Excerpts from DBS report
Analyst: Pei Hwa HO
Don’t miss the boat!
The stock is set for a rebound as:
Securing ~US$880m containership orders
Securing 2+6 units of 14k TEU containerships from Tiger Group worth up to US$880m. Tradewinds reported on 5 Mar that Yangzijiang has bagged up to eight dual-fuel 14k TEU containerships from Tiger Group at US$110m each.
This involves two firm orders plus six options.
Yangzijiang has yet to make any official release on this. If the article is true, we surmise that the contract is probably signed but pending downpayment to be effective.
This will be a remarkable win amid the COVID-19 outbreak.
It marks the first dual-fuel mega containership order for Yangzijiang, making it the third Chinese yard to build such vessels, following state-owned Jiangnan Shipyard and Hudong Zhonghua shipyard.
Assuming all options are exercised during 2020, the contracts will account for ~44% of Yangzijiang’s order target of ~US$2bn for this year.
Typically, containerships command better margins than other vessel type for Yangzijiang.
|One of the world’s best-managed and profitable shipyards. Core shipbuilding revenue is backed by its order backlog of US$2.9bn (~1.5x revenue coverage) as at end 2019.
Investment segment provides stable recurring income.
As the largest and most cost-efficient private shipbuilder in China, Yangzijiang is well positioned to ride on the sector consolidation and shipbuilding recovery.
The company’s strategy to move up into the LNG/LPG vessel segment strengthens its longer-term prospects.
“Valuation: Our target price of S$ 1.50 is based on sum-of-parts, pegged to 8x FY20F PE shipbuilding earnings, 1x P/BV for bulk carriers and 0.9x P/BV for investments. This translates into 0.9x P/BV, which is 0.5SD below its 10-year mean of 1.4x.”
Where we differ: We believe critical catalysts are Yangzijiang’s successful strategy to expand into the LNG carrier and tanker markets, and overall recovery in the shipping and shipbuilding segments leading to margin improvements.
Key Risks to Our View: USD depreciation and hike in steel cost. Revenue is denominated mainly in USD, and only half is naturally hedged.
If the net exposure is unhedged, every 1% USD depreciation could lead to a 1.5% decline in earnings.
Every 1% rise in steel costs, which accounts for about 20% of COGS, could result in a 0.8% drop in earnings.
Full report here.