Wednesday, January 11, 2017

Random thoughts: Risk-reward profile by considerations and assumptions.

I am sometimes able to draw parallel in the investing world with teaching and learning. This time round, it is the reverse, I draw valuable insights from teaching and learning that can be transferred to investment.

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:

I consider 
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) 

I assume:

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. 
(Highly likely)

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 


  1. Hi SI,
    Thanks for sharing your view about this counter ,,, yah ! Shipping and ship building is a very cyclical sector ,,, e.g., the container shipping has been in down turn for more than 10 years ,,never recover since GFC ,,,due to overcapacity,,, it may take much longer time waiting for " reverting to mean ",,,,as market consolidation (like M&A) take place slowly,,,
    Cheers !

    1. I personally think the reversion is going to happen earlier than later. But well, I could be wrong

      YZJ can survive this year well. Next year will be a pain with order book squeeze

  2. Ships are 20 to 30 years lifespan assets so the recovery may take decades.

    1. IMO,

      China are subsiding ships to scrapped, the years they are scrapped are getting younger.

      There are also many changes in terms of sulfur content in fuel, efficiency etc. so 20-30 years is misleading

  3. Sillyinvestor,

    Find a friend who works with ocean transport.

    Ask whether the re-negotiated annual transport agreement is in whose favour?

    What's good for the customer is bad for the shippers; and vice versa ;)

    I worked in Supply Chain before.

    1. Hi sMol,

      These info can found in companies Ar and presentation with charter rates. But as with all analysis, it is a call u have to make. Just tankers alone, there are spot rate, 1 year 3 year rate for different routes and different products and different ship sizes, and he'll the rates are anything but stable.

      But when u see dragon fetch welll water and coming up. U make a call. That's what I am doing