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Yangzijiang Holdings (SGX:BS6)
9 March 2019 initiation price: S$1.39 (18-month target)
8 August 2019 price: S$1.04 (intra-day low of S$0.93)
Price target based on fundamentals: S$0.50 (maintained)
Reference links:
1. Initiation post https://thebearprowl.wixsite.com/website/single-post/2019/03/09/Shipbuilder-with-massive-exposure-to-China-lending-and-FX-Risk
2. Feature and commentary on The Business Times https://www.businesstimes.com.sg/companies-markets/yangzijiang-hits-rough-waters-amid-beijings-probe-into-individual-linked-to-firm?xtor=CS3-25
3. Relevant articles by other media https://www.tradewindsnews.com/tag/Yangzijiang_Shipbuilding
We have all seen the latest news regarding allegations of a disciplinary and corruption probe on YZJ’s chairman and also the mayor from the CCP, in this post we want to provide you with our views on what has now fundamentally changed for YZJ, regardless of whether the allegations are legitimate.
People are now focused on the political aspect and expecting the worst outcome. There is no doubt that this is the main focus now, however there are also implications for the business as a whole, should they be able to carry on operations.
These are our additional insights to supplement our initiation post.
1. Impact of allegations
With the alleged probe on the Chairman and the Patron, the foundation on which business relationships and deals are negotiated will now be weaker. There is now a fundamental shift in the strength and position of which YZJ negotiates all business transaction.
There could be fewer shipbuilding order wins, lower shipbuilding margins from wins, lesser origination of investment and lower net interest income for such origination.
On top of contract origination being affected, all other business transactions will face higher levels of scrutiny and push back. This includes transactions ranging from a simple short-term loan to entering into joint ventures and acquisitions
2. Possible acceleration in decline of asset quality
We expect quality of trade receivables and investment book to decline, due to delays in collection, leading to higher levels of impairment. In China, it is common to delay payment where the customer knows they have the ability to do so, there may be customers who may even choose to default as they do not fear any repercussions due to the Chairman and Patron allegedly being investigated and missing.
The investment book was effectively valued at 1.0x P/B by the market and most fund houses. We note that the Big 4 Chinese banks are currently trading at 0.4-0.5x P/B on HSI due to negative views about the quality of their loan book.
YZJ’s investment book is of a much higher risk profile, hence it makes more sense for YZJ’s investment book to be valued between 0.3-0.5x P/B, below the Big4 Chinese bank’s valuations. The lower valuation will imply a higher risk premium for investors.
3. Impact of weakening RMB
A weakening RMB impacts the Singapore listing valuation. The NAV is currently RMB7.52. the SGD/RMB used to be at 5, which implies a SGD book value of S$1.5.
The onshore USD/RMB is currently 7.05. Market watchers are expecting the USD/RMB to weaken from a previous low of 6.88 to 7.5.
In this case, we expect SGD/RMB to get to appreciate to around 5.45, translating to a SGD book value of S$1.38, which is approximately 8% lower than before.
4. Conclusion
We maintain our short position and price target as the fundamentals of the business gradually shifts due to the weakening global macroeconomic conditions and the possible materialisation of idiosyncratic risks surrounding the business.
Any content should not be relied upon as advice or construed as providing recommendations of any kind.