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

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'.

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

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.