Yangzijiang Shipbuilding (Holdings)

[CityFarmer]

thanks CityFarmer for the sharing. I drew a few positives from the report. 1) Chinese yards are making progress along the learning curve for building offshore units. 2) despite sector being underweight, no sell but hold recommendations for Cosco and YZJ, n fair values quoted are near if not match current market prices, 3) china policy supports the growth in this sector.

Possibly do well to have a position in the best performer of a down sector and if we believe this is cyclical, the rising tide will come.
worth noting that YzJ is trading at P/B 1.1 or 1.2, which is 08/09 low. Ms Teh Hooi Ling had an excellent article on buying stocks when it's PB is low.

I mostly agree with you

There was an article on rigbuilders and China yards in last week issue of The Edge, which might worth a read.

[a74henry]

There are the risk of the rising cost of manpower and an oversupply of vessels. If China takes sovereign over the South China and the East China Sea, they would need an amanda of floating platforms. Perhaps, it is time for COSCO and YZJ to look into gaining its toehold into the naval defense industry - building and servicing the vessels.

(Not vested)

[Nick]

I have always viewed YZJ as a potential conglomerate in the making. I don't think it is fair to simply look at its ship-building capabilities when a sizable chunk of its earnings is coming from its financial service division. It is now entering the offshore sector armed with a slew of mini business catered to it ie steel fabrication. It has diversified into the counter-cyclical ship breaking business albeit at lower margins. It ventured into ship financing by providing bareboat charters to vessel owners to boost its orderbooks. And recently, it inked a deal to co-develop water-front land into commercial properties. I am not certain whether it intends to grow a property development arm in the future. Essentially, this is a conglomerate in the making and if it executes its deals properly, it could be a massive player in China. I would say kudos to the Management team for reducing their reliance on a single source of cyclical income. With that being said, this execution is not without risk and potential investors should be mindful.

(Not Vested)

[a74henry]

It seems like YZJ will be taking the path of what Keppel took years ago. If executed well, we could see YZJ hiving off its diversified businesses into various IPOs at a later stage. Certainly, worth putting YZJ on my radar.

(Not vested)

[greengiraffe]

I dunno much about YZJ.

However, from the macro perspective, the core ship building business is comparatively low tech compared to offshore builders. Cosco has once upon a time targeted the offshore sector - nothing to show for really. With costs fast rising for manufacturers, it will be tough to leverage on cost leadership. Moreover the gap between the leader is already huge so trying to catch up will be difficult.

Remember Labroy Marine - Tan Boy Tee must be smiling at his luck to have cashed up to Dubai boys. In fact Dubai situation has been so bad that they didn't even take up KS Energy in the money rights issue recently. Basically, its not about deep pockets but the brains and track record behind it.

Building vessels other than specialised ones requires cost leadership. Of course with 7 year bear and 3 year bull in shipping cycle, YZJ could well be forced into financing business - if they dont finance the clients - can you imagine how much of non-deliveries will there be.

Pardon me for wearing tinted glasses on Chinese companies but there track record is simply here today, gone tomorrow. Unless of course you are backed by Red Army and is a basic essential service like toll roads like CM Pac. Unfortunately even if CM Pac, their timing to sell off a long term non core NZ prop development is also questionable as there is a strong recovery in NZ prop market from my recent reading.

GG

I have always viewed YZJ as a potential conglomerate in the making. I don't think it is fair to simply look at its ship-building capabilities when a sizable chunk of its earnings is coming from its financial service division. It is now entering the offshore sector armed with a slew of mini business catered to it ie steel fabrication. It has diversified into the counter-cyclical ship breaking business albeit at lower margins. It ventured into ship financing by providing bareboat charters to vessel owners to boost its orderbooks. And recently, it inked a deal to co-develop water-front land into commercial properties. I am not certain whether it intends to grow a property development arm in the future. Essentially, this is a conglomerate in the making and if it executes its deals properly, it could be a massive player in China. I would say kudos to the Management team for reducing their reliance on a single source of cyclical income. With that being said, this execution is not without risk and potential investors should be mindful.

(Not Vested)

[specuvestor]

IMHO YZJ track record and Cosco track in the past 8 years had been extremely glaring, despite the similar macro environment. Makes great case study on what is the value of management.

[FatBoi]

YZJ becoming a potential conglomerate in making is new to me, breath of fresh air. I tend to be quite narrow-minded when looking at a business - thanks for broadening my view. Time will tell if that's mgmt's longer term horizon. I am not expecting any news from mgmt disclosing that ambition because it would seem like undermining the current core business and team. So far I am encouraged by the measures that mgmt had taken, they seemed forward looking in anticipating market turns. But I would grade the actions tactical rather than strategic. Again, not able to second guess what are the cards in their hands.

Just received a report from Phillips Securities on Keppel. http://internetfileserver.phillip.com.sg...130410.pdf

Seems that one possible future catalyst for YZJ would be the ability to secure premium jack up/offshore orders which currently remain the playground for Singapore yards. And this is "despite Chinese yards offering lower prices with generous payment terms". Hopefully we can soon see a tipping point whereby big players are willing to take the jump and try out Chinese yards, and of course it's for the C-yards to prove they can compete on quality, not just price.

[CityFarmer]

IMHO YZJ track record and Cosco track in the past 8 years had been extremely glaring, despite the similar macro environment. Makes great case study on what is the value of management.

I assume YZJ's management is the value referred.

To add-on with numbers to support the view.

YZJ: ROE 23% and ROA 11%, GPM 31% and NPM 24%
Cosco: ROE 8% and ROA 1%, GPM 13% and NPM 3%

[Nick]

YZJ becoming a potential conglomerate in making is new to me, breath of fresh air. I tend to be quite narrow-minded when looking at a business - thanks for broadening my view. Time will tell if that's mgmt's longer term horizon. I am not expecting any news from mgmt disclosing that ambition because it would seem like undermining the current core business and team. So far I am encouraged by the measures that mgmt had taken, they seemed forward looking in anticipating market turns. But I would grade the actions tactical rather than strategic. Again, not able to second guess what are the cards in their hands.

Just received a report from Phillips Securities on Keppel. http://internetfileserver.phillip.com.sg...130410.pdf

Seems that one possible future catalyst for YZJ would be the ability to secure premium jack up/offshore orders which currently remain the playground for Singapore yards. And this is "despite Chinese yards offering lower prices with generous payment terms". Hopefully we can soon see a tipping point whereby big players are willing to take the jump and try out Chinese yards, and of course it's for the C-yards to prove they can compete on quality, not just price.

I wish to stress that is just how I view it. I don't think the Management has ever mentioned their aim to be that.

I don't think it is fair to lump YZJ and Cosco together. The track record since 2007 has been pretty different. Just look at how they confronted the macro issues facing the industry and how both diversification efforts fared. In the long run, I don't think we should discount the Chinese yards. Today, YZJ is building 13,100 TEU vessels for Seaspan (the largest shipping 'trust' in the world) - this is something unheard of 5 years ago.

I was initially more apprehensive on their financial investments yielding interest income > 10%. It currently exceeds RMB 10 billion. I guess it has turned out well for them. Any thoughts on this division ?

(Not Vested)

[CityFarmer]

YZJ becoming a potential conglomerate in making is new to me, breath of fresh air. I tend to be quite narrow-minded when looking at a business - thanks for broadening my view. Time will tell if that's mgmt's longer term horizon. I am not expecting any news from mgmt disclosing that ambition because it would seem like undermining the current core business and team. So far I am encouraged by the measures that mgmt had taken, they seemed forward looking in anticipating market turns. But I would grade the actions tactical rather than strategic. Again, not able to second guess what are the cards in their hands.

Just received a report from Phillips Securities on Keppel. http://internetfileserver.phillip.com.sg...130410.pdf

Seems that one possible future catalyst for YZJ would be the ability to secure premium jack up/offshore orders which currently remain the playground for Singapore yards. And this is "despite Chinese yards offering lower prices with generous payment terms". Hopefully we can soon see a tipping point whereby big players are willing to take the jump and try out Chinese yards, and of course it's for the C-yards to prove they can compete on quality, not just price.

I wish to stress that is just how I view it. I don't think the Management has ever mentioned their aim to be that.

I don't think it is fair to lump YZJ and Cosco together. The track record since 2007 has been pretty different. Just look at how they confronted the macro issues facing the industry and how both diversification efforts fared. In the long run, I don't think we should discount the Chinese yards. Today, YZJ is building 13,100 TEU vessels for Seaspan (the largest shipping 'trust' in the world) - this is something unheard of 5 years ago.

I was initially more apprehensive on their financial investments yielding interest income > 10%. It currently exceeds RMB 10 billion. I guess it has turned out well for them. Any thoughts on this division ?

(Not Vested)

The company strategy is highlighted on AR2012's Chairman's Message, it states

"To mitigate the cyclical nature of our core shipbuilding business, it is our long-term strategy to generate about 60% of revenue from construction of marine vessels and the remaining 40% from related activities such as the offshore sector, ship demolition and other nonshipbuilding activities"

The financial investment seems working well and impressive. Total impairment losses is ~2.5% of invested asset (refer to page 123 of segment info). IMO, it should be acceptable which on par with bank's healthy NPL ratio although on high side. Any comment?

The management is prudent with its risk management, and further detail can be found in AR2012.

Quoting statement from Mr Tharman Shanmugaratnam on recent Opening of SEA Asia 2013, a positive sign for YZJ since it is the most profitable shipbuilder in China last year.

"Asian shipowners control about 40% of the world’s fleet across container, bulk carrier and tanker segments. 8 of the world’s 10 largest container ports are located in Asia. And over 90% of the world’s shipbuilding is also taking place in Asia, with Chinese shipyards alone holding about estimated 44% of the current global order book for new ships. Asia’s market share of shipbuilding is likely to increase further in coming years"

(vested)