SINGAPORE (Sept 25): OCBC thinks Yangzijiang Shipbuilding (YZJ) is launching a share placement exercise to undertake significant mergers and acquisitions ahead although the group has significant cash resources.

As at 1H17 ended June, the group had RMB6.3 billion ($1.3 billion) in cash and cash equivalents, RMB6.0 billion of current held-to-maturity financial assets, RMB1.1 billion of current available-for-sale financial assets and RMB724 million of financial assets at fair value through profit or loss.

Under non-current assets, there were RMB4.6 billion of held-to-maturity financial assets and RMB200 million of available-for-sale financial assets. This is against current borrowings of RMB5.2 billion and non-current borrowings of RMB801 million.

But a significant portion of YZJ’s cash could be held by its subsidiaries in China, says analyst Low Pei Hwa in a Monday report and China’s increased scrutiny recently over capital movements after certain high-profile incidents led to more capital controls.

After YZJ announced the share placement on Aug 31, its share price has dropped 13% from a high of $1.625 on Aug 30 to $1.41 as at 11.13am.

About 137 million new shares -- or 3.6% of issued shares -- will be placed out at $1.53 each to raise net proceeds of $209 million.

“The placement would therefore allow YZJ to undertake more significant overseas acquisitions,” says Low.

As for the stock, Low believes that a fair amount of new orders expectation has been baked into the share price.

“We tweak our estimates to account for the placement and adjust our P/B for the shipbuilding segment from 1.3x to 1.2x, in line with the decline in industry average, leading to a fair value estimate of $1.48. Maintain hold,” concludes the analyst.