Since the spin off completed, the performance of the share price for YangZiJiang Shipbuilding (YZJ SB) and YangZiJiang Financial Holdings (YZJ FH) have diverged so much that I have done what many might be doing the opposite. I have fully divested YZJ SB and used the proceeds to buy YZJ FH shares. I will detail the reasoning below, and we can go through the discussion together on an alternative for how we can look at YZJ FH as an entity and where its value lies.
Before we dive into the discussion, its imperative that the following documents be read through in order to be able to have meaningful insights into the new entity. I understand that the documents are long and wordy, but we can’t get a good read on the company if we don’t put in the hard work.
Let’s take a look at the quality of the balance sheet of the spin off company. YZJ FH is basically debt free and consist of a portfolio of debt investments, financial assets and investments in associated companies.
Source: Page 83/84 of Introductory Document
From the snapshot above, the SGDCNY exchange rate is circa 4.7072 when you convert RMB20bn to SGD4.249bn. However, this snapshot is as of audited statements and is not reflective of the restructuring that took place in Feb and March 2022. The 2 main points to note are that 1) cash has been injected into the Spin Off and 2) what we can assume to be the most problematic debt has been left in YZJ SB due to possible legal issues novating these debt investments to the new entity.
Increase in cash holdings post restructuring
As per indicated below, the cash and cash equivalents has been increased to SGD 656.018mn on a 4.6503 exchange rate basis. Let’s discuss this based on the year end exchange rate in order to be on the same page as the above. That would mean if we backdate to 31 Dec, the SGD equivalent would be circa SGD 648.088mn in cash and cash equivalent.
Source: Page 107 of Introductory Document
Non performing loans and FVTPL left in YZ
If you read through page 77 – 79 of the introductory document, you would have noticed that there are certain assets that are left in YZJ SB and not transferred into the spin off entity in YZJ FH. The reasons for retention of the debt investments are especially important. The reasons include YZJ SB in current litigation proceedings for overdue payment, not transferred due to debt investments being in embroiled in financial difficulties and debtors disagreeing to transfer ownership. In short, these are the most problematic investments that are not spun off with YZJ FH. What is on the balance sheet of YZJ FH are effectively filtered and much higher quality debt investments.
Referencing page 37 of the circular below, it mentions the percentage of debt investments and financial assets that will not be acquired by the Spin off Group.
Armed with the information above, we can adjust the balance sheet figures to arrive at what might look like the balance sheet of the company post restructuring (cash + debt instruments + financial assets only). My illustration adjusts current debt investments and non current financial assets for simplicity sake. The total doesn’t exactly tally but its close enough for discussion purposes.
The crux of the question
There have been various arguments for how the company should be valued and where it is trading at. Some point to Hotung Investment Holdings’ Price/book ratio as an indication of the value of the company. Some point to Chinese banks as a proxy instead. My personal opinion is that this should simply be viewed as a sum of parts that is made up of 1) private equity investments like Hotung Investment Holdings and 2) a fixed income fund that is traded on the market. That’s basically what makes up the company. This should not be regarded as a bank simply because it is not as complicated as a bank is with the occasional need to swallow distressed assets from other banks especially if it is an SOE. Through the restructuring exercise, what has been spun off is really the highest quality debt investments from the original portfolio.
For the first part, Hotung is trading at 0.73 Price/book ratio.
Source: Yahoo Singapore
For the second part, we can reference the exchange traded KKR Income Opportunities Fund. As per screenshot, the fund is trading at 8.73% discount as of 31 Mar 2022 relative to book value. You can find more information from the website itself. The credit quality making up the portfolio is also shown in the screenshot below.
Source: kkrfunds.com
For simplicity and to be on the conservative side, we can consider for cash, debt investments and financial assets only, valuing them at 1.0x, 0.9x and 0.7x of book value respectively. This arrives at an estimated $0.918 per share value, that from the above analysis should theoretically be the minimum value the shares should be trading at.
This value does not account for
The ability of the company to do share buybacks
The current climate in China that makes it a very good opportunity for the company to recycle cash from the maturing debt investments into mezzanine debt and private equity. At these depressed levels, new investments made would likely require very high returns and the companies are willing to pay to get access to capital
Future wealth and fund management business
Quality of the investment team as evidenced in the circular
As of 23 May 2022, YZJ FH closed at $0.435, market capitalization of S$1.72bn. In my opinion, this is a unique situation that gives rise to a very depressed and abnormal pricing of the Spin off. My conjecture is, by listing via introduction, a large number of investors are suddenly rushing for the same small exit because their interest lies with owning the shipbuilding business and not the financial side of the business. That stands for 52.5% (Public Shareholders) of the outstanding shares. Just 1 in 5 public shareholders having that thought would result in many seeking an exit through the same small door, what results is a capitulation of sorts that is evident since the spin off.
There are still other metrics to look at to decide whether YZJ FH is cheap, but we would not go into those for this discussion. That’s probably for another day. Suffice to say, the current PE ratio is in the mid-single digits, and depending on payout ratio, holding the shares itself should give a pretty decent yield while waiting for the business to develop.
Finally, a development that just happened while writing this. The company has sent out a circular seeking to adopt a Share Buy Back mandate up to 10% of outstanding shares. This is great news and possible the best bang for buck for usage of the cash on hand. Hopefully they don’t go the route of an Equal Access Offer that has been quite common recently. Its really a straightforward decision. As of 31 Dec 2021, book value is circa S$1.075 per share. P/B ratio at S$0.435 is 0.404, which means every $0.40 spent is getting $1 in value on a share buy back.
In conclusion, I would hold both YZJ SB and YZJ FH if there are infinite resources available. However, to limit concentration in exposure to related management, I have switched out from YZJ SB to be invested in YZJ FH only, which in my opinion looks to be at a very attractive level at the current pricing. There are are probably a multitude of opinions on how this company should be valued. It would be great to hear your thoughts in the comments below.
Disclaimer: All posts on The Squirrel's Drey are for informational and discussion purposes only. This is not a recommendation to buy or sell securities discussed. Please do your own due diligence before investing.