SINGAPORE (Apr 8): Year to date, shares in Yangzijiang Shipbuilding have tanked some 22%. But market watchers are saying the group has been an unfair victim of “macro concerns”.
Analysts at DBS Group Research note that despite operating in a cyclical industry, Yangzijiang has demonstrated its resilience during industry downturns, offering investors decent profits and dividends.
“We believe the low valuation is unwarranted,” says DBS analyst Ho Pei Hwa in a Wednesday report.
And looking ahead, things are about to get better for Yangzijiang shareholders as the group stages a comeback.
“As the largest and most cost efficient private shipbuilder in China, Yangzijiang is well positioned to ride on the sector consolidation and shipbuilding recovery,” says Ho.
“The company’s strategy to move up the value chain into the LNG/LPG vessel segment strengthens its longer-term prospects,” adds Ho.
Executive chairman retires
A regulatory filing on the Singapore Exchange yesterday might have been a cause for concern for some investors.
The group had announced that former executive chairman Ren Yuanlin would remain as honorary chairman and serve in an advisory role to the management team, while his son Ren Letian, the current CEO, will double up as the group’s executive chairman starting end-April.
On August 14, 2019, the group had confirmed that Yuanlin was assisting in a confidential investigation carried out by Chinese governmental authorities.
The myriad of issues around Yuanlin’s departure had caused the counter to plunge 20% as investors scrambled to get rid of their shares.
See: Yangzijiang confirms executive chairman Ren Yuanlin 'assisting' in investigation by Chinese authorities
Some four months later on Dec 22, 2019, the group reported that Yuanlin had returned to office and was set to resume his duties with the company.
With the former executive chairman taking a backseat, investors could be worried. But Ho is quick to point out that the smooth operations during his leave of absence is a testament to the group’s management team.
“We do not expect any material impact on operations. Ren Letian has succeeded his father as CEO since March 2015, after rotating to manage various divisions of the shipyard for nearly 10 years prior to his appointment,” says Ho.
“The shipbuilding business has done relatively well in the past four years under his leadership as chairman took a step back to focus on the investment segment,” adds Ho.
The chairman’s focus on the group’s investment segment might well pay off for shareholders soon, as Ho expects the group’s investment returns from financial assets to deliver a similar return in FY2020 as it did in FY2019, amounting to about 58% of the group’s PATMI figure.
“Even if we assume zero profits from shipbuilding business, Investment income alone is more
than enough to support four cents dividend payout,” shares Ho.
Revenue visibility
Yangzijiang’s core shipbuilding revenue is backed by its order backlog of some US$2.9 billion ($4.1 billion) as at end-December 2019, implying a book-to-bill ratio of 1.5 times.
This should offer some reassurance to investors in the form of revenue visibility for the next 1.5 years.
“Management targets to secure new orders of US$1.5 billion to US$2 billion a year to maintain
revenue coverage of two times, a healthy level for orderbook replenishment and optimisation of operational activities,” says Ho, adding that the group is now ranked first in China and fifth in the world in terms of orderbook.
The group also prides itself on having higher margins than its peers, specifically 5% higher. The group has achieved this through its premium newbuild prices and better payment terms among Chinese yards, as well as through proust efficiency and cost control.
In addition, Ho notes that the shipbuilding industry has shrunk from over 3,000 yards to less than 100 currently.
“Further consolidation is underway, probably ending with 20-30 survivors,” says Ho. “Yangzijiang will surely make the list.”
Virus impacts
As the Covid-19 pandemic continues to rattle companies on a global scale, Yangzijiang can expect some short-term business impact in terms of the delay of finalisations of new orders in light of the lockdowns, as well as potential delivery rescheduling or contract cancellations.
Yet, Ho advises investors not to worry too much, as the group has demonstrated its ability to weather through industry challenges and emerge stronger.
“We believe such an impact is short term and manageable as economic activities should gradually resume once the outbreak is under control,” says Ho.
DBS is reiterating its "buy" call on Yangzijiang with a target price of $1.50, representing a 63% upside for the stock.
As at 11.03am, shares in Yangzijiang are trading one cent lower, or 1.1% down, at 90 cents.
