YZJ - Review

I haven't talked about this company for a while already, so since I've just got it's annual report, I thought that I should take some time to review it and check up on its fundamentals.The share price has fallen by quite almost 25% since I first invested in it last year. I think it has underperformed the STI since I got in, but no matter, what's lost is lost so just look to the future and see if the company is a worthwhile investment at its current price. (The answer sounds pretty obvious since I got in at a higher price, but I would rather be safe and check its fundamentals)

As usual, starting with the profit and loss statement. The profits for the full year have fallen by about 30%, quite a large fall but given the low P/E of the company, still not completely disastrous as an investment. This is due to decreases in gross profit (which in turn is due to larger cost of sales) and other income as well as increases in income tax, administrative and finance costs. The decrease in other income is due to a decrease in interest income on restricted cash (the company has been trying to reduce its amount of restricted cash) while an impairment loss of RMB 369 million had an impact on expenses. The increase in income tax is largely due to the loss of tax credit due to change of income tax rate. At the last share price and exchange rate, the P/E ratio of the company is around 7, which I think is quite good (it's around 10 for the price that I got it at, which is not that bad as well)

Looking at the balance sheet, the company has decreased its development properties and restricted cash while increasing its cash and cash equivalents, which is good since the money is now freed up for use to expand its business (quite good when the shipbuilding market isn't in the best of shape). Borrowings have not increased much overall, but there's been an increase in non-current borrowings and a decrease in current borrowings. The slowdown in the shipbuilding industry can be seen here as well, with an increase in the amount due from customers on construction contracts.

The cash flow of the company seems ok, with more cash freed up due to the reduction of restricted cash while more cash taken up due to more trade receivables and amounts due from customers. I don't think there's anything special to be mentioned here.

For other factors that may affect the company, the US dollar doesn't seem to be strengthening as fast now, which is good considering that the company has most of its non-current borrowings in US dollars (it reported a RMB122 million translation loss on bank borrowings). But then again, the company also mentions a large amount of highly probable transactions in USD (most likely from its order book) as well as a strengthening USD will lead to higher profit before tax for the company. So the net effect on the company would be evened out.

As for the state of the shipbuilding industry, the downturn in the commodities factor has spilled over to affect it as well, with a 39% decrease in new shipbuilding orders year-on-year. But YZJ seems to be able to survive it quite well with an increase in its new orders by 25% year-on-year. While it may have taken on the orders at reduced margins, it is still quite good as its yards will still be utilized and generating profits during a downturn in the industry (showing that it should have some competitive advantage). It also has the cash to acquire the loss-making yards during this downturn and consolidate, so that when the industry improves, it will be larger and more able to take advantage of it.

With this in mind, I think that I'll continue to hold my stake in the company and maybe even increase it. And forgot to mention in the post, there's a 4.5 cent proposed dividend as well, which would give the company a 4.6% dividend yield at current price if approved.

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