Yangzijiang – 2nd worst performing STI stock with -40% YTD (6 Aug 2018)
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
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.
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 clients on 6 Aug morning. I am vested with a speculative basis and aim for a few bids of profit, if any.
Please refer to the disclaimer HERE