Asked on 29 May 2019
Discuss anything about Yangzijiang Shipbuilding (Holdings) Ltd share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment in Yangzijiang Shipbuilding (Holdings) Ltd
1) Cyclical Industry. As it is not in my circle of competence, I wouldn't go in. If you know this industry well and know the cycles, you can of course go ahead.
2) The numbers look great, my only concern is that their margins have been coming down over the years as they scaled up. So think about this, the more revenues you earn, your profits grow less proportionately.
I think Isaac did a great job in showing the numbers :)
TL;DR The firm has surprisingly strong financials, and there is a good chance the shares could be undervalued. I think that it is worth a closer look.
Source: Yangzijiang Group
YZJ is a large corporate group, with shipbuilding and offshore engineering as its core business. They also have four additional sections: financial investment, metal trading, real estate and shipping combined ship-leasing as supplementary businesses. Interestingly, shipbuilding output from 2009 was continuously ranked top 5 of the Chinese shipbuilding industry. The average output, profit and tax were also impressively ranked at the top of Chinese shipbuilding companies.
Source: Singapore Business Review
The profitability of the firm is very strong, with a net margin of more than 15%. Moreover, these margins have also substantially improved over time as well.
The revenue and earnings of the firm also had quite a growth over the past few years, with the most significant change being for net profit. As a result, earnings per share have also risen.
The firm also has quite a strong balance sheet, with both very good short-term liquidity metrics as well as debt ratios. These ratios have also improved over time, which is a testament to the strength of their balance sheet.
Free Cashflow to the firm for 2018 was quite high, with the FCF margin being a high of 23.2%. This was a result of several factors. The NOPAT of the firm had improved over the last few years, while a decrease in working capital also result in more free cash flow. With lower debt levels, there is also more free cash flow available for shareholders. Given their strong cash flow position, I do believe that the firm will be able to sustain their dividends in the long run with a stable payout ratio.
The firm's efficiency is also surprisingly good. These metrics have also improved quite a bit since 2016. The high ROE can be attributed primarily to the high net profit margin, but also due to the good asset turnover as well. As the change in net working capital had been negative, the reinvestment rate was negative for the year. If we hold ROC as constant, this would lead to a decrease in the earnings for the firm the next year.
The P/E ratio of the firm is on the lower end, which could be good indicator for value investors. For slightly higher multiples, such as P/B ratio, have good companion variables such as the ROE that might justify a higher valuation. For firm value multiples, the companion variables also support the different forms of valuation. All in all, there could be a chance that the shares of these firm are undervalued.
Cost of Capital
The cost of capital for the firm is high due to the company being more exposed to higher country-specific risk (China). This leads to a high cost of equity which then results in a higher cost of capital despite a low cost of debt. However, due to the company's high ROIC, the ROIC exceeds the cost of capital significantly. This suggests that the firm is generating much more capital than it costs for investors.
Global Market-Wide Regression
As the title suggests, a regression had been carried out on the different multiples based on each multiples fundamentals. Interestingly the shares of the firm seem undervalued when we look at both P/B and P/S ratio. Conversely, the firm seems potentially undervalued when we pay attention to the EV/Invest Capital ratio. The other multiples seem to fall quite neatly near the range of their estimates.
1 more comments
20 Nov 2019
As someone who work in the maritime industry, the shipbuilding industry a less than ideal way to be exposed to heavy industrials long-term for the common mum-and-pop retail investors.
The shipbuilding industry is ultimately dependent on the dry/wet bulk freight industry whereby freight revenue is volatile, unpredicatable and had been saddled with oversupply for some time. Even experienced shipping veterans had made several costly mistakes betting on the fortune of the freight trends. Its not a transparent market. Most times, it is mainly sentiment that driven million dollars transactions. Seem crazy but thats reality.
When freight drop, shipowners will go back to shipyards and renegotiate those backlog shipbuilding contracts and try to reduce/cancel them. So take those backlog orders, free cash flow of a particular year with a very small pinch of salt.
There are much better, fundamentally stronger industrial stock plays such as CAT/UTC/3M etc out there to consider.