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'Add' Yangzijiang as spinoff of debt investment portfolio will be re-rating catalyst: CGS-CIMB

Atiqah Mokhtar
Atiqah Mokhtar9/7/2021 04:32 PM GMT+08  • 2 min read
'Add' Yangzijiang as spinoff of debt investment portfolio will be re-rating catalyst: CGS-CIMB
CGS-CIMB views the potential listing and Yangzijiang's ability to secure orders will drive its share price in the near term.
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CGS-CIMB Research analyst Lim Siew Khee has reiterated her “add” call for Yangzijiang Shipbuilding (Holdings) with an unchanged target price of $1.91 after the company announced it had secured US$534 million ($716.7 million) in new contracts on September 2.

With the new contracts, Yangzijiang’s contract wins have risen to US$7.21 billion, while its estimated order book stands at a record US$9.18 billion. Year-to-date, Yangzijiang has secured 118 effective shipbuilding contracts.

See also: Yangzijiang reports 1HFY21 earnings of RMB1.6 bil, sitting on record order book

In a September 3 research note, Lim highlights that Yangzijiang remains selective in accepting only the highest bidders for new orders and is currently operating at full capacity. “We believe Yangzijiang holds the bargaining power as Clarksons records yet another peak of crica 4,386 on the Shanghai Containerized Freight Index (SCFI),” she remarks.

However, Lim notes that high steel prices and a strengthening renminbi against the US dollar remain “pertinent threats” to the company’s gross margin. Nonetheless, she points out that Yangzijiang can still rely on the sale of second-hand bulk carriers to boost net profits. She is forecasting FY2021 and FY2022 ending December core shipbuilding gross margins of 15% and 17% respectively.

Looking ahead, Lim believes that in the near term, the potential listing of Yangzijiang’s debt to securities portfolio, which makes up some 50% of its gross profit, combined with the clarity in its new corporate structure should serve as a re-rating catalyst that could attract a wider investor pool.

“We see minimal earnings gap from the spinoff if Yangzijiang retains a partial stake in the debt to securities portfolio while reaping the fruits of strong shipbuilding orders,” she says.

To that end, Lim believes Yangzijiang’s share price will see a boost. “We believe Yangzijiang’s ability to secure high-value orders amidst soaring raw material prices, coupled with the impending spinoff of its debt investment division, will further strengthen investors’ confidence and therefore drive the share price in the near term,” she explains.

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Key downside risks to her rating and target price include the spinoff falling through, as well as a sharp decline in freight rates.

As at 4.31pm, shares in Yangzijiang are trading flat at $1.62.

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