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Yangzijiang splits!  – what do shareholders need to know?

SG, Stocks

Written by:

Alex Yeo

We previously covered Yangzijiang (YZJ) when it announced the possibility of spinning off its investment segment. The rationale for the spin off was to allow each segment to trade and be valued individually, eliminating the conglomerate discount and unlocking value for shareholders.

The spin off was approved earlier in the month and YZJ started trading on an ex-entitlement (XE) basis on 22 April 22, with Yangzijiang Financial Holdings (YFH), the spun-off investment segment slated to start trading on 28 April 22.

The share price closed at $1.54 on the last day before the XE and YZJ commenced trading as a pure shipbuilder play at $0.80 on 22 April 22 before closing at $0.96, which leaves for possible upside for shareholders holding YZJ before XE should the combined YZJ+YFH share price trade above $1.54 in the days to come.

However, as trading for YFH only commences on 28 April, shareholders holding onto YZJ shares before XE currently do not know if they are better or worse off as compared to before XE.

Who will be kicked out of the Straits Times Index?

On 20 April 22, YZJ announced that YFH will be added to the Straits Times Index (STI), FTSE ST Mid Cap Index, FTSE ST China Index and FTSE ST All-Share Index. 

Following the spin-off and listing of YFH, YZJ will remain in the STI with the same investable weight. YFH will be added to the STI with the same investable weight as YZJ when it starts trading on 28 April 22. The STI constituents will be ranked by full market capitalisation on 28 April 22 and the smallest constituent will be removed from the index effective 5 May 2022. 

The relegation list from the STI is as follows:

Current STI ConstituentShare priceMarket capitalisation
Comfort Delgro$1.50$3.2b
Keppel DC Reit$2.08$3.6b
Yangzijiang Shipbuilding$0.96$3.9b

In addition, YFH commences trading on 28 April 22, based on a NAV of $1.08/share, the corresponding market cap is $4.4 billion. If share price falls below $0.79, the market cap would fall below $3.2b and YFH could be a candidate for removal from STI.

For any of the four companies mentioned above, a removal from the STI will likely lead to short term price weakness as index funds and other institutions rebalance their portfolio holdings.

What should existing shareholders know

Existing shareholders who now have YFH and YZJ must now assess each company separately on its own merits and be comfortable holding both companies. As YZJ is currently trading at $0.96, existing shareholders are better off as long as YFH commences trading at $0.60 or higher.

Yangzijiang

YZJ’s disclosed that its FY21’s profit before tax for its remaining assets is about RMB 2.5 billion. At the share price of $0.96 and assuming a 20% tax rate, the S$ profit after tax is about $420 million and translates into a P/E of 9.3 times. There has not been a firm dividend guidance from YZJ, if we assume for a payout ratio of 25%, this represents a dividend yield 2.7%. There is also a $0.05 dividend that has been announced for FY21 which shareholders will be entitled to.

YZJ’s order book as at 31 December 21 is US$8.5 billion, a significant high as compared to previous years. While there has not been any major contract wins officially announced by YZJ in 2022, we did some channel checks and found news of at least one contract win for four handysize vessels.

YZJ’s order book as at 31 Dec 21

While the stock has already recorded a strong performance today, there is likely to be further upside for the share price should contract wins continue. In addition, as YZJ delivers the vessels in the next 1-2 years, this will translate into higher profits and dividends.

Yangzijiang Financial Holdings

YFH has an equity base of $4.4 billion and a net profit of $327 million. At a share price of $0.60 (which would allow for YZJ shareholders to not be worse off), the P/B is 0.56 times and the P/E will be 7.5 times. The dividend guidance is for not less than 30% of profits which would represent a yield of 4.0%.

At a share price of $1.08, the P/B is 1.0 times and P/E will be 13 times.

It is intended for YFH to realign its existing investment portfolios towards more growth-oriented investments, expanding global footprint and growing fee-income business, hence diversifying from the current single industry, country and asset portfolio.  Following the completion of the Spin-off and Listing, YFH will have greater capital resources and flexibility to form asset management capabilities. 

YFH envisages that the capital arising from maturing debt investments will be recycled into:

(a) investments with longer investment horizon, such as private debt and mezzanine funds, under the Investment Management Business in the PRC; and

(b) its newly established offshore Investment Management Business in Singapore.

In addition, while not stated in official documents, YFH has mentioned an 8-10% return on equity (ROE) target. Based on the current equity base, it represents an approximate net profit range of $352 to $440 million, this is between 7.6% to 34% higher than FY21’s performance.

Some valuation reference points (while not perfect) are of the Chinese big 4 banks who have a ROE of around 10% to 12% are trading at P/B of below 0.4 times and P/E of around 4-5 times and of asset management players such as China Cinda which trades at a P/B of 0.25 times and a P/E of 3.5 times with a ROE of 7% and a payout ratio of about 33%.

Existing shareholders should be more wary as YFH is in the nascent stage of its revised business model and it operates in China’s current uncertain credit and economic situation.

New shareholders

YZJ: Buying at the current price would entitle the investor to a $0.05 dividend and for investors who are confident in the immediate prospects of the shipbuilding industry, there could be further upside.

YFH: Investors who are looking for a company in the nascent stage of building its investment management business regionally can consider YFH at an appropriate entry price point using the information and reference points provided in the previous paragraph.

Closing statement

While the easy option would have been to sell YZJ before its XE date, this may mean that some upside is left on the table. Existing shareholders who choose to hold on may get to enjoy further upside from the unwinding of the conglomerate discount as each entity continues to trade independently.

New investors have the benefit of choosing their preferred investment option base on whether they would like a direct exposure into a company with a sizeable order book that is widely regarded as one of the leaders in the shipbuilding industry.

As there is a potential removal from STI for either YZJ & YFH should their market cap fall to become the lowest among the 31 stocks current in the STI, both existing shareholders and investors should be wary of the potential impact.

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