From Worst to Best: A Shipbuilder’s Fortunes Turn Around

Ships under construction at Yangzijiang Shipbuilding in China.

By Krystal Chia and Livia Yap (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 Ltd., which specializes in dry-bulk carriers, has rallied 83 percent in 2017 to lead the benchmark Straits Times Index. The Chinese shipbuilding firm has made a comeback after it won 13 contracts worth $318 million in the first quarter, about 40 percent of its $823 million worth of orders it won last year.

Its share-price gain this year is more than five times that of the Straits Times Index, which is heading toward its best showing in five years with a 15 percent 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 since 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 Ltd. and Keppel Corp., which focus on oil rigs, have seen their earnings weighed down as crude plunged more than 50 percent since mid-2014, and an oversupply in the market. Shares of Sembcorp Marine and Keppel have risen 19 percent and 11 percent respectively this year, but remain well below historical highs. Yangzijiang’s advance this year has reversed a 26 percent 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 $1.2 billion, according to a report by HSBC Global Research. It reported $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 the report last week, raising the stock to buy and increasing earnings estimates by 18 percent to 24 percent for the next three years.

© 2017 Bloomberg L.P