A layman's approach to Yangzijiang (YZJ)

Some weeks ago, after YZJ lost 30% in market capitalization in a single day, more than a few courageous investors figure that it could be an opportunity.

As you can see, it is also the lowest it has been for almost its entire life listed in SGX, saved for the Great Financial Crisis.

Personally, I am not a sophisticated investor, and uses simpler means to determine value.

Market Capitalization of Yangzijiang (as of now, based on 0.915 a share): 3.63B
Share price of YZJ at its lowest during the debacle: 0.755 a share: 2.98B

The easiest way to determine value is to look at its balance sheet. Safe to say, YZJ is a shipbuilding company, so it is not too wrong to use simple balance sheet investing, as opposed to services or software companies.

All figures above in RMB.

The following "discounted" values are used:
Cash: 4108.414
Restricted cash: 17.815
derivative fin. instruments: 2
Fin asset at fair value: 500

Receivables: 2000
Inventories: 1000
Contract Assets: 3000

Total: 10628M RMB

The biggest asset of all, "Debt investment at amortised cost," is 14520.602M. I have no idea how reliable this asset is... only the management will know. I note that there is a similar entry in the non-current assets section that is worth some 4266.881M RMB, but I shall leave it as it is now.

This approach is too conservative but I have always lean towards the cautious side.

All liabilities will not be discounted. As such, the value of 14570M is dervived.

Remember we left this debt instrument asset in the current asset alone. This is where we try to fit assumptions to value:

If Debt Asset is worth…	100%	75%	50%	25%
Debt Asset Value is…	14520.602	10890.4515	7260.301	3630.1505
Adding to adjusted, discounted, current assets of 10628M:	25148.602	21518.4515	17888.301	14258.1505
Liabilities	14570	14570	14570	14570
Net Adjusted Current Asset Value:	10578.602	6948.4515	3138.301	-311.8495
Adjust from RMB to SGD	2071.08	1360.37	614.42	-61.05
If Non-current asset is worth 14.7B RMB (approx. 2B SGD)*	4071.08	3360.37	2614.42	1938.95
…if YZJ is selling at 0.915, market cap is 3.63B	11% discount	7.5% premium#	28% premium	47% premium
…if YZJ is selling at 0.755, market cap is 2.98B	36% discount	12.7% discount	12.3% premium	35% premium

*We are making a huge, huge assumption here. We ascribing a value of 1 dollar for every 1 dollar of non-current asset, which is very generous. Let's not forget that there is about 4B of debt instrument valued in the books, which is about 820M SGD. How reliable is the assets?!

#premium means that we are overpaying, i.e. the value of the company is estimated to be 7.5% lower than the market price.

If YZJ were to be selling at 0.915 a share, and we feel that the debt asset is worth 1-for-1 dollar, then we are ONLY getting a 11% discount from the assumed value of YZJ.

Realistically, it the debt assets is only worth 75% of its stated value, and we were lucky enough to bottom pick at 0.755 a share, we are only getting a 12.7% discount of price to value.

I doubt that is enough margin of safety for the prudent investor. Some of these "investors" were already claiming to be geniuses, and others are fools!

***

Another observation should be noted: Within a space of six months, the debt instruments in the book increased by 29.4% in the current asset section, and 18.7% in the non-current. Should one be concern, given that the management has been less than forth-coming in disclosure (that its founder-director is under investigation), and that the company's main business is after all, shipbuilding?

Or should we all nod our heads in unison, and agree with the market, as it recovered from 0.755$ a share to 0.915$ a share?

The simpler the approach, the better.

July 2019 Portfolio Review

STI (ES3) returns: 3.087-> 3.188 + 0.12 (dividends) = 7.16%
HSI (2800) returns: 25.25->  26.75 + 0.15 (dividends) = 6.53%
S&P (SPY) returns: 254.38 ->  283.82 + 1.43164 (dividends) = 12.14%
Current Portfolio return: 15.74% (bond, stock and funds invested for mum), 22.22% (my stocks only)

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Transactions (between May to July)
1) Small increase in OKP due to outcome of the legal suit.
I did not expect those charged to be let off so lightly. As a shareholder, it is good news, but I do hope that the family members of the deceased are well compensated.

TBH, purchasing OKP isn't a perfectly moral move. When the day comes, a good portion of it will be donated.

2) Selling of Healthway Medical, to move funds to ... (3)
Healthway Medical is a stock that was deem cheap by insiders who are motivated to turn the business around. With the pressure of the minimum trading price fading, it might be a sound move to acquire stock instead of selling.

HM isn't quantitatively cheap as opposed to companies like LHT and ChangShouHua. It did not have a suitable dividend record. Acquiring a huge block of stock is not prudent. Chances are, I would make money if I held on, but the probability is much lower.

Results were out 2 hours ago as I wrote this post-- earnings have fallen off a cliff. It certainly looks bad short term, but afaik, renovations are on-going, and the prospects of this company is anyone's guess.

An industry insider with a qualified insight on the abilities of the management, has a better chance with this stock.

3) Initial purchase and subsequent increase in ChangShouHua due to lowering prices
CSH is just another value stock with much better figures to account for than most of the value genre.
CAGR, since 2008, as follows:

Revenue: 13.89%
Bottom Line: 14.27%
Gross Margin: from 10.69% to 23.27%
No debts
1.8billion of cash, market cap of 1.4billion
Modest dividend of 3-5% since 2012.
Positive free cash flow of 6/10 years

What is the bad news? Probably market saturation, diworsification by expanding into products that might not sell, and a increase in Days Sales Outstanding of 30% since 2008.The DSO numbers are pretty level in the last 5 years, which bring some comfort.

Cash Conversion Cycle is about the 40 day mark.

4) Increase in LHT due to lower prices
The story with LHT runs the same thread as CSH-- cheapness. It is more cyclical than CSH for sure. It has a pretty decent dividend history, shareholder-friendly management and from the words of my pal, no reasons to doubt their honesty. It has a better free cash flow record. 21.4m of cash, miniscule debt and a market cap of 29.8m means you are paying for about 8.4m for about 2.5m free cash flow yearly.

DSO, DSP and DSI looks pretty stagnant, hence fraud is unlikely.


5) Initial position in Stamford Land
Stamford Land's management is boorish. One of its board member, Danny, is a pretty collected individual and has been acquiring shares. The value, or the public opinion of it, in Stamford Land is pretty well publicized.

Management might make an emotional purchase, but board members are less likely to do so. Hop Fung (a company that was introduced by a pal) have board members exercising their stock options at 42 or so cents. If it is cheap for an insider....it should be cheap enough for someone to buy a token amount of stock in a Graham-Schloss manner.

"If you expect this company to pay high dividends, you are in the wrong investment, said Mr Ow." I agree but at a low-interest-rate environment at present, 2% is bearable.

What would SL do with its assets? I don't know, and quite frankly, I expect a long wait as well, since there are no white knights to pressure the board.

Hotel business in Australia is not remarkable at the moment, and that gives the Ow-s much needed justifications to cap its dividends.

6) Initial position in Colex
Colex has a contract that might end next year, but the value in it is obvious.

Another 2% dividend-er like Stamford Land, it has a very strong free cash flow history-- no red ink for the last 10 years. Market cap is now 33.1m, cash is 19.4m, and it is debtless for a decade.

Free cash flow for the first half of this year is 10% lesser but no cause for alarm. If they were to win the Jurong tender this coming quarter, prices should adjust upwards. Capex requirements aren't too alarming, and there is a sizable amount of book value to protect the downside.

7) Slight Redemption of Singapore Saving Bonds
Short term coupon rate has fallen off the cliff from 1.96 to 1.6x-- this tells you what they expect-- longer period of low-interest rate environment. The redemption of bonds is reactionary to the lowering of prices in the stock market.

I do not subscribe to the theory that the market is leading indicator of the economy.
We are over a decade of low interest rates. People are getting tired of dancing, yet the music kept playing. There will be an unforeseeable problem arising in the world, and valuations will adjust accordingly.

It is not my job to forecast where the problem will be. It is just too difficult to guess where and how. One has to be an optimist and buy stocks when things look pretty bad.

It takes a lot of guts to buy a Chipotle Mexican Grill at PE 50 when it was having the viral crisis... and I don't have it. These gutsy folks deserve the profits of a hefty 80 PE revaluation of CMG by the market.

In theory, when the market is depressed as a whole, this is the perfect opportunity to buy growth stocks.

In theory, that is.I just not that gutsy.