Is Yangzijiang Shipbuilding Holdings Ltd Undervalued Now?

The aptly-named shipbuilder Yangzijiang Shipbuilding Holdings Ltd (SGX: BS6) announced this morning that it has been awarded new orders for six VLOCs (Very Large Ore Carriers) from ICBC Leasing, one of the largest ship owners in China and a wholly-owned subsidiary of ICBC, China’s largest state-owned bank.

The total value of the orders is US$510 million. According to Yangzijiang Shipbuilding, they are a milestone for the company.

First, the orders can be seen as a vote of confidence in the company by a state-owned ship owner. The six vessels will also be the largest VLOCs that Yangzijiang will be building till date.

A group of Chinese ship owners, including ICBC Leasing, had entered into a contract of affreightment with Brazilian mining giant Vale S.A. to transport iron from Brazil to Japan for up to 27 years. To fulfil the contract, the ship owners had made collective orders for 30 VLOCs; the six VLOCs announced by Yangzijiang belong to that 30.

Second, the US$510 million contract has boosted the company’s order book by nearly 10%. At the end of 31 December 2015, Yangzijiang had an order book size of US$5.4 billion.

Given all the above, there are clearly positive developments seen at Yangzijiang. Yet, at the company’s current share price of S$0.985, it is trading at just 7.0 times trailing earnings according to data from S&P Global Market Intelligence. Does this mean the company could be undervalued right now?

There may be good reasons why the firm’s shares have a low valuation.

Yangzijiang has seen its profit decline by 3.6% annually from RMB2.96 billion in 2010 to RMB2.46 billion in 2015. Meanwhile, its return on equity has also declined steeply from 36.4% to 11.6% over the same period. In addition, the company had made some impairments in 2015 for assets in both in its shipbuilding and investments segments.

In the company’s earnings release for the fourth-quarter of 2015, it also stated that the shipbuilding market “is expected to remain challenging in the foreseeable future, given the low shipping demand, shipping rates and oversupply of vessels.”

Without any clear indication that the worst is over for the shipping market, even with the new orders, the future for Yangzijiang still appears uncertain to me.

Foolish Summary

Although Yangzijiang might be trading at an attractive valuation right now, the uncertainties in its market is an important risk for investors to think about.

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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 writer Stanley Lim doesn't own shares in any company mentioned.