Yangzijiang Shipbuilding (SGX: BS6) Full year result analysis (FY2020)
Yangzijiang Shipbuilding (SGX: BS6) Full year result analysis (FY2020)

Yangzijiang Shipbuilding (YZJ) share price closed at $1.23 on 20 March 2021, representing a 30.85% gain from the previous blog post dated 29 December 2020. The increase in share price mainly driven by release of financial results and clinching new orders.

This blog post my view of the FY2020 full year financials to determine will there be an opportunity to buy at current price level.

Profit and loss

Revenue decreased by 37%, while gross profit declined slightly by 2%

The decline in revenue mainly due to the shipbuilding and trading segment. This is expected in FY2020 due to COVID-19. Gross profit margin (GPM) has in fact improved in FY20, where GPM increased from 15% to 21%. Based on the variance analysis provided, it was due to construction of better margin vessels.

One-off transactions that will not occur in FY2021

The screenshot highlight some of the profit and loss items that investors should be aware of.

YZJ one-off items

Impairment loss on debt investment at amortised costs

The amount increased by RMB 411 million, which is not considered to be a large sum when considering the debt assets YZJ hold on its balance sheet. The average debt investment at amortised costs to be  RMB 15.7 billion, computed impairment loss / debt asset to be 3%, which is considered to be reasonable.

Impairment loss on property, plant and equipment

Based on the financial result filing on sgx.com, the impairment loss on PPE arise from the Group’s 55%-owned subsidiary, Jiangsu Yangzi Jiasheng Terminal Co. Ltd to reflect the decrease in value of its existing chemical storage tanks and terminal facilities after its planed conversion to an LNG terminal.

This is considered to be one-off in nature, and will not expect to have such line item in FY2021. Based on the past 5 years financial statement, the last impairment on PPE was FY2016 amounting to approximately RMB 1.0 billion.

Foreign Exchange Losses

RMB/USD exchange rate for 2 years
Extracted from xe.com

Foreign exchange loss increased by 826%, mainly due to the depreciation of US dollar against Chinese RMB from Jul 20 to Dec 20. This is because contracts are negotiated in USD, while the entity operations are located in China.

The large foreign exchange loss will not occur in FY2021 as the rates seem to have bottomed out in Feb 21.

Provision for customer claim

This is a management estimate, hence the actual amount incurred will vary, the difference will be expensed or reversed when the actual amount is finalised.

Balance sheet

Balance sheet remains to be strong, where net asset have improved from RMB 32 billion to RMB 33.4 billion.

Proportion of individual asset line item to total assets

Assets breakdown YZJ
YZJ Total Assets breakdown

From the break down, a large proportion of asset is held as debt investment. While the approximately 33% of total asset is considered to be liquid, where it can be converted in to cash readily.

Note: a simplified explanation of contract asset will be work being performed by YZJ to its customers (in the form of progress towards completion), but have not billed the customer.

YZJ Order book

YZJ Order book as at 31 December 2020
YZJ Order book as at 31 December 2020

One key highlight will be YZJ’s order book. YZJ finally broke the 3 year downtrend in its order book, aided by the strong container shipping sector in Q4 2020. According to the filing on 5 March 2021, YZJ have secured order for 60 shipbuilding contracts with aggregate value of US$3.04billion in FY21 alone. This brings YZJ order book to be at approximately US$ 5 to 6 billion.

World Containers Index remains to be high, hovering at 5,000 points, and Baltic Drybulk Index is at a 3 year high. YZJ is expected to benefit where YZJ may continue its momentum in securing new orders.

World Container Index by Drewry
World Container Index (WCI) by Drewry
Baltic Drybulk Index
Baltic Drybulk Index Chart extracted from bloomberg.com

However, don’t expect YZJ revenue to have explosive revenue growth number despite its higher order book. As a vessel take approximately 1.5 to 2.5 years to construct, and the revenue will be required to recognise overtime in accordance to FRS 115. Furthermore, depending on YZJ’s shipyard capacity may further limit the number of vessels to be constructed at the same time.

Key risks

  1. YZJ is not a pure ship building company. As mentioned above, a large proportion of asset is placed in debt investments to generate a return. These 2 business segment do not have much synergy between them.

Investment income contributes to approximately 50% of revenue in FY2020. With such a large proportion of revenue generated from business of lending, it might be susceptible to regulatory changes, which may adversely impact the financial of the company.

2. The profit and loss statement involves many areas with management estimation. Some examples are: revenue, provision, allowance of expected credit loss and more. With a higher level of uncertainty, a higher discount rate will be placed on the entity in computing its intrinsic value.

YZJ Target Price

Brokerages have issued very positive reports on YZJ, below will be the summary of reports issued recently by various brokerage houses:

YZJ Broker Target Price
Brokerage Target Price for YZJ

Based on previous blog post, Vezted target price for YZJ was 1.16. Understand that there is many positive catalyst that may propel YZJ further. However at the current price of $1.23, the risk to reward is not that attractive, even it rises to 1.3 to 1.4 range.

YZJ Technical Analysis

The price have shot up rapidly from 1.1 to a high of 1.3 in a week time. Personally I feel that the chart is currently over extended, with price deviate far from the MA20 and MA 50.

Expect the price to mean revert closer to the moving average price. Personally will think that 1.12 to 1.15 range will be a better entry point if intend to hold for longer term.

YZJ Technical Analysis 20 March 2021
YZJ Technical Analysis

Conclusion

With the positive catalyst ahead, it is possible that YZJ will soar further after a short period of share consolidation. Personally do not think YZJ will be able to go to 1.5 as per analyst report in a short period of time.

At the current price of 1.23 I will not make any move, as the risk to reward is not that attractive.

In the event of further pull back, I will consider to enter YZJ at 1.12 to 1.15 range, considering the 4.5 cent dividend (4% yield) is considered to be decent.

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