We have a module on reflection, and suddenly I realize in investing, we made many considerations but seldom do a check on our most fundamental assumptions.
Let's do this:
1) YZJ to be a cyclical play.
2) it to be a alpha company that will gain when turnaround happens.
3) it to be reasonably financially strong, unless u totally discount HTM (low debt)
4) it to be a good dividend payer as I wait. (About 4%)
5) the downcycle to be at bottom although I have no idea how long it will last. (Companies went bust, scrapping on ships increased, rates bottoming out)
1) That the turnaround will come and YZJ will benefit
2) The HTM will not turn sour
3) I am steady enough to av. In when it falls 20%
4) I have the cash to invest further in this counter
5) It will remain profitable even if profits falls.
6) Falling profits will not cause a plunge of share price beyond 30%
Of the 6 assumptions, I realise I might not be able to do point 4) since I am only 40% cash and if I double down on other down beaten counters.
The turnaround might never come, or when it comes does not benefit YZJ operations or shares price.
HTM turning sour.
Fall In profits leading to plunge in price
Thinking through such risk and assumptions thinking, it made me wonder what returns is fair enough to take this risk?
40-50%? I think it's possible. If we take reversion to mean of 5 cents dividend, and a fair yield play of 5% with prospect of dividend growth, $1 is not an demanding valuation with P/B still below 1. Note that when turnaround happens, earning should improve beyond "mean" and the ships valuation will improve too, further depressing P/B to our favor. YZJ payout ratio is historically around 30% although Ren hint strongly it will increase it this year to maintain a decent dividend yield.
In terms of operation capabilities, they have scale up the tech chain successfully so there are plenty of market segment where YZJ can tap on.
Then, how about down side?
It makes me wonder what amount of loss is enough to throw in the towel, and what should trigger that call?
The best scenario is price go down around 20%, I accumulate and it rebound. Possible gain, assume this happens - around $3500
The worst is it went down 20% and I accumulate and it went further down 10% and I cut. Loss will be around $1200
This risk reward profile is good enough for me.
LOL. Sorry I dun do numbers crunching. This is random thoughts series, when u expect