DBS Group Research analyst Ho Pei Hwa has reiterated her “buy” call for Yangzijiang Shipbuilding (YZJ) with a target price (TP) of $1.70.
According to Ho, the recent price weakness following the doubling of YZJ’s share price last year presents a “buying opportunity”. The stock’s share price tumbled 12% to $1.20 in the first two trading days of 2023 on a high average daily volume of 86 million shares compared to the two-year average daily volume of 30 million.
“We have little findings on possible company specific negative development following checks with management and market sources. We believe 2HFY2022 performance should be promising in view of the higher activity level and favourable forex and steel cost,” says the analyst.
Operationally, the company’s vessel construction and delivery are on schedule while margin improvement trends should sustain in 2023 with the delivery of higher margin orders secured from 2021, she adds.
“In the absence of material negative newsflow, profit-taking and portfolio rebalancing into reopening plays seem to be the probable reasons for the drop in YZJ’s share price after a doubling of its share price in a year,” she explains.
Ho says YZJ is poised to rerate further towards her target multiples as the group delivers strong earnings growth as the company continues to make headway into the LNG carrier market with a “game-changing” order win for two units of 175,000 cubic metres of LNG carriers in October 2022 — a significant breakthrough that accelerates its clean vessel transformation.
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Meanwhile, YZJ’s advancements in environmental, social and government (ESG) improvement will also be a growth driver for the company. “YZJ is stepping up its ESG initiatives, introducing a two-pronged carbon strategy: Green Factory aims to reduce carbon footprint in shipyards while Green Vessels targets to build more clean energy vessels,” says the analyst.
She notes that YZJ has made notable progress with around 40% of its order book coming from clean energy vessels. An ESG committee, comprising senior management and external advisors, has also been set up to build a more structured ESG management system.
Ho’s TP of $1.70 is based on a 1.7x FY2023 price-to-book value ratio (P/BV), which implies an 11x FY2023 price-to-earnings ratio (P/E). She says the stock’s valuation is undemanding, trading at a 1.4x FY2023 P/BV and 9x FY2023 P/E against a projected 16.6% return on equity (ROE) in FY2023, and three-year core earnings per share (EPS) compound annual growth rate (CAGR) of 19%.
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Ho says that YZJ also boasts a record high order backlog of over US$10 billion ($13.41 billion) which will boost earnings visibility through 2025, putting off concerns of shipbuilding orders tapering off.
“This is expected to propel an earnings CAGR of 19% in the next three years, driven by both revenue growth and margin expansion, as 80% of its orderbook is made up of container ship orders that command higher value and margins,” she says. “We expect further uplift in its orderbook, boosted by potential orders for large LNG carriers.”
Key risks to Ho’s view include YZJ’s USD denominated revenue. Assuming around 50% unhedged net exposure, the analyst says every 1% depreciation in the USD against the RMB could lead to a 1.5% fall in earnings.
Every 1% rise in steel cost, which makes up around 20% of YZJ’s cost of goods sold, could also lead to a 0.8% drop in earnings. However, Ho says she is not overly concerned about increasing steel costs as it started from a low base and she expects steel prices to hover around RMB4,000 to RMB5,000 per tonne.
As at 4.21, shares in YZJ were trading 1 cent or 0.83% down at $1.19.
