Introduction
YangZiJiang is a shipbuilding enterprise that produces a broad range of commercial vessels such as containerships, bulk carriers and LNG vessels. The group’s shipbuilding bases are located along the Yangtze River. Over the years, the company has made investments into debt instruments in China to produce returns for the company’s accumulated cash hoard. In part due to this, the market capitalization of the shipyard has, in my opinion, been depressed across the years due to both a conglomerate discount and general skepticism on these debt investments.
Source: Yahoo Finance
The share price of the company has hit a high of $1.67 during the year, with it subsequently getting beaten down to the current $1.31. During this period of retracement, the Q3 update confirmed the increase in raw materials cost impacting Q3 gross profits and resulted in a further knock down of share price.
Investment Thesis
So, why the interest in YangZiJiang Shipbuilding (YZJ)? Why now? I believe there is a convergence of factors that’s going to result in a change in the perception of the value YZJ holds.
Prospects of the Shipbuilding business
As in the headlines and covered in the Samudera Shipping Line analysis, the world has seen sustained heightened shipping rates in the past year. This has given major shipping lines the money and the opportunity to refresh their fleet and order record breaking number of vessels.
In YZJ’s latest shipbuilding order update, the company has announced that they have secured a record value for contracts in this year alone.
“In summary, year to date the Group had secured a total of one hundred-eighteen (118) effective shipbuilding contracts with an aggregate value of US$7.21 billion.”
A later announcement also states that “As of 1 November 2021, the Group has secured order wins for 124 vessels worth USD7.41 billion in 2021, the Group’s largest order wins in history, and has an outstanding orderbook of USD8.86 billion for 165 vessels.”
From YZJ’s announcements, its contracts tend to be realised up to a 3-years horizon. Looking back at historical trends, YZJ recorded RMB13.02bn of shipbuilding revenue (circa USD1.87bn) in 2019, and RMB9.97bn of shipbuilding revenue (circa USD1.53bn) in 2020. Suffice to say, the next few years' revenues have been largely locked in and we can expect a record year in 2022. You can already see that starting to happen with RMB3.7bn of revenue recorded in Q3 2021 as per the 3Q business update presentation and press release.
You would see an impact to the gross profit to the segment due to a rise in raw material costs. That is evident in the steel prices in the market in recent months. The good news for YZJ is that the prices of these raw materials are coming down from a Sep/Oct high.
As a proxy, we could look at Steel rebar prices. These has dropped significantly since a fallout in the Chinese property sector. Property developers are reining in constructions and hoarding cash in the face of increasing costs and risks towards obtaining refinancing.
Source: Trading Economics
The impact to Steel prices Is reflected in Stainless Steel prices as well, coming down from a high of about RMB22,000/T in Sep to the current circa RMB17,500/T. Current futures curve suggest a rather steep backwardation to a subdued price of mid RMB15,500/T within the next year.
Source: Shanghai Futures Exchange
Suffice to say, record revenue with recovering gross profit margins. What’s not to like?
Spin off for the Investment Segment
Earlier in the year, the company had announced in their results announcement, a review of the portfolio of debt investments that has been amassed over the years. On 29th November, the company announced that the investment segment will be spun off to create 2 separate listed companies to pursue targeted business strategies. Subsequently on 7th December, the company announced the appointment of professionals to the process. The separately listed company would be distributed in specie to shareholders.
What would the newly listed company look like?
In this portion of the discussion, everything here is purely speculative. I have gone through some publicly available information and came up with what I think is a logical end point for the newly listed company.
The very first step of the spin off would be to channel all the assets under the investment segment into a separate listing. Would that be the end all for it? Would the shareholders be left with basically 2 companies holding the same stuff as it was when it was 1 company? I think not. And here’s why.
On 6th December, the company announced the resignation of Mr Toe Teow Heng as Independent Non-Executive Director. The reason given is due to “his intention to seek a consultation role in the company’s proposed spin-off project and in the building of a new international assets management company, including but not limited to…”. This gives a glimpse into how I think the new company will work.
We have to then look into the links of this individual. Also known as Vincent, the two brothers (I have assumed the relationship from the Bursary description) Danny and Vincent have set up ICH group.
Danny happens to be the founder and CEO of ADDX as well, a fully regulated digital securities exchange in Singapore. The exchange tokenizes private market investments for high networth individuals and accredited investors and brings access to these investments to the public. This interview with the Chief Commercial Officer of ADDX gives more description of what ADDX is about. ADDX has had an impressive stable of investments offerings, including but not limited to managers such as Seatown (Temasek related), Azalea (Temasek related), Mapletree and Quantedge, which really are some of the biggest names in town.
Source: ADDX
Vincent also serves as an investment manager on one of the fund offerings, the Unicorn Opportunity Fund via ICHAM. And what’s ICHAM? ICHAM is a Multi Family Office with asset management capabilities. Vincent Toe is part of the management team in ICHAM
Source: ICHAM
ICHAM has made headlines as well, having received US$200 million from the Chongqing government for Chinese offshore investments, making it the first Singapore company to be allocated funds under China's Qualified Domestic Limited Partnership (QDLP) scheme.
From the above, I would make a bold assumption in what the company is aiming to do with the newly listed company. Firstly, the company is likely to start making fund offerings on both ADDX and traditional exchanges offering exposures to the Chinese market. These are essentially the onshore investments and cash to be redeployed to alternative investments such as private equity, that are sitting in the investment segment. These fund offerings would offer exposure to China. The proceeds from the offerings can then be distributed to shareholders of the new company via dividends. As an end point, the new company would target to be an asset light asset management company, similar to how Blackrock or Vanguard works.
If this comes true, we can expect a gradual realization and distribution of what has been viewed so far as locked in investments the company holds. This solves many tax and regulatory hurdles the company would face by directly selling the investments in China and distributing the proceeds to the Singapore Company’s shareholders. And it also dispels the uncertainties around the risk on debt instruments held on the balance sheet.
The company itself already has in its employment a team of professionals handling the debt portfolio.
Source: 1H Presentation
So, the conversion to an asset management company would require additional steps of adding marketing personnel to the mix, hiring more asset management professionals in other alternative spaces such as private equity and getting the required regulatory approvals which Mr Toe is already very experienced in.
Now for some numbers
The final question lies with, is the company now cheap? At a market traded price of $1.31 at the time of writing, the total market capitalization stands at around SGD5.14bn. Let’s break down how much the parts are worth.
According to the 1H 2021 Financial Statements, the investment segment has net asset value of circa RMB21.38bn. Assuming RMB18bn as the final value of assets to be spun off, this is potentially circa SGD3.87bn of fund offerings that can be sold to investors and in turn returned to YZJ shareholders in the form of dividends. The remaining RMB3.38bn remains as working capital.
Let’s assume that new company is valued on the SGD3.87bn of potential fund offerings alone, and the fund management business is worth $0, which obviously is not right. However, this is just a mental exercise to see how cheap the remaining shipbuilding business is. I am estimating the profit after tax for the Shipbuilding, Trading and Other segments only would come in at about RMB1.65bn for full year using the 3Q update multiplied by two. That would be about SGD267m in profits, giving the residual SGD1.27bn (SGD5.14bn – SGD3.87bn) market cap about 4.76x PE ratio for FY2021. For one of the largest and most successful privatised shipyards in the world, is that cheap? Yes, I would say it is! And with these assumptions, you get an asset management business for free!
Conclusion
I find this YangZiJiang Shipbuilding a compelling buy in the face of recent developments. Even if the spin-off does not materialise, the decision to undertake such a corporate action shows the management’s confidence in their investment segment and the quality of the underlying assets. Adding on icing to the cake, the company has been steadily buying back shares both last year and this year. From 5th November to 3rd December 2021 alone, the company has bought back a total of 22,101,500 shares at an average price of about $1.279 per share. This benefits shareholders since they are buying below book value and definitely below what I would see as fundamental value.
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.