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$YANGZIJIANG SHIPBLDG HLDGS LTD(BS6.SI)$ is one of the largest, most efficient, and profitable shipbuilders in China. It has moved up the value chain to produce ultra-large containerships and very large bulk carriers, as well as LNG vessels.

Target Price: S$2.15

Recomendation: BUY

Market Cap: S$4970m

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Key Statistics

Our Views

Spin-off of investment arm improves corporate governance.The separate listing of $YZJ Fin Hldg(YF8.SI)$ offers greater transparency and flexibility for investors. The appointment of senior management from MAS, SGX and law firm as directors of YZJFH could contribute to improving corporate governance practices as well.

Set to re-rate as pure proxy to shipbuilding and shipping upcycles.Post spin-off of YZJFH, Yangzijiang’s shipbuilding business deserves a re-rate from the currently implied 0.8x PB and 6x PE (assumes YZJFH at a 0.7x PB) towards 1.5x PB and 12x PE on the back of a 13% ROE, 4%-5% dividend yield, and ~20% earnings CAGR.

Potential upside to earnings growth and dividend yield.A record-high order backlog of US$8.5bn as of end-2021 will keep Yangzijiang’s yards full through to 2024. We are hopeful of Yangzijiang delivering stronger-than-expected shipbuilding margins for its mainstream containership orders (~80% of orderbook). The dividend payout ratio could also be raised with every 10ppt increase, translating to a 1.5ppt higher dividend yield from the base case of 4%.

Risks

Revenue is denominated mainly in US dollars. Assuming the net exposure of ~50% is unhedged, every 1% depreciation in the USD could lead to a 1.5% decline in earnings. Every 1% rise in steel cost, which accounts for about 20% of cost of goods sold (COGS), could result in a 0.8% drop in earnings.