UOB Kay Hian's Adrian Loh has raised his target price on Yangzijiang Shipbuilding from $2.19 to $2.86, to reflect better earnings prospects with steady drum beat of new order wins,
The counter has gained 62.4% year to date, beating the Straits Times Index's 2.8%, notes Loh in his June 10 note. "Market giving due recognition to a solid business," he says.
With US$3.32 billion in new orders year to date, YZJ has achieved 74% of its 2024 target of US$4.5 billion vs our higher expectation of US$5 billion.
"Despite this outperformance, we note that management has remained particularly conservative and stuck to its original target while we have decided to upgrade our 2024 order win expectation to an admittedly high target of US$7 billion, which is a short way from its previous annual high of US$7.41 billion back in 2021.
On the other hand, YZJ is seen to enjoy higher margins as prices of steel, a key raw material, has held steady at RMB4,000 per tonne, says Loh.
He believes YZJ has the potential to increase its dividends, given how it holds a cash balance of RMB16.6 billion as at end of last year, up 54% y-o-y.
Upon paying out FY2023 dividends totalling some $257 million, YZJ now holds the equivalent of 44 cents cash per share.
"Without any onerous spending on the horizon, we believe that the company could pay out more dividends," says Loh.
For FY2024 to FY2026, Loh has raised his earnings estimate for the company by 10 to 30% due to a greater conviction that the company will be able to maintain its 20% shipbuilding margins in the medium to longer term.
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Loh's $2.86 target price is based on 9x PE, which is 2SD above the company’s five-year average of 6.0x.
He believes that this premium valuation multiple is justified given YZJ's earnings visibility that now extends into 2028 as well as its strong track record of safe and efficient shipbuilding for its international customer base.
Even so, the higher target price of $2.86 still pegs YZJ more cheaply versus other shipbulders such as the Koreans, trading at 1.8x P/B with 9-14% ROE. YZJ, meanwhile, trades at FY2025 P/B of 1.6x and generates an ROE of 20.
