch higher margin projections of greater than 20 percent,” DBS said.

DBS added that despite steel prices surging since May 2020, the bulk of the newbuild contracts secured this year have factored in higher steel costs of 6,000 yuan to 6,500 yuan a tonne, compared with market levels around 5,500 yuan.

Last week, Yangzijiang reported its third quarter gross profit fell 20.8 percent on-year to 1 billion yuan as the gross margin dropped by 13 percentage points to 22.4 percent as the shipbuilder was faced with rising raw materials costs.

Revenue for the July-to-September quarter increased 25 percent on-year to a record 4.47 billion yuan, Yangzijiang said in a filing to SGX.

DBS noted revenue came in below expectations for 5.5 billion yuan, partly on a power crunch, recognition timing of new contracts and lower trading revenue.

But since November, yard operations are at full utilisation, with no change to scheduled vessel delivery in the second half of this year, DBS said.

DBS said it sliced its 2021-2023 net profit forecasts by 2 percent to 5 percent to fine-tune revenue recognition and margin assumptions.

The bank rates the stock at Buy with a target price of S$1.95.

Shares of Yangzijiang dropped 3 percent Friday to end at S$1.29.