Singapore’s Straits Times Index (SGX: ^STI) pulled off an impressive performance last year, providing a total return of 8.4% (inclusive of dividends).
While this may not seem high, remember that growth stocks took a pummelling in 2022 with the S&P 500 Index falling by close to 20% and the bellwether technology stock index NASDAQ Composite Index losing a third of its value.
Yangzijiang Shipbuilding (SGX: BS6), or YZJ, is one of the blue-chip stocks within the index that enjoyed a steep surge in share price in 2022.
The Chinese shipbuilder saw its share price soar by close to 84% last year to S$1.36.
The start of 2023, however, saw YZJ’s share price take a sharp tumble, plunging 13.2% to S$1.18 over three days.
While it has since recovered to S$1.24, the group’s share price is still 8.8% below its 2022 close.
Investors may wonder if there is some news event that caused the decline. Should they be concerned?
An immaterial winding-up application
Last week, YZJ announced that it had received a winding-up application for one of its subsidiaries, Yangzijiang Shipping Pte Ltd, because of a dispute for the sale of an oil tanker.
The claimant is Trinity Seatrading S.A. and is involved in the arbitration outcome of the dispute for an amount of around US$4.8 million.
The group is consulting legal advice and will consider its options relating to this winding up application.
However, investors should note that the amount of US$4.8 million is immaterial compared with the group’s latest results.
For its fiscal 2022’s first half (1H2022), YZJ reported a net profit of RMB 1.36 billion, which translated to around US$203 million.
The amount in dispute thus represents just 2.4% of its 1H2022 net profit.
Furthermore, YZJ’s balance sheet was also backed by cash of RMB 9.04 billion (around US$1.35 billion), providing it with more than sufficient financial resources to tackle the disputed amount.
A healthy business update
Investors should feel reassured by YZJ’s latest fiscal 2022’s third quarter (3Q2022) business update.
The shipbuilder reported an outstanding order book of US$10.3 billion which is at its highest level since the beginning of 2020.
143 vessels are slated to be delivered by 2026, with the majority being containerships and bulk carriers.
The group snagged order wins of US$4.19 billion for the first nine months of 2022 (9M2022), more than doubling its target of US$2 billion for the entire year.
As of 30 September 2022, YZJ’s Shipping segment contained a diversified fleet of 22 bulk carriers, four stainless steel chemical tankers, two containerships, and one multi-purpose vehicle.
For its Shipbuilding segment, the group intends to optimise the capacity and capabilities of its three major yards in China to seek out growth areas by lowering emissions and harnessing production efficiency.
As for its Shipping division, YZJ will tap into its shipbuilding capabilities to build and manage vessels.
It will also possess a ready fleet to meet shipowners’ demands and YZJ will be flexible on fleet size by divesting vessels at desirable valuations if possible.
Maiden contract win for the LNG market
Aside from reporting a record-high order book exceeding US$10 billion, YZJ also announced that it had broken into the lucrative liquified natural gas (LNG) market.
In late October last year, the group secured its first order for two 175,000 cubic metres LNG carriers, placed by a European customer.
These vessels are scheduled to be delivered from 2025 to 2026 and are a significant win for YZJ as global LNG trade is forecast to increase 17% by 2025 from 2021 levels.
The Chinese shipbuilder now has one foot in the LNG door and has the potential to clinch more of such contracts, thereby expanding its order book further.
With the group able to build a wider variety of vessels, its attractiveness as a shipbuilder has also increased and should enable it to secure contracts from a larger group of customers.
Get Smart: Just a short-term blip
The share price fall appears to be a knee-jerk reaction to the words “winding-up petition”, giving investors the (mistaken) impression that the group was in some kind of financial trouble.
However, a closer look revealed that the amount involved was immaterial and that the group’s business is still going strong.
Investors can make use of the short-term share price weakness to accumulate shares if they feel comfortable and confident about YZJ’s prospects.
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Disclaimer: Royston Yang does not own shares in any of the companies mentioned.