Yangzijiang – may be ripe for a bounce (12 Nov 2019)

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

Yangzijiang chart 12 Nov 19
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

Table 1_YZJ share buy back for 2018, 2019_12 Nov 2019

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%

Analyst target 12 Nov 19

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.

 

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