Yangzijiang Shipbuilding Holdings Ltd (SGX:BS6) (YZJ) is the only China-based company that is part of the Straits Times Index (SGX:^STI) in Singapore. The common term used for China-based companies in Singapore is “S-Chip”, which means China companies listed in Singapore. They were popular back in the pre-Global Financial Crisis (GFC) era with high investors’ demand and soaring share prices. However, they were also notorious for corporate scandals with financial irregularities, fund embezzlement and accounting fraud. Many companies had since went bust or suspended their trading that brought much distraught to investors.
Yangzijiang Shipbuilding Holdings is arguably one of the very few S-Chips that had performed well over the global financial crisis and S-Chip scandal, and has seen its business grown strength-to-strength in recent years.
Let us study YZJ’s overall operations and its strengths/weaknesses to see if its good enough to be part of your stock holdings.
Ticker Symbol: BS6
Market Capitalisation: S$ 5.17b
Sector: Manufacturing. Sub-sector: Transport Equipment
Yangzijiang Shipbuilding Holdings is primarily a ship builder. It is the largest non-state-owned ship-building company in China that produces a broad range of ships and vessels such as containership, bulk carriers, Liquified Natural Gas (LNG) vessels and Very Large Ore Carriers (VLGC), with 5 shipyards located along the Yangtze River.
It also has a shipping arm that owns a fleet of 13 bulk carriers that generate charter revenue. This segment also operates other shipping related services such as chartering, ship design services and ship demolition.
Its last segment of business includes the ownership of financial assets covering available-for-sale investments, financial platforms participation with opportunities arising from industry restructuring and consolidation, and micro financing.
Deep Ship-Building Capability
Yangzijiang Shipbuilding Holdings’ strong ship-building capability is reflected in its diversified product offering. It is able to build different kind of ships and vessels ranging from the basic bulk carriers to the bigger vehicles such as containerships, LNG vessels and ore carriers. This enables YZJ to cater to customers’ varied requirements in transporting different goods categories including dry bulk, commodities, and liquified gas.
It is worth noting that Yangzijiang Shipbuilding Holdings has steadily moved up the ship-building value chain by expanding its capability into more complex and technically-challenging vessels. In 2007, the company built bulk carriers and containerships. Fast forward to 2017, it is able to produce massive 10,000 tonnes Twenty-Foot-Equivalent-Unit (TEU) containerships traditionally dominated by the industry-leading Korean shipyards, and 400k Dead-Weight-Tonne (DWT) VLOCs that are the largest bulk carrier ever constructed. These are good indicators of YZJ’s deep expertise and strong capability.
Production Efficiency and Strong Financial Standing
Yangzijiang Shipbuilding Holdings maintains an efficient production with low production cost that give rise to decent margins. According to CIMB research, its gross margin has been around 20% past 5 quarters and compare favourably with its peers such as the state-owned Cosco Corp that often runs into operational loss, and Sembcorp Marine with around 10% margin.
YZJ also boasts a strong balance sheet. As of end-Mar 2017, it has cash balance of RMB 6.67b, borrowing and debts of RMB 5.45b.
The production efficiency and better margins provides headroom for Yangzijiang Shipbuilding Holdings to price its product competitively without impacting its earnings, enabling it to compete better. The robust balance sheet further enables company to focus on meeting clients’ requirements with better products, without worrying about straining its balance sheets to pay debts.
Healthy Orderbook Providing Revenue Visibility
As of end-Mar 2017, Yangzijiang Shipbuilding Holdings orderbook stood at US $4.3b or about RMB 28.8b. Considering its FY16 revenue of RMB 15b, the orderbook amount provides clear revenue visibility well in excess of the next 1 year.
Well-Positioned to Capture Potential Shipping Turnaround
The global shipping industry has been in the doldrum for years. Charter rate is low, with many idle vessels lying around. The industry is also consolidating with many mergers and acquisition deals including our national shipping firm NOL that was sold not too long ago. While we can never be sure when the industry will turnaround (until it has actually done so), YZJ would be well-positioned to ride on the upturn given its operation efficiency, strong capabilities, and robust financial standing. It is also worth noting that the Baltic Dry Index has risen from the trough of 290 in Feb 2016 to about 1,100 in Mar 2017. Hence, in the short term, the industry outlook seems positive.
4 – Threats/Weaknesses
Managing Forex and Steel Price Fluctuations
Given that most of its revenue is denominated in USD and its reporting currency being RMB, YZJ needs to stay on top of currency movement which is influenced by many uncontrolled macro factors. Currency hedging can protect YZJ’s earnings if done well. However, a bet on the wrong side can impact earnings. The company also has to ensure ready supply of steel at a comfortable cost to ensure profitability, given that steel is a major component of its Cost of Goods Sold.
Continued Industry Downturn
The shipping market, in particular bulk carriers and containerships, remains challenging as there is still excess capacity and slow demand for shipping services due to the patchy economic recovery since the GFC. Industry experts and insiders also doubt that the industry can return to the pre-GFC boom years anytime soon.
Undoubtedly, the subdued industry outlook will impact YZJ’s revenue with few shippers placing new orders for vessel production. This is a challenging industry landscape that YZJ has to navigate through, falling back to its technical expertise, efficient operations and industry knowledge.
Yangzijiang Shipbuilding Holdings is currently trading at a PE ratio of 14.4 and a P/NAV ratio of 0.71. Historically, its PE and P/NAV ranged from 5.8-9.5 and 0.71-2.92 from FY2010. Its dividend yield, based on 4c dividend and price of $1.35, is about 3%.
Yangzijiang Shipbuilding Holdings’ Executive Chairman, Ren Yuan Lin, has a direct shareholding of 0.08% of the company’s total share. However, he has a total deemed interest of 26.25%, through shares held by Yangzi International Holdings Ltd. The company’s Deputy General Manager, Wang Dong, has a 10.28% deemed interest through shares held by Lido Point Investments Ltd. Based on the key personnel major shareholdings, the management’s interest seems aligned with retail investors.
YZJ’s latest financial reports can be found in the link.
Income Statement – Click Here
Balance Sheet – Click Here
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The information provided is for general information purposes only and is not intended to be any investment or financial advice. All views and opinions articulated in the article were expressed in CS Chong’s personal capacity. It does not in any way represent those of his employer and other related entities. CS Chong does not own any companies mentioned.
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