Yangzijiang Shipbuilding share price undervalued at 0.94?
Photo by Kinsey on Unsplash
Yangzijiang Shipbuilding share price undervalued at 0.94?

Yangzijiang Shipbuilding (SGX: BS6) attracted my attention on the day 30 November 2020, where there was 369million shares traded on the day of deletion from MSCI Singapore. The jaw dropping number of shares transacted is the second highest volume for this stock ticker (highest being the first day of trading at 462million). Share price performance for the year to be -19.4% as at date of writing. After a substantial decline in price and being a Straits Time Index (STI) constituent stock, there might be value emerging from the stock.

Share price performance for the year to be -19.4% as at date of writing. After a substantial decline in price and being a Straits Time Index (STI) constituent stock, there might be value emerging from the stock.

The post will try to understand the business of Yangzijiang Shipbuilding (YZJ), its financials and the key risks involved in the stock to find out if $0.94 is an undervalue buy.

Yangzijiang Shipbuilding Business overview

YZJ revenue breakdown
Source: 3Q2020 quarterly results released on sgx.com

Shipbuilding Segment

Yangzijiang Shipbuilding is in the shipbuilding business, with its operations in China. Currently there are 3 shipyards operated by YZJ: New Yangzi Yard, Xinfu Yard and Yangzi-Mitsui Shipbuilding Co., Ltd. (YAMIC).

Notably, YAMIC is a 50:50 joint venture with Mitsui E&S Shipbuilding Co., Ltd (MES). MES was well regarded in the ship building industry, the joint venture will combine YZJ’s high production capacity with the Japanese partners’ commercial and technological capabilities, making it more desirable.

Yangzijiang Shipbuilding mainly builds Dry bulk & Multipurpose, Containership, Oiltanker, LNG carriers and Others. Majority of the shipbuilding revenue recognised in the past 3 years was contributed by Dry Bulks & Multipurpose (approximately 66%), followed by Containerships (approximately 27%).

Number of deliveries have increased from average of 35 vessels from 2014 to 2017 vessels. From 2018 to 2019 the number of vessels delivered rose to 54 vessels per year.

YZJ vessel deliveries
Source: YZJ past annual reports

Revenue & Gross Profit Margin (GPM)

Revenue fluctuates between RMB 15 billion to RMB 21.6 billion at its peak in FY18, while gross profit margin has returned to a healthier level at 25% in FY20.

As compared to the chart above, there is a trend where revenue is 1 year in advance of vessel delivery, where the peak delivery in FY19, while the peak revenue is in FY18. This is because the revenue recognition method “percentage of completion” used by Yangzijiang Shipbuilding . As a vessel construction period is approximately 1.5 years to 2 years, revenue is recognised over the period based on the progress of the construction. Based on FY2019 annual rep