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Hot stock: Yangzijiang shares up 6% in Monday's early session

FOLLOWING a selloff in Yangzijiang Shipbuilding that saw shares dive 17.3 per cent after last Thursday's lifting of a trading halt, the counter reversed those losses on Friday and has continued to trend upwards in Monday's early session.

At the midday break, shares in China's largest non-state owned shipbuilder were trading up six Singapore cents or 6.1 per cent at S$1.05 on a volume of 61.5 million, the Singapore bourse's most active counter.

Yangzijiang's shares dived by as much as 20 per cent on Aug 8 before a trading halt was called following a query from the Singapore Exchange (SGX). The trigger for the panic selling was said to have stemmed from a report by global shipping news service TradeWinds two weeks ago that Liu Jianguo, described as a "veteran political patron of the shipbuilding industry", was being probed for "serious disciplinary violations".

Mr Liu's career included a long period of service in the key shipbuilding region of Jiangsu province, where Yangzijiang's production areas are located. He is also the chairman of a charity foundation set up by Yangzijiang executive chairman Ren Yuanlin. Yangzijiang said on Wednesday that Mr Ren is assisting Chinese authorities with investigations.

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Last week, Citi Research analysts Kwok Wei Chang and Patrick Yau wrote: "Given that the company has addressed the uncertainty surrounding chairman Ren's whereabouts, we think that the stock price correction has been overdone." Citi is of the view that the price drop represents a good opportunity to add positions on the stock.

Yangzijiang ended at S$0.86 on Thursday, a 2.5-year low closing price, but has since reversed as investors turned to picking up its stock, which traders said were oversold, and after the selloff, were trading at attractive valuations. It closed 15.1 per cent higher at S$0.99 on Friday.

Yangzijiang also conducted share buybacks between Thursday and Friday. It purchased 2 million shares on Thursday between S$0.85 and S$0.87. Friday's share buybacks amounted to 4 million shares, purchased between S$0.96 and S$0.99.

Referring to Monday's stock performance, one trader said: "I think investors are currently of the view that Ren Yuanlin's absence, while away assisting authorities, is unlikely to have a material impact on Yangzijiang's operations."

On Aug 5, Yangzijiang reported that second-quarter net profit fell 6 per cent to 936 million yuan (S$186 million), as rising raw material and labour costs cut gross profit margin for the shipbuilding business to 18 per cent, from 21 per cent previously.

DBS Equity Research analyst Ho Pei Hwa said last Thursday that going forward, "order win momentum, which was expected to
pick up strongly over the next few months, would be crucial, serving as a confidence booster on the yard’s operations and ability to win new contracts". DBS has a "buy" recommendation on Yangzijiang with a target price of S$1.82.

JPMorgan analysts are less bullish. In a Aug 6 note, they downgraded Yangzijiang to "underweight" with a price target of S$1.10 on the shipbuilder being unlikely to achieve its orderbook target of US$1.5-2.0 billion in FY2019.

"The stock trades on orders, and the shipbuilding orders are cyclically driven by macro factors in our opinion," JPMorgan said.