Yangzijiang on track for record profits in 2011

On track for record profits this year
YZJ mgmt. announced that it is “confident to deliver not less than 30% growth in net profit attributable to equity holders of the Group in the upcoming 9 months results announcement.” In 9M2010 YZJ earned CNY2.12b, which would set their minimum 9M2011 profits at CNY2.76b. Considering that they earned CNY2.96b last year, YZJ is definitely on track to make record profits this year.

For the full year, our estimates are actually slightly rosier than a 30% increase. We forecast PATMI growth of 35% full-year for a record profit of CNY4b, equivalent to about S$0.207 per share (depending on year-end SGDCNY rate. We are using today’s 5.0418.)

No change to our risk assessment on financial assets In today’s announcement, YZJ contrasted the value of its microfinance assets with its market cap (<2%) and NTA (<3%). In previous communications we had chosen the bottom line as a reference point—CNY248m vs this year’s PATMI of CNY4b, or merely a 6% onetime risk to profits. The market selldown of over 20% was a clear overreaction which led to our call to average down.

Furthermore, these microfinance companies are “profitable and operations remain healthy”. Even so, YZJ has already made provisions against unforeseeable losses, which further reduces the probability of any negative bottom-line impact.

Likewise, we continue to view positively the held-to-maturity assets on YZJ’s books. We highlight again that even defaults do not immediately mean losses, unlike for a regular bank since these loans are heavily collateralized with Collateral/ Loan Value coverage ratios of more than 2x.

We calculated that using conservative assumptions the Shanghai Composite Index would have to fall to 1,300 points before YZJ began booking losses. Considering that in the GFC the index fell to “merely” 1,700, we see very low loss probabilities. YZJ mgmt. also stated that there have been no defaults since 2008, in other words, these HTM assets went through the GFC completely unscathed.

In the meantime, the HTM assets are generating healthy profits and contributing between 9-15% of the dividend, which this year we expect at 6.2 cents.

No change to estimates and valuations
Indeed, today’s announcement contained very little news beyond the assurance of at least 30% PATMI growth. It was, however, necessary since the media has had a field day at YZJ’s expense given the recent Wenzhou incident. Our earnings estimates are unchanged (we see record profits of CNY4b maintained for the next 3 years), and with YZJ’s consistent 30% payout dividend policy, we see DPS at 6.0-6.5c over the next 3 years, translating into a very decent 6.5% yield.

Our valuation metric is unchanged at 8x P/E, taking into account the weak shipping market in general, giving a fair value of $1.60. As we have stated before, we can easily see YZJ doubling in the medium-term of 3 years when global economies and the shipping markets recover.

Combined with the annual dividends, a doubling in the share price from today allows for a compounded return of 31% annually.