Yangzijiang Financial: a free mystery box

We’re going back for some classic deep value in this month's article with Singaporean financial company Yangzijiang financial ($YF8.SG). A recent spinoff with some Chinese real estate exposure and management turnover, that’s trading at an incredibly cheap valuation and returning capital. The intrinsic value is opaque, but it’s an extremely interesting situation with an attractive risk/reward profile.

Business Background

Yangzijiang Financial was the financial arm of Chinese shipbuilder Yangzijiang Shipbuilding spun off in early 2022 in an attempt to create value for shareholders. At the time, the company was mainly made up of debt investments based in China. In the 2 years since the spinoff, China exposure has gone from 100% to 73% with a long term target of 50%, with now almost half the fund being in cash enhancement products and equities. The company is 24% held by the Chairman Ren Yuan Lin with another 5% held by his son. Ren began his career at his local factory as an apprentice straight out of high school, moving up the ranks until eventually moving to shipyard director where he took the shipyards revenue from 100m RMB to 1.5b RMB in the decade following the Asian financial crisis. By 2019 the company was doing 23b Yuan in revenue and Ren stepped down amid a corruption investigation (that he was later cleared for), however he did not resume control due to his son’s strong performance as CEO. The 17 year total return CAGR since listing for Yangzijiang shipbuilding is 6.4% which is solid considering the company is based in China and IPO’d a year prior to the global financial crisis.YZ Financial seems to be somewhat of a passion project for Ren, and he is obviously well incentivised to perform well with a significant position in the company contrasted by a low salary.

While there is nothing impressive about the company itself, what’s interesting is the valuation. In the 3rd quarter the company had $3.84b net assets which at a current market cap of $1.1b leaves a price to book of 3.5x. Now a large proportion (50%) of their assets are in Chinese debt that likely has significant exposure to scary Chinese real estate and financials so this book value is significantly impaired, however looking at their safer assets it becomes apparent the opportunity is still very interesting. The company has 18% of their assets in around 5% yielding Singaporean based cash products equating to around $780m which is $580m of safe asset backing (after liabilities) or around 50% of the market cap. Another $140m is in the maritime fund which is likely worth more (let's say 15% for estimating purpose) following the events in shipping over the last quarter. Another $150.5m is in fund of fund investments and private equity which naturally I don’t especially trust the marks of.

Going into the Chinese assets they have $469m in cash management products that should be safe in all but extreme circumstances and will likely be cycled out into non-Chinese products over the next quarters as they increase their non-Chinese exposure. Add on $470m of equities with a third of that being listed. The listed assets have probably fallen significantly in the quarter since as the Chinese market has sold off hard while again I don’t trust the private values.  Finally we’ve got the huge debt holdings. The company holds $2.1b of Chinese debt with 41% of that being considered “non-performing” and another 8% being considered “under-performing”. The company has written off $230m of loans in the past 3 years, with $124m being written off in FY22 however the company has actually managed to make net recoveries in 2023 demonstrating the groups “conservative policy” for impairing loans. While the group isn’t transparent on what these loans are made up of they do state that they have exposure to the terrifying Chinese real estate market so I think it’s fair to assume that these loans are significantly impaired.

Doing a rough back of the envelope valuation without including the debt we get $1.2b of safe assets (cash products and maritime fund). While there are a lot of hairy assets, we are essentially getting these assets as a free option on top of a safe, risk free ≈ 5% yield. The main remaining question is the value of the remaining portfolio. For numbers sake if we assume the non-China assets are valued at 75% of book, the Chinese equities are 50% and the debt is a conservative 20% we get a total book value of $1.97b or an 80% premium. While these numbers have been plucked out of space, it demonstrates the attractive risk reward profile of the company, with a hard capped downside and significant upside for those willing to stomach the uncertainty.

Many emerging market regulars will currently be screaming at their monitors about realising value in cash equivalent heavy holdcos and it’s true that the area has a deserved reputation for trapping and destroying shareholder value. There are countless Chinese and Singaporean net nets that I could point to as examples, however I think this is different. YZ first popped up on my radar because I was looking at daily buyback numbers for the Singaporean exchange. For many days in a row, YZ had been close to 100% of the daily volume in its own shares, with management repurchasing essentially any shares they could get their hands on. In fact, the company has bought back $129m of shares since listing or around 9% of shares outstanding, likely limited only by volume. To top it off the company paid out a 1.8c dividend last year or a 6% trailing yield on current price taking them to around a 16% trailing total shareholder return. Whether the market values them accurately doesn’t really matter and honestly I would prefer the market continue to undervalue them so management can continue to buy back shares on the cheap. I estimate their underlying, trailing 6 month earnings to be around $100m, which would equate to $200m annualised or a 5.5 P/E ratio. While they are probably overearning, this earnings value doesn’t even include the earnings of their fund and private equity assets, being just cash returns.

One more quick thing to add. Often when I look at funds trading at discounts a key reason is because of exorbitant management fees eating into returns. In this case, non investment related expenses are only around $8m or around .5% which I’m pretty comfortable with.

An important question I ask in all of my stock ideas is why does this opportunity exist? The first and most obvious reason is the huge China exposure, especially through the debt. In the Evergrande liquidation the bonds are reportedly getting 1 cent on the dollar, which would hypothetically wipe $2b of value from the book. We don’t know how much of the Chinese debt is exposed to real estate or even exposed to companies exposed to real estate so there’s no way to accurately discount the Chinese debt. It’s a mystery box. Additionally, all Chinese assets are currently trading at huge discounts, so the remaining Chinese assets should still command a large discount based on counterparty and geopolitical risk. I believe this risk is mitigated in a few ways. Firstly, the large base of non-China assets provides downside protection against the China risk, meaning we’re essentially capturing the upside without much of the downside. More importantly, the company is actively transitioning into having half their assets in non-Chinese assets, which would be $1.9b at current book value. Whatever the true value of the Chinese assets, the non-Chinese asset base will only increase from here as they continue this transition. As these non-Chinese assets increase I suspect we will see investors increase the stock with it as hey see more certainty around the true intrinsic value.

Another key risk here is management. In October the company sold off 20% on the announcement that their CEO and Singapore CIO had resigned, to be taken over by Chairman and founder Ren Yuanlin. Additionally, the company removed the China and Singapore CIO roles, instead putting all investment decisions under the purview of the CEO. A cynical view would take this as a power grab by Mr Yuanlin, who now despite not being a majority shareholder controls a huge voting block of shares, along with being Chairman and CEO. While he is incentivised to perform due to his 20% holding, investors would be relying on his competence to create shareholder value. At this valuation, with his track record at Yangzijiang shipping and with a history of buybacks I think that’s a bet I’m willing to take.

While these risks are tangible and significant, I don’t believe they justify the full valuation discount. Another factor that contributes to the discount is that this company is a recent spinoff, and a spinoff in a completely different sector. It is well documented that spin offs can be a fantastic source of alpha as they are a large trigger for both forced and unforced selling. Additionally, the stock is listed in Singapore which is significantly less liquid than other major exchanges, which exacerbates the effect of the forced selling. Singapore also has a reputation for being a hellscape of asset heavy value traps, plagued by poor governance and poor asset allocation which leads to the whole exchange trading at cheap valuations.

Overall I find this setup quite attractive. I struggle to see significant downside with significant capital returns and a solid backing of “safe” assets and it exhibits the traits of a classic heads you win big, tails you don’t lose setup. The next few years should see significantly more clarity around the intrinsic value of the portfolio as they convert the proceeds of their Chinese assets into less risky non-Chinese assets along with capital returns for shareholders. I have currently made Yangzijiang financial around a 9% position and may even add to it based on the upcoming results announcement.