Yangzijiang Shipbuilding (Holdings)
Price target:
Citi Research “buy” $1.98 DBS Group Research “buy” $2.15
Share price ‘will re-rate’ upon successful spin-off
Analysts from Citi Research and DBS Group Research have kept their “buy” calls on Yangzijiang Shipbuilding (Holdings) (YZJ) after the component stock of the Straits Times Index announced that it had increased the share capital of its proposed fund management and investment business to $4.3 billion. The analysts also believe that YZJ’s share price will re-rate following the successful completion of the proposed spin-off.
On March 25, YZJ said that it had increased the share capital of Yangzijiang Financial Holding (YZJFH), the entity that will soon be spun off from YZJ, to $4.3 billion comprising 3.95 billion shares, or $1.08 per share. YZJFH will be headed by Ren Yuanlin, former executive chairman of YZJ and father of current chairman and CEO Ren Letian.
The amount is exactly the same as guided by YZJ’s management during the recent FY2021 ended December results and does not come as a surprise, notes Citi analyst Jame Osman. “More importantly, we believe the move is an affirmation of YZJ’s intent to crystallise value via the spin-off, given that its core shipbuilding business is currently trading at a deep valuation discount, in our view,” the analyst writes in his report on March 27.
“As we previously flagged, at YZJ’s current valuation, the market is essentially assigning almost zero residual value for YZJ’s core shipbuilding business versus its past 10-year through-the-cycle mean of 5.4x P/E.”
“Even if we ascribe a more conservative value of 0.5x P/B multiple to its financial assets, it would yield an implied FY2022 P/E of 7x for its shipbuilding business,” he adds. “We continue to believe that a successful spinoff of its investment arm could drive a potential re-rating of YZJ on the basis of improved earnings quality and attract investors seeking more direct exposure to the company’s core shipbuilding business.”
So far, the valuation of the proposed entity has been the main concern for investors with the distribution of the shares of the new entity in specie to existing YZJ shareholders, in which some investors are concerned of a potential sell-off and valuation de-rating.
“We think these concerns may be overdone, considering that 90% of YZJ’s financial assets currently are liquid; classified under current assets. Management had flagged that it is targeting a potential valuation of 1x P/B. Ultimately,
the shares of YZJFH could trade on a yield basis,” says Osman.
“Little is known at this stage in terms of [its] potential income distribution, although management has outlined broad plans for the asset management business and its structure,” he writes, adding that YZJ has strong medium-term earnings visibility and momentum, with its record order book and delivery slots filled till 2024. The company also enjoys a positive near-term industry outlook; the potential spin-off of its debt business is a key catalyst to its share price re-rating.
Osman has given YZJ a target price estimate of $1.98 based on a sum of the parts (SOTP) valuation methodology. “Debt investments currently account for about 30% of the group’s total assets. We have accorded a 13x
P/E multiple, a slight discount to +1 standard deviation historical mean, to YZJ’s shipyard operations given lower expected earnings volatility going forward as the shipping industry recovers; and also taking into account that: we expect the group to remain profitable, with respectable ROEs or return on equities (in excess of its peers); and to recognise significant strides the group has made in market share gains.”
“We value the group’s debt investments at 0.5x book, a slight discount to trading valuations of Chinese banks (0.7x) taking into account YZJ’s less developed credit controls when compared to banks,” he continues.
In his report, Osman sees weaker-than-expected margins from orders secured during the downturn disappointing contract-win quantum/or significant number of order cancellations; and the execution risk of projects as key downside risks to YZJ’s share price performance.
In a note dated March 27, DBS Group Research has given YZJ a target price estimate of $2.15, which values YZJFH at 0.7x P/B of 77 cents. The remaining shipbuilding-related business is valued at $1.38.
“Assuming fair value of YZJFH at 77 cents, Yangzijiang’s current share price of $1.46, only value shipbuilding-related business at 69 cents per share, implying unwarranted low valuation of 0.8x P/B and [an estimated] 6x P/E despite 13% ROE and potential upside to 4% dividend yield,” says the brokerage.
In its note, the brokerage believes that YZJ is set to re-rate closer to its target price of $2.15 following the completion of the spin-off. If all goes to plan, the listing of YZJFH could be completed by end April or early May this year.