BEIJING, Dec 2 — Yangzijiang Shipbuilding (Holdings) Ltd maintains it is well-positioned to lead the shipbuilding industry in China, even as the China Association of The National Shipbuilding Industry (CANSI) warns new ship prices will remain subdued.
The Chinese shipbuilder also mentions its entry into the Chinese government’s White List of shipyards published in September this year, where those making the list have dominant market positions and account for 72 per cent, or a total of 7.9 million compensated gross tonnage of total vessel deliveries in China year-to-date.
Marine Log published the names of the 51 shipyards on the White List in a September 5, 2014 article.
Jiangsu New Yangzi Shipbuilding Co, Ltd, one of Yangzijiang’s six shipyard companies located along the Yangtze River, was second on the White List.
It is not immediately clear or verifiable if there is tangible advantage from being in this position on the list.
Reuters added further context to the White List announcement in an article where it stated that an industry official indicates the intention for publishing two more lists, without giving a timeframe.
China is working on turning around its shipbuilding industry this year after underperformance in the past when overcapacity became a problem.
Yangzijiang also maintains it is still en route to returning to its core business of shipbuilding by reducing existing non-shipbuilding businesses.
Analysts were unanimously bullish on the stock as the third quarter performance exceeded their expectations.
They were approving of the company’s strong financials, including high returns from investment assets, the Chinese government’s inclusion into its White List of shipbuilding companies, and the strong order total of US$4.6 billion (RM15.82 billion).
The company just announced earnings for Q3FY14:
Revenue: +2 per cent to CNY3.74 billion (RM2.09 billion)
Profit: -1 per cent to CNY811.2 million
Cash flow from operations: CNY1.98 billion vs (CNY1.54 billion)
Dividend: Nil
Order book: US$4.6 billion
Revenue increased by 2 per cent led by the company’s shipbuilding and related operations, of which shipbuilding alone comprised 93 per cent of the total CNY3.74 billion.
A total of eight vessels were delivered on schedule, the same number as in the corresponding period.
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1. Can it lead in the government White List of shipyards?
On the White List of shipyards are competitors including the heavily indebted China Rongsheng Heavy Industries Group Holdings Ltd, China’s largest private shipbuilder.
The government has intervened in the case of China Rongsheng, which is expected to complete its Jiangsu shipyard restructuring in June 2015.
Notwithstanding competition from the other shipyards on the White List, this lull time for China Rongsheng could give Yangzijiang’s New Yangzi Shipbuilding Co, Ltd shipyard an edge until June.
But is this enough to turn the tables significantly as Yangzijiang already has US$4.6 billion in orders to fill?
Could it still be shoring up new orders from companies on China Rongsheng’s client list?
And what are the advantages Yangzijiang currently has over the other 49 shipyards on the White List?
2. What about its five other shipyards not on the White List?
Yangzijiang’s other shipyard companies also on the Yangtze River but not among the 51 on the White List are:
- Jiangsu Yangzi Xinfu Shipbuilding Co, Ltd;
- Jiangsu Yangzijiang Shipbuilding Co, Ltd;
- Jiangsu Huayuan Metal Processing Co, Ltd;
- Jiangsu Yangzijiang Offshore Engineering Co, Ltd;
- Jiangsu Yangzi Changbo Shipbuilding Co, Ltd
Why did they not make it onto the White List?
3. Why were there no new orders during Q3FY14?
4. What caused the loss on the disposal of Taizhou Hengjian Real Estate?
Yangzijiang sold three Chinese property companies in October this year as part of its strategy to return to its core business of shipbuilding.
All of them made losses.
One of these companies is Taizhou Hengjian Real Estate in which Yangzijiang had a 55per centstake acquired in February this year.
The announcement on February 27, 2014 (refer Item 1.4.3) does not state anything further than the 55 per cent equity interest and the CNY100 million paid for it.
Scant, even non-existent details can be gleamed from an Internet search on the company.
It is just seven months between the acquisition in February and its disposal in October.
In the Q3FY14 results (refer page 13 under Statements of financial position review), it is mentioned that “land under development decreased to zero from RMB242 million as at 30 June 2014” upon disposing Taizhou Hengjian Real Estate.
Can Management provide more details about this land being developed by Taizhou Hengjian Real Estate?
What were the factors leading to the real estate developer and manager’s losses on the land?
5. Why did interest costs rise when debt has been reduced?
Interest on borrowings increased 30 per cent even though Current Liabilities, Borrowings reduced from CNY12.24 billion to CNY9.49 billion.
So how did the rise in interest costs come about?
6. What happened to the remaining proceeds of CNY210 million from asset sales?
Yangzijiang announced on July 15, the disposal of two companies: Wujiang Jinke Yangzi Real Estate Development Co, Ltd and Jiangsu Leyuan Innovation International Trading Co, Ltd.
Wujiang Jinke was sold for CNY200 million and Jiangsu Leyuan was sold for CNY10 million, making a total of CNY210 million received.
We couldn’t find this amount in the Q3FY14 financials.
Can Management explain when this cash will be received?
7. What was the source of dividend income for Q3FY14?
Yangzijiang mentions under Other Gains — Net that it received CNY16 million in dividend income for Q3FY14 (refer page 12 of the Q3FY14 results).
Which companies paid dividends?
8. Why was subsidy income lower in Q3FY14?
Also on page 12, Yangzijiang mentions a lower subsidy income of CNY16 million.
Can Management tell us why that happened?
9. What level of gearing is it targeting?
10. When is a verdict on the dispute between Ren Yuanlin and Tianjin Guoheng Railway Holding expected?
Yangzijiang’s CEO Ren Yuanlin was in a dispute with Tianjin Guoheng Railway Holding earlier this year in May where he, as a controlling shareholder through his investment company Taixing City Liyuan Investment, was accused of “various misdeeds”.
Ren assured this development would not impact Yangzijiang itself and that he was exploring all remedies available to him.
OCBC Investment Research reported Yangzijiang’s share price slid 10.6 per cent upon the announcement, then climbed 3 per cent in recovery after Ren dismissed the allegations.
Can Ren advise the latest developments in this claim?
According to a 4 June 2014, BT Invest article, Ren has said he remains undeterred from pursuing Liyuan’s lawful interest in Tianjin Guoheng.
11. How soon will it shut its micro financing business, if ever?
The Micro Finance Business segment clocked a profit margin of 97 per cent in this third quarter (refer page 11 of Q3FY14 results).
The revenue generated was CNY25.4 million, small in comparison to the CNY3.74 billion total revenue of the company.
OCBC Investment Research reports in September that Yangzijiang still faces risks from its financing business.
OCBC says it understands that “a significant portion” of the company’s held to maturity assets are entrusted loans.
As at Q2FY14, held to maturity assets comprise real estate companies (38 per cent), manufacturers (30 per cent) and others (25 per cent).
OCBC values the held to maturity assets at 0.55x book compared to Chinese banks at 0.74x book because Yangzijiang has a short track record in the financing business and probably has a less developed system of credit control compared to the Chinese banks.
It is also difficult to determine how deep and expansive an understanding Yangzijiang has of its borrowers and their industries.
Still, Yangzijiang is one of many micro financiers in China.
Where it has started to reduce loans, we cannot help wondering if Management intends to keep this business.
China began cracking down on shadow banking in January this year as Business Insider reports.
Still, China’s banks have slowed their lending in October this year following the authorities’ control on credit growth and this once again lends to a vacuum for loans.
Can Management advise a timetable to exit?
12. What companies or individuals comprise the Others slice in the held to maturity assets?
OCBC Investment Research mentions 25 per cent of Yangzijiang’s held to maturity assets portfolio comprise companies (or individuals) in other categories.
Are these companies only or are there individuals as well?
What businesses are they in?
13. How much of the real estate and manufacturing business does it know to make its loans confidently?
It could be said that the proof is in the pudding when Yangzijiang announced the sale of its real estate businesses.
But this could be far from true as businesses always bear risks.
So when OCBC Investment Research revealed the composition of Yangzijiang’s held to maturity investments, we wonder about the risk exposure because real estate companies and manufacturers were the largest customers taking loans from Yangzijiang.
Plus, that Yangzijiang has a short track record as a financier.
What plans does it have to capture returns for certain, in a reasonable window of time?
A March 2014 report by Next Insight reveals Yangzijiang has a loan book of CNY14.1 billion.
14. When is it stepping up its trading business?
In the 2013 annual report (page 8), the Chairman’s statement said there are plans to “seize opportunities to expand our trading gains through interest rate carry trade, currency exchange rate carry trade and economies of large scale trading”.
Yangzijiang has since incorporated two trading subsidiaries in Singapore.
It cited its free and low-cost access to steel and scrap metal to capitalise its trading edge in this respect.
We have invited the company to an on-camera interview, and/or to reply to our questions in writing.
At the time of publication we have not received a reply (which is why you are seeing this message).
We will update this report if we do.
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