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
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.
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 report Note 2, the revenue is based on the costs incurred to date over the estimated contract cost multiplied by the contract value. Therefore, the revenue will be recognised between date of contract and delivery date, which is in FY18 to FY19 for vessels delivered in FY19.
Based on prior year data, the shipping segment seems to be cyclical in nature and delivery of vessel is not consistent through out the years. This is due to the nature of the business, where each vessel will have a certain specification required and the time to build will vary on a case by case basis.
In the future years, it is unlikely to expect a clear growth trend in the shipping segment.
Yangzijiang Shipbuilding Orderbook
Order book value was on a down trend in the past three financial year, this means that the new order wins did not keep up with the completion of projects. In FY20, there is increase in order win, resulting in higher order book of USD 3.36billion. Using the RMB/USD exchange rate of 6.53, the order book approximates to RMB 21.96billion, which is more than 1-year worth of revenue for the shipping segment.
Having a high book order provides visibility to Yangzijiang Shipbuilding future revenue for FY21 and FY22, as the usual construction period for vessel is approximately 1.5 to 2 years. It is expected that YZJ Yangzijiang Shipbuilding be able to record a revenue of approx. RMB 17billion in FY21.
Due to the high container rates in 4Q2020, where World Container Index have reached $4,200 per 40ft container, which is more than 2 times the price from Feb’19 to May’20. Attributable to consumer recover in 4Q2020.
There is no surprise that the recent contract wins are for containerships. With the high freight rates, it is expected that Yangzijiang Shipbuilding will be able to secure more vessel construction contracts soon, which is another positive sign for Yangzijiang Shipbuilding .
Recent Contract Wins
Contrary to most people’s understanding of investment income, YZJ interest income earned on investment on debt asset measured at amortised cost is recognised in revenue line of Profit and Loss statement.
Despite the segment contributes a low percentage to the total revenue (17%), the contribution to the gross profit to be significant, at approximately 50:50 split against its ship building segment.
YZJ provides financing to companies to generate interest income. As at 30 September 2020, the amount of debt asset is at RMB 16.2billion, approximately 35% of YZJ’s total asset. Most of its debt asset are short term in nature (84%), which matures within 1 year and all loans are collateral secured loans.
Investor should be wary of the quality of the debt assets, even collateral secured for the loan. Based on Yangzijiang Shipbuilding annual report FY2019 Note 37, the asset quality is split into 3 stages, where Stage one has the lowest risk of default, where stage 3 have the highest risk.
At 31 December 2020, 85% of the loan are performing loan, expected credit loss of RMB 1.5billion was provided.
Due to challenging economic climate in FY20, it is expected that the credit loss allowance will increase as a result. Based on quarterly results, the net impairment on debt securities is on an uptrend. At 4Q2020, the impairment loss/ income generated to be 34.90%. The impairment loss amount should be closely monitored for 4Q2020 results to determine is there any deuteriation of asset quality.
Balance sheet & Financial metrics
At 30 September 2020, Yangzijiang Shipbuilding (YZJ) recorded a cash and cash equivalents of RMB 9.22billion, while borrowing amounting to RMB 5.06billion, YZJ is in net cash position of RMB 4.16billion, translating to a net cash position of SGD 0.21/share, 22.5% of total market capitalisation.
|Dividend Yield (%)||4.76|
The key ratios have shown that YZJ balance sheet is very healthy, current ratio of 3.21x will mean that YZJ will be able to make all short-term repayments when due. With reasonable ROE of above 10% and a low Price/Book value of 0.57x, this is an indication of the stock being undervalued.
Why share price remains low despite being undervalued?
- Estimation involved in recognising revenue. Due to percentage of completion method under FRS 115, the revenue is recognised based on cost/ estimated cost for the contract. As the contract cost may not be accurately estimated, revenue will be susceptible to earnings management (to bring forward revenue by estimating a lower than actual cost, to defer by estimating a more than actual cost).
- According to FRS 109, financial asset measured at amortised cost is required to estimate for the expected credit loss (ECL) by estimating future impairment losses that will be incurred in the current period. This is an area involves estimation by the management, which will be susceptible to earning management as well.
- Cyclical nature of the industry with intense competition from other shipyards.
- The company do not have a growth story as a catalyst to excite investors.
These might some of the reasons why the valuation is low for YZJ, as there is higher level of uncertainty, where investors will need to use a higher level of discounting to compute YZJ’s valuation.
Yangzijiang Shipbuilding dividend
YZJ consistently pays dividend from 2008 to 2020, where most of the year’s dividend payment is on May of the year, and dividend amounting to 4.5 Singapore cents to 5.5 Singapore cents. At a conservative 4.5 Singapore cents to be paid in May’2021, it is at 4.81% dividend yield at current price.
Not bad for a stock that is currently undervalued, allowing me to earn decent dividend while waiting for capital gains.
Can Yangzijiang Shipbuilding sustain its dividend?
Definitely! Using expected dividend of 4.5 cents, multiplied by the current share outstanding will result in RMB 840million dividend payable in May’20, 9% of 3Q2020 cash position.
Furthermore, the annualised EPS to be SGD 0.18, which is enough to pay 4.5 cents dividend in FY2021, at a conservative payout ratio of 25%.
Will there be higher dividend in FY2021?
I would think a special dividend of 0.5 cents, or 1 cent might be possible, given the improvement in the sentiment in the shipping industry especially for containerships. The higher order book also shows a positive sign for its future business.
However, I would not complain if there is no extra dividend paid out more than 4.5cents, as YZJ is able to generate 5.6% on every dollar of asset per year.
Yangzijiang Shipbuilding share buy back
YZJ consistently share buyback started from 4 September 2020 to 29 December 2020. Share purchase made on every single trading day, each day purchased 1million shares. This is an indication by the management that the price of share now is potentially undervalued.
The chart below shows the share price distribution of share buybacks performed in December 2020.
The chart shows that the price at $0.935 looks to be a strong support range, where the downside risk will be at approximately $0.805. After consolidating at the floor of $0.93 range for a period, it might be moving upward soon.
YZJ target price
Research analysis was released on YZJ for the month of December 2020 have shown rerating of the stock. The average target price for YZJ is $1.31. Vezted target price will be at $1.16, which provides an upside of 24%.
- Government regulation in the place of operation might affect the share price adversely, as YZJ have an investment segment which contributes material profit to YZJ. A change in policy may prohibit lending activities.
2. USD/RMB have weakened in FY20, where foreign exchange loss will be recorded. Vessel contracts are denominated in USD while the presentation currency is in RMB, this will result in a lower revenue in the future financial years due to foreign exchange translation.
3. Negative news that might cause huge swing in YZJ share price. One example will be the announcement of its executive chairman involved in a probe by Chinese government on 14 Aug 2019, which sent the share price down by 20% a day.
Based on the business, YZJ is a value play, with decent operational metrics. At P/B of 0.57x, and current share price of $0.935 is near a strong support line. Despite the lack of growth factors, there is visibility in YZJ future earnings due to existing order book amount.
Investors looking for value stock, with a decent dividend yield may consider this counter to add to your portfolio.
Note: Currently vested in YZJ (SGX:BS6) and will intend to add on to the position.
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