Yangzijiang Shipbuilding (SGX:BS6) has announced that it is exploring the possibility of spinning off its investment segment, with the intention of separating its core shipyard business segment from its investment segment.
With the shipyard segment securing the largest order in history for 124 vessels worth US$7.41 billion in 2021 and carrying a sizeable order book of US$8.86 billion for 165 vessels, Yangzijiang is taking the opportunity to consider its options to unlock value and restructure its organisation for future growth.
The objective is to create a leading Asia Investment Manager with funds and asset management capabilities. This will allow Yangzijiang to build a more efficient capital allocation structure by focusing its capital appropriately.
The transaction is proposed to be carried out in two parts. First, it will transfer the existing investments to a newly incorporated entity with the appropriate structure that would allow it to carry out its objectives. Second, it intends to list this entity on a suitable stock exchange.
The principal activities that this entity will carry out will also expand from its existing scope of micro-financing and debt investments in China to a much broader one, which would include growth-oriented investments. This would allow it to expand its footprint and grow its fee-income business, hence diversifying from the current geographic region of China that it currently operates in.
What does it mean for shareholders?
Transaction timeline
It is important for shareholders to note that the proposed spinoff and listing is at a preliminary stage and that the company has not formally consulted SGX or determined which exchange it would carry out this second listing on. While they have indicated a target completion timeline of 6 to 12 months, the entire transaction is dependent on various factors such as securing the required regulatory passes, compliance with existing rules and regulations, and most importantly, the prevailing market conditions.
Dividends
The next question on everyone’s minds is the possibility of higher recurring ordinary dividends or the declaration of a special dividend.
Generally, companies have taken the approach of matching recurring ordinary dividends with improved operating performance. While there is a possibility of higher profits due to its scope expansion, Yangzijiang will also be entitled to a smaller portion of the profits of the future investment entity due to the lower stake held after the spinoff.
The broader expectation tends to be that if a company successfully completes a capital transaction, there should be a special dividend to reward existing shareholders. Yangzijiang has shared their plans to list the investment segment on the Singapore Exchange and carry out an in-specie distribution of shares. In other words, the company would distribute shares in the investment segment to shareholders.
Are there potential show stoppers?
There are various foreign exchange rules and capital controls in China which means that there could be challenges faced for the distribution of dividends and for its expansion plan of investing outside of China. In addition, there are also restrictions over foreign ownership which the Company will have to consider.
It looks like there is some work to be done to ensure that the spin-off can be carried out as Yangzijiang has hired a corporate finance advisor, a tax consultant and two legal advisers, one for Singapore and one for PRC law.
Generally, new listings tend to occur when capital market conditions are benign or favourable. For Yangzijiang this is especially crucial, not only to achieve a positive post-IPO performance but also because the performance of the investment segment is closely related to the broader economic environment. With countries globally worried about the new COVID-19 strain Omicron, this could result to reduced forward fiscal and monetary policy spending and a higher interest rate environment and could all together affect the potential listing.
How about the valuation?
One key objective of the spinoff is to allow financial markets to separately value the shipbuilding and investment segment as Yangzijiang is currently trading at a P/E ratio of about 7.5x and a P/NAV of about 0.7x.
Various analysts have previously valued the overall business above a 1.0x P/B of about S$1.80 and a P/E ratio of between 10-12, which represents a share price value of around S$1.76 to S$2.05. The general consensus is for the value to be unlocked as there would then be a readily available reference price once the investment segment is trading separately.
This would also reduce the discount that commonly occurs with a holding company structure which utilises a sum of the parts or conglomerate valuation.
Conclusion
When it comes to transactions such as a potential spinoff, there is no certainty or assurance that the proposed spinoff and listing will be undertaken. But there is usually no identifiable downside as the worst situation is the continuation of the status quo. The best case scenario would be a successful listing in a short timeframe and the growth of the business in a positive economic environment.
Existing investors do have to take into consideration the performance of the shipbuilding business as it holds sway over the share price performance. Meanwhile, new investors have to be mindful of the potential show stoppers mentioned above.