Lower shipping charter rates, coupled with a weak property of Hong Kong are causing an overhang to persist over Uni-Asia Group.

 

Nonetheless, with the share price of the investment firm hovering at a wide discount to its peers, and an even wider gap to its book value, SAC Capital analysts Nicole Lim and Matthias Chan are upbeat that there' s room for the share price to head up.

 

As at June 30, Uni-Asia' s NAV was US$1.89, implying a price to book ratio of just 0.36x, versus a sector average of 0.92x. The 60% discount, in the words of Lim and Chan in their Aug 30 note, is " too wide" considering the " high quality of its real assets recorded at values significantly below those of the market."

 

According to the analysts, charter rates are likely to remain weak in the current 2HFY2023 ending December.

 

This follows a 74% y-o-y drop in 1HFY2023 earnings to US$4.3 million, as average charter rates in the second quarter of 2023 dropped 13% over 1Q to US$10,800 per day.

 

Uni-Asia' s management is guiding for a blended spot rate of US$10,000 to US$15,000 for 2HFY2023 before recovery in the coming FY2024, led by the recovery in external demand.

 

As such, Lim and Chan have cut their FY2023 and FY2024 earnings estimates to US$8.3 million and US$11.3 million.

 

However, the analysts point out that Uni-Asia has the flexiblity to sell some of its ships, and use the proceeds to pare debt.

 

The price in May for a 38-40kDWT new build price stands at US$30 million, almost on par with a 5-year-old 38kDWT price of U$26 million, signaling price resilience despite falling charter rates.

 

" Purchase of second-hand vessels still remain an attractive option," write Lim and Chan.

 

Uni-Asia has taken a series of minority stakes in small commercial developments in Hong Kong as well. However, the city suffering spillover from the broader slowdown in China.

 

" Conservatively, the company does not expect contributions from Hong Kong property projects in 2H23 and 1H24," the analysts say.

 

On the other hand, Uni-Asia sees further expansion in Japan.

 

After its first successful co-purchase of land outside Tokyo, it is considering similar acquisitions with other investors in Furano and Niseko, the analysts note.

 

" We maintain a buy recommendation at revised target price of $1.14, down from $1.20 previously," note Lim and Chan, who have inputted a valuation of 0.45x book, using a smaller discount of 50%.

The boom years that generated record earnings for the bulk shipping industry may have run out of steam. However, Kenji Fukuyado, CEO of Uni- Asia Group, is unfazed and is banking on China&rsquo s reopening to the world will lead to higher demand and an earnings recovery. Uni-Asia charters out are what are known as handysize bulk carriers. A bulk carrier or bulker is a merchant ship specially designed to transport unpackaged bulk cargo such as grains, coal, ore, steel coils and cement, whose demand is a proxy to economic growth and higher consumer demand.

 

&ldquo They have to support their economic growth,&rdquo says Fukuyado, referring to China, &ldquo Our base scenario is that they will further reduce their Covid-19 policies in some way so demand should pick up quickly.&rdquo

 

A Nov 7 Bloomberg report says China&rsquo s exports and imports unexpectedly fell for the first time in more than two years as rising recession risks led overseas consumers to buy less while internal problems such as strict zero-Covid controls and a housing slump flattened domestic demand.

 

China&rsquo s General Administration of Customs also reported exports in dollar terms fell 0.3% in October from a year earlier. This was well below the 4.5% gain projected by economists.

 

Imports into China in October also fell 0.7%, the first drop since August 2020. The decline in imports was widespread, with Chinese purchases from Australia, the US, Japan, South Korea and Taiwan all down. Imports of iron ore in the first 10 months of 2022 were down last year as the continued drop in housing construction dampen demand for steel and other construction materials.

 

Another reason for Fukuyado&rsquo s optimism is that while overall demand for bulk cargo has fallen, the supply of bulk carriers, which constitutes the lion&rsquo s share of the company&rsquo s shipping portfolio, is at a 30- year low.

In its 1HFY2022 ended June press release, Uni-Asia says that higher dry bulk rates did not lead to an exponential increase in construction orders for bulk carriers. One of the main reasons is that shipyards are busy fulfilling construction orders for containerships fuelled by a boom in the container market.

 

Indeed, Uni-Asia&rsquo s earnings are much at the mercy of the volatile bulk shipping industry. In FY2020, the company recorded a loss of US$7.5 million ($10.03 million) but earnings surged to US$18 million the following year.

 

In its most recent 1HFY2022, the company reported record earnings of US$16.5 million, up 134% y-o-y. This came on the back of a 54% y-o-y rise in revenue to $48.9 million.

 

In its earnings report, Uni-Asia noted that the Baltic Handysize Index (BHSI) averaged 1,432 points in 1HFY2022 compared to 1,084 in 1H2021. The average daily charter rate for its 10 consolidated dry bulk carriers was US$19,411 ($26,253) for 1HFY2022 versus US$10,864 in 1HFY2021.

 

However, in its 3QFY2022 business update on Nov 16, Uni-Asia noted that there have been signs of weakening demand. The average daily charter rate for its vessels had risen for seven out of the eight quarters following 2QFY2020&rsquo s figure of US$6,548 to US$20,364 in 2QFY2022. The 3QFY2022 figure came in at US$19,609.

 

Property expected to stay stable

 

Besides owning and chartering out bulk carriers, Uni-Asia also invests in commercial properties in Hong Kong and residential properties in Japan.

 

In Hong Kong, Uni-Asia has been taking small stakes in a series of commercial projects, which are at various stages of development and sale. Fukuyado acknowledges that Hong Kong has been hit heavily by China&rsquo s Covid-19 measures. In 1HFY2022, this segment was US$366,000 in the red, versus earnings of US$50,000 in the same period a year earlier. Revenue in the same period was down 6% y-o-y to US$133,000 as the company did not make any significant investment returns, booking, instead, minimal fee income only.

 

However, Fukuyado is also optimistic that once the restrictions are relaxed and travellers can enter Hong Kong freely, be it from the mainland or overseas, the market will pick up. After all, Hong Kong, a key financial hub of Asia, had bounced back from previous crises, such as the Sars outbreak in 2003 and the 2008-2009 Global Financial Crisis, to reach new heights each time.

 

Its Japan property ventures did better. Uni-Asia&rsquo s business model there is to buy small plots of land and develop each plot into buildings with 10&ndash 30 units of studio or maisonette-type apartments.

 

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This segment has given the company a steady revenue stream, recording a 68% y-o-y gain in revenue in 1HFY2022 to US$12.1 million. Profit in this segment also more than doubled from US$820,000 in 1HFY2021 to US$1.69 million in 1HFY2022.

 

For now, most of these projects are within Tokyo, where there is an active property market. However, Fukuyado is open to expanding further into more areas in Japan, as it has already done so in the southern city of Fukuoka in Japan&rsquo s Kyushu region. &ldquo If it&rsquo s feasible and profitable enough we may expand out more, but we&rsquo ll see,&rdquo he says.

 

Dividends and market movements

 

Uni-Asia has tried to keep investors happy with a relatively generous dividend payout. In 1HFY2022, the company paid out an interim dividend of 6.5 cents, up from the two cents in 1HFY2021 and nearly equal to the seven cents paid out for the whole of FY2021. The 1HFY2022 dividend translates into a payout ratio of nearly 25%.

 

Fukuyado explains that the company was able to be more generous as it had made use of the earnings enjoyed from the shipping boom to pare down debt, strengthen its balance sheet and is enjoying better cash flow. Borrowings for Uni-Asia fell from US$180.7 million in FY2018 to US$83.8 million at the end of FY2021. This figure fell further to just US$73.1 million at the end of 9MFY2022, with Uni Asia saying that funding costs for 9MFY2022 were less than three-quarters of FY2021.

 

However, the dividend paid has not enticed investors to stay put with the stock to wait for more. Year to date, Uni-Asia shares have dropped by almost 35%. As at Dec 6, the company&rsquo s share price stands at 81 cents, valuing the company at $65.24 million. At this level, the company is trading at just 44.5% of its book value of US$1.82 as of June 30.

 

When asked about the lacklustre performance of the share price, Fukuyado says &ldquo some factors are beyond our control. So what we can do as management is to just focus on business, make profits, and generate good cash&rdquo . He also adds that Uni- Asia has been keeping investors and analysts updated about the company&rsquo s developments.

 

Most recently, key executives like executive chairman Michio Tanamoto and executive director Masahiro Iwabuchi purchased 200,000 and 80,000 shares back in August at $1.12, with Iwabuchi purchasing another 50,000 shares on Oct 10 at 87.5 cents.