In the general blood-bath of the market in the last few days, Yangzijiang was one of the worst hit victims. Share price totally plummeted near its 52-week low of $0.78, on the threat of higher steel prices as Australian iron ore becomes more expensive.
Despite YZJ weakness to steel and labour costs, its main drawback as a stock is its massive 3.2 billion units of shares outstanding. I’ve bought the stock on its excellent ratios – Operating Margin 25.7%, Debt to Equity 0.7%, P/E 13, Quick Ratio 1.23. But my error was not checking the amount of shares it had issued.
DCF Analysis on WACC 11% and forecasted growth of 35% averaged over 5 years (based on Order Book) only gave me an intrinsic price of $0.23. Its second drawback was CAPEX expenditure, sucking 61% of Operating Profit in 2007, which effectively limited its Free Cash Flow generation.
Just to illustrate how shares outstanding can drastically affect intrinsic price – YZJ needs to buy back 2 billion units of shares for the intrinsic price to hit the current price of $0.79, at current earnings.
Potential opportunities that YZJ can exploit at this moment is to renegotiate its pricing terms and continue its aggressive buybacks at a bargain. Will be monitoring YZJ’s reactions to this selldown.