Brokers’ take: DBS raises Yangzijiang Shipbuilding target price on ESG advances

DBS Group Research has raised its target price for Yangzijiang Shipbuilding : BS6 0% to S$1.70 from S$1.40, after the company shared a new environmental, social and corporate governance (ESG) strategy as well as a record order book value in a Q3 business update. 

The new target price is based on revised profit forecasts for FY2022 to FY2024, which were lifted by 4 per cent to 6 per cent in recognition of the higher expected revenue from Yangzijiang’s new order wins. DBS analyst Ho Pei Hwa said on Tuesday (Nov 15) that she expects the company’s net profit to grow at a compound annual growth rate of 19 per cent between FY2022 and FY2024. 

The shipbuilder’s order book stood at a new high of US$10.3 billion as at Nov 13 – the date of its Q3 update – with US$4.2 billion attributable to contracts acquired year to date. The wins mark “another fabulous year” for Yangzijiang as they more than doubled its annual order win target of US$2 billion, said Ho.

She predicts that Yangzijiang will deliver returns on equity of about 17 per cent to 18 per cent for FY2023 and FY2024, and therefore raised her valuation peg to 1.7 times the price-to-book ratio of FY2023 estimates. 

However, the analyst believes that the shipbuilding business “deserves re-rating” towards 2 times the price-to-book value as returns on equity inch closer to 20 per cent. The shipbuilder’s “great” ESG advances could lift up its valuation even more, she added. 

In Ho’s view, Yangzijiang has made itself attractive in a “timely and crucial” manner to investors with ESG criteria – especially since the shipbuilding industry has traditionally been weak in such initiatives. Ho added that ESG has emerged as a key assessment factor in investment decisions.

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Yangzijiang’s new ESG plan includes a “two carbon strategy”, which involves better resource management to reduce its carbon emissions. It also plans to build more clean energy vessels, including liquefied natural gas (LNG) carriers. It has also set up an ESG management committee comprising company executives and external advisers.

Ho estimates that clean energy vessels account for roughly 40 per cent of the shipbuilder’s order book value. The analyst believes that Yangzijiang’s ESG progress can alleviate “a major concern that plagued the share price in the past”.

She added that Yangzijiang’s recent LNG carrier contract wins were “game-changing”, as they represent the first time a Chinese private shipbuilder has entered this particular market. The analyst expects more LNG carrier orders to come.

Ho reiterated “buy” on the stock, saying it remains undemanding at the current share price.

“The market has overlooked Yangzijiang’s earnings growth potential, the structural uptrend of shipbuilding demand, and its ESG transformation into clean vessel space,” she said.

Shares of Yangzijiang were trading 1.5 per cent or S$0.02 lower at S$1.33 as at lunchbreak on Wednesday.