The Motley Fool

Is Yangzijiang Shipbuilding Holdings Ltd A Bargain Now?

Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) is one of the largest China-based companies listed in Singapore. In fact, its size is sufficient enough to earn it a spot in the reserve list of the Straits Times Index (SGX: ^STI). The reserve list consists of companies which are next in line to enter the 30-strong Straits Times Index should any of the existing constituents get kicked out for whatever reason.

Even though the shipbuilding industry has been weak for many years, Yangzijiang was able to end 2014 on a strong note. The company entered into a total of 41 shipbuilding contracts during the year with its contract wins totaling some US$1.8 billion. In the fourth quarter of 2014 alone, Yangzijiang managed to secure 13 new contracts worth US$388 million with additional options totalling US$122 million. According to Yangzijiang’s management, the company’s current book order will be keeping its yard busy for the next two years.

Yangzijiang has been experiencing a decline in both its top- and bottom-lines over the past three years. From 2011 to 2013, the shipbuilder has seen its revenue fall from RMB15.7 billion to RMB14.3 billion (around US$2.4 billion); meanwhile, net profit slipped from RMB3.98 billion to RMB3.1 billion.

These have led to a very low valuation for the company – at its current price of S$1.23, it is valued with price/earnings (PE) and price/book (PB) ratios of only 6.4 and 1.2 currently. For some perspective, the SPDR STI ETF (SGX: ES3), an exchange-traded fund which tracks the Straits Times Index, carries PE and PB ratios of 13.5 and 1.3 at the moment.

Although it’s never healthy for a firm to experience sustained dips in sales and profits, the flip-side is that Yangzijiang has been able to remain profitable throughout a period when the shipbuilding industry was facing great difficulties.

Yangzijiang also has some strong financials – its net profit margin has been more than 20% in the past five years and it has also been consistently earning a respectable return on equity of more than 15% throughout the same period. Yes – the firm’s balance sheet has seen its leverage pile up over the past five years (the total debt to equity ratio has increased from 14.4% to the current level of 53.1%). But, Yangzijiang’s interest coverage ratio (a measure of how easily a company can service its borrowings) still stands at a comfortable 12 times. So, it is likely safe to assume that the company is still far from facing a debt crisis.

Foolish Summary

The shipbuilding industry has been plagued with weak demand ever since the global financial crisis happened. In the meantime, Yangzijiang has done reasonably well to withstand the pressures coming from weaknesses in its industry. But, without a clear industry-wide recovery in shipbuilding activity, there is nothing much the company can do to significantly boost its revenue or earnings for the time being.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Stanley Lim does not own any companies mentioned above.