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BROKERS' TAKE

Yangzijiang undervalued, set to bottom out, says DBS

Underperformance may be due to overhang and selling pressure resulting from MSCI deletion

Singapore

YANGZIJIANG Shipbuilding (YZJ) is a "conviction buy", DBS Group Research said on Friday, as it noted that the company's shares have been underperforming, with value emerging.

In a research note, DBS analyst Ho Pei Hwa said that YZJ is trading at an "unjustifiably low" 0.5 time price-to-book value (P/BV). This is despite the company having "superior financials" of 8 per cent return on equity, and sustainable dividend per share of above four Singapore cents, representing around 4.4 per cent dividend yield.

She noted that YZJ has underperformed its regional peers since early November, dragged by selling pressure from MSCI rebalancing. The stock was left out of the recent equity rally and rotational interest into cyclicals, as investors looked to position for economic recovery on vaccine progress.

While regional peers have seen shares gain between 4 per cent and 38 per cent since Nov 1, YZJ saw its share price fall 1per cent.

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"We believe this is due largely to overhang and selling pressure resulting from the MSCI deletion," Ms Ho said, referring to YZJ's removal from the MSCI Singapore Index in November.

The MSCI overhang has been eliminated post-rebalancing on Nov 30, she added.

"We believe that the stock's current price is at a tipping point that investors should not miss," Ms Ho said. "The stock is set to bottom out with improving fundamentals."

The research team has a target price of S$1.40 on YZJ. The target price is based on a sum-of-parts valuation, and represents a 54 per cent upside on Thursday's close of S$0.91.

The report noted that YZJ currently trades at two standard deviations (SD) below mean P/BV, in contrast to its Singapore and Chinese peers, which are at 0.5 to one SD below mean. Shares of YZJ's peers in South Korea are trading above mean.

"In our view, Yangzijiang is undervalued and probably mispriced, trading at merely 0.5 time P/BV, which is two SD below its five-year mean, a steep discount to its peers despite a much stronger balance sheet, profitability and dividend yield," the analyst said.

She added that the valuation gap is poised to narrow, with YZJ shares better reflecting current fundamentals if they traded at one SD below mean, at S$1.20.

Ms Ho also noted that YZJ has a distinct economic moat as the largest and most cost-efficient private shipbuilder in China, and is well-positioned to ride on shipping recovery. YZJ's share price has remained muted, even though shipping rates have been trending up since the middle of this year.

DBS said that industry order momentum could be stronger than expected in 2021.

YZJ has already managed order wins of US$1.26 billion year to date, more than for 2019 despite Covid-19 challenges, and the research team does not think this has been fairly reflected in share price performance.

According to DBS, the main risks for YZJ are a potential rise in the cost of steel, as well as currency risks. An increase in steel cost could raise the cost of goods sold.

Currency risks may also affect earnings, as revenue is denominated mainly in US dollars, which could impact earnings if the US dollar depreciates and the exposure is unhedged.

YZJ's shares closed on Friday at 91 Singapore cents, unchanged from Thursday.

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