Nonetheless, the company's earnings growth and order outlook remain intact and Yangzijiang remains undervalued relative to regional peers, says DBS.
The tankers, which were to be delivered between 2026 and 2027, were cancelled after belated disclosure of critical information alleging the buyer’s sole shareholder was involved in a scheme to circumvent US sanctions.
This renders the buyer in anticipatory repudiatory breach of the contracts or frustrating them due to supervening illegality. The contract cancellations are not expected to have a material impact.
According to Yangzijiang in its statement on Sunday afternoon, construction had commenced only on one tanker and no revenue or profit has been recognised, though deposits totalling about U$22.48 million have been collected.
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"It remains to be seen the shipowner’s next course of action," says DBS.
According to DBS, the best-case scenario would be for Yangzijiang to retain the deposits.
A neutral outcome would be the company returning deposits to the buyer and ending the contracts amicably.
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The worst scenario is for this unnamed customer to file a lawsuit against Yangzijiang, claiming vessel price appreciation and/or loss of income due to contract termination.
"We are leaning towards the best and neutral scenarios for now. It is a new customer with no other outstanding contracts with Yangzijiang," says DBS.
This order cancellation aside, the company has won new orders totally US$1.9 billion for 44 ships year to date, including two new containerships ordered by Seaspan Corp, a long time customer. DBS notes that the orders by Seaspan were placed after news on US port fees, which suggests resumption of confidence.
In the past 3 months, Yangzijiang's share price has gained nearly 50%, but still trading at 8x PE and 2x PB.
In contrast, regional peers are at 18x PE and 3x PB, even though Yangzijiang is generating ROE of more than 25%, gives a dividend yield of 5% and is on track for earnings growth of between 10 and 15%.
DBS, in reiterating its "buy" call and $3.80 target price, which is at 2.5x PB, sees earnings growth with potential upside.
Yangzijiang Shipbuilding shares dropped 1.83% to change hands at $3.22 as at 9.07 am.
