Yangzijiang Shipbuilding Holdings Ltd (SGX:BS6) – Building Ships or Lending Money?
Established in 1956, Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) is one of China’s largest shipbuilding companies with a market capitalization of RMB21 billion (SGD4.3 billion) as at 8 Aug 2014.
It was listed in the Singapore Stock Exchange in 2007 with a dual-listing on the Taiwan Stock Exchange.
Even though the Group prides itself as an integrated marine service provider, Yangzijiang Shipbuilding Holdings Ltd does more than just manufacturing of bulk cargo carriers and containerships. Oddly, a large proportion of its business has been diversified into financial investments (mainly trust loans) since the last global financial crisis in 2008/2009. Moreover, the Group’s Executive Chairman, Mr Ren Yuanlin has announced in the Group’s annual report for 2013 that it will re-organize its business operations into 5 core segments, including Financial Investments and Property Development:
1. Shipbuilding and Offshore
2. Financial Investments
3. Shipping Logistics and Chartering
4. Ship Demolition, Steel Fabrication and related trading businesses
5. Property Development
Its long-term strategy would thus focus on Shipbuilding and Offshore Engineering contributing 60% to the Group’s revenue, with the remaining 40% contributed by non-core segments which are financial investments and property development.
From Shipbuilding to Credit Lending
Financial investments accounted for RMB14.7 billion as at end-Dec 2013, representing approximately 33% of total assets. Half of these financial assets were invested in Chinese real estate companies, manufacturing companies and Other investments through the issue of trust loans to these companies.
This further exposes the Group to the property market cycle and manufacturing sector risk. It is also useful to note that both the Chinese properties and manufacturing sectors are currently facing an oversupply issue and financing constraints.
With the lending curbs by the central government imposed on selected property and manufacturing companies, it becomes highly profitable for lenders such as Yangzijiang to be issuing these “underground loans” at a high interest rate to make up the shortfall of credit. Based on the interest income received from financial assets of RMB1.4 billion in end-Dec 2013, this would equate to an average yield of close to 10% per annum! Moreover, most of these investments mature shortly within 2 years. Quite an attractive return for a relatively short tenor investment.
If these troubled industries face an adverse correction in property prices or a sudden decline in real demand in manufacturing, impairment rates on these financial assets would not only increase but could adversely affect the overall profitability of the company.
Moreover, even though revenue from shipbuilding accounted for a major proportion of total revenue, financial investments was a more profitable business to the company as shown in the table below:
| (RMB thousands) | 2013 | 2009 |
| Revenue Segment | ||
| Shipbuilding | 11,148,572 | 10,623,642 |
| Investments | 1,506,907 | 274,207 |
| Others | 1,683,158 | 0 |
| Total Revenue | 14,338,637 | 10,897,849 |
| Segment Results* | ||
| Shipbuilding | 2,992,012 | 2,234,672 |
| Investments | 1,096,892 | 274,207 |
| Others | (89,722) | 0 |
| Total Segment Results | 3,999,182 | 2,508,879 |
Source: Company Reports
From Credit Lending Back to Shipbuilding
Roughly after 5 months since the release of the Group’s annual report of 2013, it seems that Mr Ren has decided to change his mind to refocus its business model back to shipbuilding again. Below is an excerpt of the 2Q2014 announcements released in Aug 2014:
Perhaps the decision to revert focus to shipbuilding might have come after securing an order of four 260,000 DWT (deadweight tonnes) in Jun 2014 from its first Australian customer. However, it still leaves investors questioning the true business model of this 58 year old company.
Value In Action
Assessing how management steer the strategic direction of a firm’s business is critical for investors to judge the viability of the company. A prime example would be Yangzijiang Shipping Holdings where it seems difficult for investors to ascertain the true nature of its business.
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All views and opinions articulated in the article were expressed in Willie’s personal capacity and do not in any way represent those of his employer and other related entities. Willie does not own any shares in the companies mentioned above.
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