Yangzijiang – may be ripe for a bounce (12 Nov 2019)
- Original Post from ERNEST LIM'S INVESTING BLOG

This week, besides Food Empire which caught my attention (click HERE), Yangzijiang (“YZJ”) also caught my attention for being a laggard. It has given up all the gains since its large 7% jump on 5 Nov 2019. Notwithstanding the recent mild profit taking, it seems to be holding up well above its uptrend line. Given that its results are just around the corner, it may be an opportune time to take a look at YZJ. Do take a look at the basis, and more importantly, the risks.



Basis


A) Chart analysis – a breakout / breakdown seems to be on hand with breakout more likely


Based on Chart 1 below, YZJ has experienced five days of share price consolidation after its large 7% jump on 5 Nov 2019. In fact, it has given up all the gains since then and closed at $0.980 today. Prices are starting to converge. ADX closed at 17.7 amid positively placed DIs. Indicators such as RSI, MFI, MACD are strengthening. MACD has done a bullish MACD line crossover and centreline crossover. Given the above development, it is likely that a breakout, or breakdown seems to be imminent. A sustained breakout above $1.01 with volume expansion is positive whereas a sustained break below $0.960 with volume expansion is negative. On the balance of probabilities, the possibility of a bullish breakout outweighs that of a bearish breakdown.


Near term supports: $0.970 – 0.975 / 0.950 – 0.955 / 0.920


Near term resistances: $0.990 / 1.01 / 1.03 / 1.05


Chart 1: YZJ – still above the uptrend line established since Aug 2019




Source: InvestingNote 12 Nov 2019


B) Orders seem to be improving


According to Clarkson Research dated 15 Jul 2019, YZJ holds the top spot in China and ranks #5 in the world by the size of its order books (YZJ has an order book worth US$3.1b as of end Jun 2019). Notwithstanding the drought in orders in 1HFY19, orders seem to be picking up as YZJ clinches US$395m worth of new orders for 3QFY19. According to some of the research reports which I read; management is still guiding for US$1.5-2b of new orders to be clinched in FY19F. However, most analysts are sticking to more conservative estimates of US$1.0b for FY19F which is already 60% fulfilled as of 5 Sep 2019. Most analysts’ reports cite that medium-term outlook for YZJ remains positive on a rebound in industry demand; initial orders for LNG carriers and as shipowners firm up their plans on how to cope with the IMO environmental regulations that come into force in 2020.


C) Potential switch from Sembmarine to YZJ


In Singapore, Sembmarine (“SMM”) and YZJ are classified in the same industry as offshore and marine plays. An argument may stand to reason to switch some funds out from SMM to YZJ due to the following reasons. Firstly, SMM is loss making and it has guided that 2HFY19 losses are likely to exceed that of 1HFY19. YZJ is profitable and likely to remain profitable in 2HFY19. Secondly, SMM trades at 1.21x P/BV and unlikely to dish out any dividend in FY19. YZJ trades at 0.66x P/BV and analysts project YZJ to yield a dividend yield of 4.8% at current price $0.980 for FY19F. Thirdly, SMM’s net gearing as of 30 June 2019 is around 1.42x whereas YZJ is almost net cash.


D) Relatively cheap valuations either historically, or vs peers


YZJ trades at relatively cheap valuations either historically, or vs peers. Based on Bloomberg, YZJ trades at 0.7x P/BV and 5.3x current PE vis-a-vis its 10-year average 1.5x P/BV and 7.8x PE. NAV / share stands at around $1.49. In addition, YZJ trades at lower valuations than our Singapore shipyards which are trading at approximately 1.2x P/BV.


E) Share buybacks in 3QFY19 > the entire 2018


Based on Table 1 below, YZJ has bought back 25m of its company shares in 3QFY19 alone, translating to $23.1m worth at an average price of $0.924. This is significant, as the share buyback in 3QFY19 alone is more than that of the entire 2018 share buybacks.


Table 1: Massive share buyback



Source: Shareinvestor


F) Total potential capital upside of around 43%


Based on Figure 1 below, the analysts’ target prices range from S$1.00 to S$1.82. Suffice to say that most analysts are positive on YZJ with an average analyst target price $1.35. Coupled with an estimated dividend yield of around 4.8%, this represents a total potential return of around 43%. Readers can refer to YZJ’s analyst reports HERE.


Figure 1: Average analyst target $1.35; potential capital upside of around 43%



Source: Bloomberg



Risks


As usual, there are numerous risks in stock trading. Besides the usual business execution risks which apply to all companies, I have outlined a couple of risks. This is not exhaustive, and readers should do their own due diligence.


A) Chart analysis – based on probability


As per previously mentioned, YZJ’s chart may stage a bullish breakout, or bearish breakdown, as prices become more congested (see Chart 1 above). However, on the balance of probabilities, a bullish break is more likely than a bearish breakdown. Notwithstanding this, as YZJ’s exponential moving averages are still moving downwards, take profit levels have to be realistic.


B) Not extremely familiar with YZJ


I am not extremely familiar in YZJ and have not followed the company events closely, especially the events encompassing YZJ’s Chairman assisting Chinese authorities in an investigation.


C) Outcome of YZJ’s Chairman assisting Chinese authorities in an investigation


According to YZJ’s announcement (click HERE), YZJ’s Chairman Mr Ren Yuanlin is assisting Chinese authorities in a confidential investigation. However, YZJ emphasises that neither Mr Ren Yuanlin, nor any of the company’s directors / executive officers, nor the company is the subject of the investigation. Nevertheless, the outcome of this investigation may have an impact to YZJ’s share price.


D) Results – potential event risk


Results are usually an event risk. Share price may not move, even if the company beats earnings and outlook expectation as share price may be influenced by other drivers in the short term.


E) Trade tensions


If trade tensions heighten, this may affect the demand for ships which may have an adverse impact on YZJ.



Conclusion


YZJ seems interesting on its relatively attractive valuations either historically or vs its peers; share price laggard and improving order wins. Nevertheless, the outcome of YZJ’s Chairman assisting Chinese authorities in an investigation and results risks are some of the risks which readers need to consider. Readers, as usual, please do your own due diligence and exercise your independent judgement.



P.S: I have informed clients on YZJ since late last week and I am vested for trading purposes only.


Disclaimer


Please refer to the disclaimerHERE


$YZJ Shipbldg SGD(BS6.SI)

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24 likes
7 comments
rrr

Fortune favors the brave Ernest!

RN85

Don't know why till today the Chairman is still not show himself to the public.
So siong investigation meh?

Cyprus

Reply to @RN85 : Mayb kena put behind bars liao

Kingmaker

Please don't recommed shares that can be suspended anytime.

Bbh

Reply to @Kingmaker : Won't la, y suspended u have insights?

sby125

Thanks for your detailed analysis. Deeply undervalued, net cash, good dividend yield, strong market liquidity ... I see significant potential upside inYZJ.

davidtan1102

A double edged sword.


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Yangzijiang – 2nd worst performing STI stock with -40% YTD (6 Aug 2018)
- Original Post from ERNEST LIM'S INVESTING BLOG

Yangzijiang (“YZJ”) has been the 2nd worst performing STI stock with -40% year to date (“YTD”) return based on the closing price of $0.880 on 6 Aug 2018 (click HERE). In the past four days, YZJ has weakened approximately 9.3% after hitting the intraday high of $0.970 on 31 Jul 2018.
Is this recent share price decline the harbinger of poor results to be released on 7 Aug, after market?

2QFY18 results unlikely to be poor
Based on my personal view, 2QFY18F results are unlikely to be poor based on the following points:
a) Number of vessels delivered
Based on a CGS-CIMB Research report dated 11 Jul 2018, CGS-CIMB wrote that YZJ is likely to deliver some 30 vessels in 2QFY18 vis-à-vis 9 in 1Q18 (2Q17 delivered 4 vessels). In addition, it is likely to register stronger shipbuilding margin on a quarter on quarter basis.
b) USD / RMB exchange rate
According to a DBS research report dated 28 May 2018, YZJ made RMB1.2b worth of provisions in 4QFY17. This was based on assumptions of USD / RMB exchange rate at 6.15. As of 30 Jun 2018, USD / RMB exchange rate is around 6.62. As of 6 Aug 2018, USD / RMB exchange rate is around 6.85. DBS estimates that every RMB0.10 depreciation results in RMB300m writebacks upon delivery of vessels.

Price seems to be consolidating
YZJ has declined for 3 out of past 4 trading days. Except for 6 Aug, trading for the other 3 days is accompanied with lower than average volume. Based on Chart 1 below, YZJ is still entrenched in a downtrend established since the start of 2018. All the exponential moving averages (“EMAs”) are still pointing downwards. A sustained breach above its downtrend line (currently around $0.955) with volume is bullish whereas a sustained break below $0.840 is negative for the chart. Indicators are mixed. It is noteworthy that YZJ rose on 31 Jul with a larger than expected volume. i.e. there may be some contra players who may exit in the next three trading days if they have not done so yet.
Near term supports: $0.875 – 0.880 / 0.850 / 0.840
Near term resistances: $0.905 / 0.940 / 0.950 – 0.955
Chart 1: YZJ – downtrend since start of the year

Source: InvestingNote 6 Aug 2018

Attractive valuations
Based on Figure 1 below, YZJ trades around 0.7x P/BV and 6.0x PE. This compares favourably to its 10-year average of 1.7x P/BV and 7.7x PE respectively. According to a report by DBS Research dated 3 Jul 2018, it cited YZJ’s attractive valuations, i.e. trading at approx. 30% discount to global peers. This does not take into account of YZJ’s superior ROE of 8-9% vs peers’4-5% and approximately 5% dividend yield.
Figure 1: 10 year valuation band

Source: Blmberg 6 Aug 2018

Share purchases underpin confidence
Based on Shareinvestor, from 30 May 2018 to 17 Jul 2018, YZJ bought back a total 23.1m shares for a consideration of S$20.9m, equivalent to an average price of $0.905 / share. Such aggressive share purchases typically signify confidence in the company.
Table 1: YZJ bought back 23.1m shares with a consideration of S$20.9m

Source: Shareinvestor 6 Aug 2018

Analysts remain positive
Based on Figure 2 below, average analyst target price is around $1.34. This represents a >50% potential capital upside as compared to the closing price of $0.880 on 6 Aug 2018. To be fair, I wish to point out that DBS has an “outlier” target price of $1.82 which raises the average analyst target price. If DBS were to reduce its target price, this will naturally reduce the average analyst target price. Notwithstanding this, it is noteworthy that the lowest target price for YZJ is around $0.870 which is very near to the closing price. Although analysts can change the target price anytime (especially post results), the current available information is still a good gauge of analysts’ view on YZJ.
Figure 2: Average analyst target indicates >50% potential capital upside

Source: Blmberg 6 Aug 2018

Near term risks
With all investments, there are certainly risks which readers need to consider. The below list of risks is not exhaustive. Please refer to the analyst reports for more risks.
a) Results – undoubtedly an event risk
Notwithstanding the above analysis, there is definitely a possibility that the results or / and outlook by YZJ may be below analysts’ estimates. This may push the share price lower;
b) Share price decline from $0.970 may be the harbinger of poor results
The recent share price decline from $0.970 so near to the results date may not bode well for its upcoming results. Nevertheless, this depends on how one views it. As YZJ is the second worst performing STI component stock with a YTD decline of 40% in share price, I guess it is reasonable to say that expectations are not very high for this stock.
c) Macro factors come into play
If markets especially China, Hong Kong and Singapore market continue to fall or be jittery, YZJ may not appreciate even with results beating estimates.
d) Not extremely familiar with the company
I am not extremely familiar with YZJ and I don’t have direct access to company management. Clients who wish to know more about YZJ can check out its company website, SGX and this website HERE for the analyst reports. I wish to emphasise that stocks carry risk, and everybody is different, it is recommended that you do your own due diligence before committing to any trade or investment decision.

Conclusion
YZJ’s valuations are low as compared to its 10 year average. Coupled with a 40% share price YTD decline, it seems reasonable to say that expectations are not extremely high for this stock. Nevertheless, one key event risk its upcoming results which they will release on 7 Aug 2018 evening or 8 Aug 2018 before market. Stay tune for its results.
P.S: I have highlighted to my clientson 6 Augmorning. I am vested with a speculative basis and aim for a few bids of profit, if any.
Disclaimer
Please refer to the disclaimerHERE
$YZJ Shipbldg SGD(BS6.SI)

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