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Tea with Mike: Analysis of Yangzijiang, an S-chip (Part 1).

Wednesday, September 4, 2013

The recent episode with China Minzhong was viewed by many, including professional analysts, as the proverbial last straw that broke the camel's back. S-chips have been declared by them as untouchable and even toxic.

Surely, S-chips have reached a low point and are mostly unloved. In such a situation, are we brave enough to venture forth to sort through the debris to find hidden gems? See what Mike has to say about Yangzijiang (YZJ) which he is vested in.

.................................................

Before I start, to avoid losing sleep over this blog, I must say that  all information I am sharing here is to my best knowledge accurate but I cannot be held liable for any errors. Of course, please point them out if you should spot any.
I invested in YZJ because it fits my approach to investing which is to buy into an alpha company in a cyclical industry during a down cycle. In my opinion, the low valuation of this company is unjustified.

 
1. YZJ pays decent dividends, consistently paying out about 30% of their earnings, yielding about 5% based on recent share price. I like companies that compensate me while I wait for the upturn.
2. I like the management's foresight. In a time when China is competing head on with South Korea for a share of the global shipbuilding pie, many shipyards competed on costs, and offered great terms to build smaller bulk carriers and container ships. YZJ moved into “green” technology that saves on fuel costs and built large container ships. They are the first in China to build 10,000 TEU container ships for Seaspan, but lost the crown to Jiangnan Changxing, which has signed deals to build 16,000 TEU boxships.
If we followed the recent developments in the shipping sector, many are talking about LPG carriers, YZJ through an interview with The EDGE Singapore, mentioned they are in talks with companies for building such. While it is akin to counting eggs before they are hatched, it does show that the management is on top of things where industry trend is concerned.
3. I also like the management's prudence. They did not venture aggressively into the O&G sector which proved costly for COSCO, instead they developed a financing arm (Mirco-financing and HTM investment) which works well for them so far. Of course this is not without controversy and risks. I will talk about this later.
4. Although their order book has shrunk considerable from the boom years, it is beginning to grow again. Order book shows about USD3.24b with 47 outstanding options worth about USD2.54b that are not yet exercised by its customers. Their customers base has also grown since their IPO.  

5. Ratios and financial numbers? I have mentioned about low gearing, reasonable P/B of 1.1 and PE ratio of 5.4. Valuation has not taken future recovery into account. This is unlike many hot stocks which have valuations that have already accounted for expected strong growth for years to come.
6. There is favourable sector development. The PRC government is trying to reform the shipping industry. They want the top 10 shipping companies to account for 70% of the ship building contracts. YZJ is in the top 5.  Although no one will want to start a shipyard in China now, as demand recovers, domestic competition might increase and disrupt the consolidation of the industry. So, the PRC government has effectively closed off such competition by not issuing anymore license to potential new players. In addition, they also do not allow any expansion of capacity of existing builders'.

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In Part 2, we will see what Mike thinks are the possible risks of investing in YZJ.

Continue reading: Part 2.

Related post:
Tea with Mike: Approach to stock selection.

11 comments:

AK71 said...

Analysts said the recent debacle has seriously dampened investor confidence and appetite for S-chips.

Daryl Liew, head of Portfolio Management at Reyl Singapore, said: "The number of S-chips that come onto the market tend to be of lower quality than what we see that are listed in Hong Kong.

"There are a number of S-chips that have already gone down. It is not difficult to raise reasonable doubt and raise a panic and cause the stock price to go down. The lesson here at the end of the day is one of corporate governance."


Source:
http://www.channelnewsasia.com/news/business/singapore/china-minzhong-saga-casts/800886.html

Gary said...

Hi AK

Good and strong corporate governance resonates a quote by Richard Buckminster, "Integrity is the essence of everything successful".

opal said...

For those with a strong heart, this can also mean an opportunity!
There is always the other side of a coin. :)

AK71 said...

Hi Gary,

How can we tell with some degree of accuracy if a company's management has integrity? -.-"

Solace said...

Hi AK & Gary,

I am afraid that it is pretty hard to judge whether company's management has integrity.

With my limited knowledge, i can only think of the following:

1) Management should act like they are shareholders, rather than hired personnel
2) Check how much they are paid, it should be in line with market, not excessive
3) Avoid Companies that give loans and many stock options to employees
4) Management should be open enough when disclosing information. Are they defensive when answering question about their operations or finance?

AK71 said...

Hi Solace,

Warren Buffett said before that we should only invest in companies which have managers with energy, competence and integrity.

Although he said "integrity" was the most important, he did not give any specific rules as to how can we tell if a management has integrity.

I believe that your point number one is classic. If management align their interests with those of shareholders, we have less to worry about since they would be hurting themselves if they choose to hurt shareholders.

It is, therefore, precisely because it is so difficult to tell if a management has integrity that investing in a company which sees its management having a substantial shareholding is seen as a safeguard.

Solace said...

Hi AK,

Sharing something not related to stocks and investment.

Was Working Over-time in my office for the past few days. Come across this interesting Comic Strrip today:

http://zenpencils.com/comic/128-bill-watterson-a-cartoonists-advice/

And decided to stop my work and went back home to rest and work on my other interest (Investment).

Hope you enjoy the comic strip too :)

AK71 said...

Hi Solace,

I seem to have trouble with the link. I will try again later.

Wah! You were still in the office at 11pm? Sometimes, no choice but to work late, I know. :(

Take vitamin C pills to help to cope with stress and drink plenty of water. It makes a difference.

Gary said...

Hi Solace,

I've noted and agreed with you that assessing management integrity of the company is an art, and the points stated are also valid as well.

I think it is good that as retail investor we should keep on probing to understand how the finance and operations are managed. If there are major irregularities, "alarm bells" should start to ring! I maybe thinking too far fetched as well! Lolx.

For the comic strip, Solace, thanks for it! Nice to touch base with the fundamentals of life! =)

Gary said...

Hi AK

There are many ingredients to assess integrity as I have mentioned in my comments to Solace! =)

AK71 said...

Hi Gary,

Some call it an art and some call it an inexact science. I don't know the process well enough to know what to call it. :(

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