Yangzijiang Shipbuilding: From Singapore's worst-performing stock in 2016 to best this year

Yangzijiang Shipbuilding Holdings, China’s largest privately owned shipyard.
Yangzijiang Shipbuilding Holdings, China’s largest privately owned shipyard. PHOTO: YANGZIJIANG SHIPBUILDING HOLDINGS
A Yangzijiang shipyard in China.
A Yangzijiang shipyard in China.PHOTO: YANGZIJIANG SHIPBUILDING

SINGAPORE (BLOOMBERG) - A recovery in demand for new bulk carriers has helped Singapore's worst-performing stock in 2016 become its best this year.

Yangzijiang Shipbuilding Holdings, which specialises in dry-bulk carriers, has rallied 79 per cent in 2017 to lead the benchmark Straits Times Index. The Chinese shipbuilding firm has made a comeback after it won 13 contracts worth US$318 million in the first quarter, about 40 per cent of its US$823 million worth of orders it won last year.

Its share-price gain this year is almost five times that of the Straits Times Index, which is heading towards its best showing in five years with a 15 per cent advance. The bulk-shipping industry is in the midst of a recovery and scrapping of older vessels are creating demand for new ones, underpinning Yangzijiang.

Earnings are still expected to be under pressure for the next few years as the rebound in orders has been limited amid an oversupply of vessels since the financial crisis. Yangzijiang's profit growth is expected to slow for a third consecutive year in 2017, according to estimates from eight analysts. The shipping industry has been in a downturn since the financial crisis as weak global trade led to multiple bankruptcies and order cancellations globally.

Investors may be willing to look past near-term earnings weakness if Yangzijiang can win more contracts, particularly when the sector's performance tends to be driven by the outlook on the shipping industry, said Corrine Png, chief executive officer of Crucial Perspective, a research firm focused on Asian transport equities.

The company, which is expected to report second-quarter results on Aug 8, declined to comment, citing a blackout period ahead of the earnings release.

Bigger rivals such as Sembcorp Marine and Keppel Corp, which focus on oil rigs, have seen their earnings weighed down as crude has plunged more than 50 per cent since mid-2014, and due to an oversupply in the market. Shares of Sembcorp Marine and Keppel have risen 20 per cent and 11 per cent respectively this year, but remain well below historical highs. Yangzijiang's advance this year has reversed a 26 per cent decline in 2016, though the stock remains below a 2015 peak.

"Yangzijiang's main product is dry bulk carriers, Sembcorp Marine and Keppel Corp are mainly rigs, which is still facing probably quite a huge overhang from oversupply," said Joel Ng, an analyst at KGI Securities in Singapore. "There's an oversupply in shipping too, but the good thing is that the trend is pointing towards a rebalancing in terms of supply and demand for dry-bulk carriers."

The company's new order flow for 2017 looks to be on track for US$1.2 billion, according to a report by HSBC Global Research. It reported US$823 million last year, according to a company statement.

"Yangzijiang has been the surprise so far this year, winning orders in the bulk carrier and containership segments", analysts at HSBC Global Research wrote in a report last week, raising the stock to buy and increasing earnings estimates by 18 per cent to 24 per cent for the next three years.