Wednesday, October 2, 2013

Yangzijiang- What I think of analysts reports that cite higher target prices

I think its all about getting you to trade to earn commission.

I am not carried away by seemingly upgrades of target prices, I feel that analysts are slapping their own faces.

I saw on a forum an analyst report cut and pasted, it has a sell call, it goes like this: 

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Yangzijiang Shipbuilding: Wary of a False Dawn; Cut to Sell, $1.135 - TP
$0.98
YZJSGD SP | Mkt Cap USD3.5b | ADTV USD13.2m

Ø Cut to contrarian SELL, SOTP-based TP at SGD0.98. We do not see a broad-based recovery for Chinese shipbuilders yet as (1) rise in BDI was led mainly by rate hikes for capesize vessels, (2) container freight rates remain weak, and (3) yard overcapacity issue lingers. We fear that
YZJ’s recent rise in share price may meet with downward pressure when shipping market recovery story disappoints.
Ø We do not see shipbuilding prices picking up significantly yet. While there may be some short-term spike in new orders, we still see margin contraction and EPS decline for YZJ’s core shipbuilding business for FY13-15F as higher margin contracts are depleted from orderbook.
Ø We agree YZJ would be the best proxy to ride a shipbuilding recovery cycle, but we disagree that this is the turn. We think that the recent lift in valuation is fragile as it is not supported by future EPS growth with margin decline still in the cards.

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This is the last straw, and below is my response:

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I generally agree with the big picture assessment that there are dark clouds, and the boom years of fat margins are not here yet. I am also agreeable that next few quarters might disappoint.

But I think we should take a report with a heavy does of salt. Let me explain why.

They have a downgrade target price of $0.98, they would have more credibility had it been a HOLD call all this while with a target of $0.98.

But from a cut from $1.135 when the orders from the next 12 months is already in the orderbook since 2011? How did you get $1.135 at the first place, was it a mistake at the first place? If other facts like increase in price of steel leading to increase in cost will weaken earning going forward in the next 12 months, is a reason cited, then I would say its quality analysis. Hello, how would BDI affect YZJ earnings? It would affect it future order books that will affect earnings from 2015 onwards, and you are cutting your 12 months target based on that?

These analyses of calling sell, and even upgrading "buys" with higher price targets are all a slap in the face of analysts, why is YZJ a $1 call 2 months ago and $1.4 call now? either one is a serious mistake unless you can strongly justify the change. For example,HYPOTHETICAL EXAMPLES ONLY: we expect margins to fall to 15%, but they managed to hold it to 20% and the property devt arm is up and going earlier than expected.(increase target price) Or, CHina is clamping down on shadow banking and wealth management products more agressively than we expect, and we are concerned that there might be some write down on HTM.(Reduce Target price)

BEWARE of all analysts that quote recent orderbook wins as justification to change in 12 months price target. The overriding motive is for you to trade so that they earn commission.

Investing community deserved better analysis by professionals. Below is my thoughts on the "highlights" of the report


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(1) rise in BDI was led mainly by rate hikes for capesize vessels,
True, but panamax is increasing significantly too.



(2) container freight rates remain weak,
True.

and (3) yard overcapacity issue lingers.
Do note that the "overcapacity" accounts for the weaker yards too, if you follow order wins in china, it is highly concentrated on the SSOE shipyards and a few other big yards like rongsheng, another one in zhejiang (can't remember name), it is less than a dozen names. The overcapacity in china is already playing to an end by market forces.

We fear that
YZJ’s recent rise in share price may meet with downward pressure when shipping market recovery story disappoints.
Agree, but whats with you $1.135 target? What makes you shift goalpoles?

Ø We do not see shipbuilding prices picking up significantly yet. While there may be some short-term spike in new orders, we still see margin contraction and EPS decline for YZJ’s core shipbuilding business for FY13-15F as higher margin contracts are depleted from orderbook.
Hello, fat margins orders from 2008 and 2009 are already delivered  please stop copying and pasting from other views.

Ø We agree YZJ would be the best proxy to ride a shipbuilding recovery cycle, but we disagree that this is the turn. We think that the recent lift in valuation is fragile as it is not supported by future EPS growth with margin decline still in the cards.
Agree

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As I always say, stay away from short term price distraction, you are buying for a turnaround, wait for the turnaround, don't care if its a false dawn, unless the false dawn gave you the target price you want.

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