Some perspectives about the giant ship Yangzijiang

And so YZJ expectedly or unexpectedly reported an impressive 2Q18 results and pulled its price out of previous two months' slump. Not a lot higher than my EP of $0.955, but that's life, thanks to beloved Trump. (My reasons of buying was stated in June's update)

With a slightly lightened mood, in oblivion of AEM's plight, I have decided to dig deeper into YZJ in the following perspectives:

1. Top shareholders (based on quarter results PPT):

Obviously these big names like Blackrock, Norges Bank have disregarded the YZJ's S-chip status; even though Vanguard might be forced to buy since YZJ is in STI. I am surprised to see GMO was holding, and so as Value Partners from HK. Out of curiousity, I have tracked their buy/sell time and see how did they fare. (Of course this is just for fun, since we have no idea on their portfolio style, management, etc)

Obviously GMO has practiced buy low sell high, while Value Partners had up their stakes at a false dawn and reduced their exposures at the darkest period in year 2016 before ran away in last year's high.

SEB keep reducing their stakes until last year's high.

Whereas Alliance Bernstein suffered the same fate of Value Partners albeit in a much shorter timeframe.

Blackrock has been a loyal holder, even though they had sold low bought higher, perhaps they had a much better opportunity for that short window.

Overall, most funds have exited during 2017 high, while Norges Bank and Schroders have been reducing their stakes. The only positives is jp government pension fund have recently appeared as a top shareholder, aiming for its dividends most likely.

With so many big funds looking at YZJ as an alpha in the shipbuilding industry, I finally understand why is there so much volatility for this blue chip. As a noob, I thought blue chip should be less volatile; and looking from hindsight, my first entry for YZJ when it announced placement was a real dumb entry.

2. Core item in valuation: Held-to-maturity assets (HTM)

This is the crucial part of YZJ business where people often have doubts. Perhaps knowing this, YZJ has described more in their 2Q18 PPT.

Even analysts are divided on this part on how much they should worth. CIMB has done a nice compilation on their ROE and give it valuation of 1 PB.

While OCBC valued it using 0.6 PB, 0.1 lower than China banks' valuation, citing YZJ's short track record as reason.

The most optimistic valuation, 1.1PB was given by DBS, by using local banks as reference. Even though I like this valuation, but is this reference an appropriate one?

So how should we value this HTM if even analysts are so divided? Let's take a detail look on their HTM. Their main borrowers are from services, manufacturing and infrastructure; which are generally considered less risky; albeit in the form of collaterals, the % of shares is increasing.

And a detailed ROE for the past 10 years, after taking their impairment loss for HTM into account.

It can be seen that YZJ has started their focus in HTM in year 2009, and started to be more systematic in year 2011 where they started to provide allowance for impairment. Two points to be noted:

a) % of allowance has been increasing, perhaps due to their prudence and also to reflect the increasing risk of macro environment  (or perhaps because proportion of shares as collaterals is increasing?)

b) The average ROE for past six years is 9.4%, but ROE has been decreasing since 2015.

So how much valuation should YZJ's HTM be valued at? 0.6PB is definitely too conservative. 0.7PB, same as China's banks? It really depends on the bank's loan sector. China Merchants Bank has large proportion of loans from retail sector and hence it is valued at 1.3PB. With YZJ's HTM borrowers are from less risky sector, I would think 0.8PB to 0.9PB is a safe valuation to use, since there is already 10% allowance provided outside of book value. And this valuation is stationary, neglecting the return it generates.

Hopefully YZJ can secure more orders in the second half. As for the impressive results, actually quarter Y-o-Y or QoQ has no basis for comparison for YZJ, just like property stock, because their earnings are lumpy and largely depends on the ships completed for the quarter. I would rather look at remaining orders, new orders, new order price, steel price, RMB vs USD trend, BDI index, and others to monitor.