Ren Yuanlin, executive chairman of Yangzijiang Financial Holding (YZJFH), is miffed that investors are not appreciating the value of his company. The investment company started trading at 69 cents on April 29, after it was spunoff by Yangzijiang Shipbuilding (Holdings). It has been dropping steadily since to as low as 31 cents on Oct 31, and to close at 34 cents on Nov 9. The share price has been “chopped at the waist”, laments Ren in an interview with The Edge Singapore.
On June 8, YZJFH had announced a commitment to spend up to $200 million to buy back shares. It promptly started doing so on June 9, paying 51 cents for one million shares — only for the share price to slip further.
As at Oct 31, the company has spent $99 million to buy back 259.6 million shares, equivalent to 6.6% of the total share base of 3.95 billion shares. This makes YZJFH closing in on the 10% buyback mandate cap allowed in a year under a normal mandate. If the share price stays at this level, and if the company continues buying up to the cap, there will be an estimated $60 million to spare from the $200 million committed.
The share price started dropping, as investors such as US fund manager T Rowe Price cut its stake. On the other hand, YZJFH’s CEO Vincent Toe and two of the three independent directors, Chew Sutat and Chua Kim Leng, had at various times bought shares from the market. However, Ren, the single largest shareholder with a direct stake of 21.6% (or more, if deemed stakes such as the 4.2% held by his son Ren Letian are included), has not followed suit thus far.
When asked, Ren says that once the 10% mark is reached, he is prepared to move in and increase his personal stake, while seeking another mandate from shareholders to continue the buyback. Ren notes that the share price, at current levels, is just a fraction of YZJFH’s book value of $1.07 as at June 30. “You are paying just 30 cents to buy $1 worth of assets.”
He also reiterates the company’s dividend policy of paying out at least 40% of its earnings for FY2022 to FY2024. From FY2019 to FY2021, the company’s earnings per share (EPS) were 8.72 cents, 8.13 cents and 8.28 cents respectively. Assuming an EPS of 8 cents, with a payout ratio of 40%, will mean a dividend of 3.2 cents, which will translate into a yield of 9.41% at 34 cents. “This is a more generous dividend policy than 90% of all Singapore-listed companies,” claims Ren.
In its first post-listing report card on Aug 11, the company says that for 1HFY2022 ended June 30, earnings came in at $136.4 million, down 30.6% y-o-y. Total income was $173.8 million, down 27.3% y-o-y. The company explains that the drop was due to fair value changes on equity financial assets following weakness in financial markets. For the whole of FY2021, earnings reached $327.2 million on a total income of $384.8 million.
In a previous interview with The Edge Singapore, Ren explains that the spin-off was partly because investors prefer either pureplay shipbuilders or financial firms, but not something like YZJ Shipbuilding which was both. Ren notes that prior to the spin-off, YZJ Shipbuilding’s share price was around $1.20. Under terms of the spin-off, YZJ Shipbuilding shareholders received a YZJFH share for each YZJ Shipbuilding share they hold. Both YZJFH and YZJ Shipbuilding’s share prices may have come down, but if they are added together, there is still a gain. “I don’t regret the restructuring,” maintains Ren.
Economy of two halves
Ren believes there are a few reasons why investors have shunned the stock. Firstly, YZJFH is perceived by investors as a China stock, and along with that come all the worries and pessimism towards this market. It did not help that as a result of investments made and loans meted out previously, YZJFH now has exposure to China’s property sector, which is under stress because of government policies. In addition, global markets — not just China — are on a downtrend as investors fret over the multitude of negative factors including rate hikes, inflationary fears and overall recessionary worries amid rising geopolitical tension.
Ren points out that despite the lowered GDP numbers, China’s economy is still enjoying moderate growth, with the World Bank forecasting 2022 growth of 2.8%. Not many developed economies can claim the same pace, he says. Nonetheless, he acknowledges that China’s overall economy and markets are fraught with uncertainties.
For one, the strict zero-Covid policy, which has curbed economic activity, is likely to remain in place. The geopolitical tension with the US, plus the perennial issue of how Taiwan is to be re-unified, continues to add complexities to the decision making of businesses and investors.
Ren notes that internally, China’s economy is seen to consist of two diametrical halves. The first half comprises industries either being curbed because of government policies, or suffering from intense competition with one another in the similar fields. The other half of the economy, however, enjoys a vast, growing market potential — a blue ocean, so to speak. Areas such as clean energy, big data, and AI are those that YZJFH will be looking more closely at.
Tiger with wings
Ren is especially optimistic about the potential growth of ship financing and leasing as a growth area for YZJFH. After all, this is familiar ground for him. Back when he was running YZJ Shipbuilding, which he did for decades before handing the reins over to Letian, he was already actively involved in related financing activities, such as facilitating the sale and leaseback of vessels. This business is similar to the aircraft leasing model, where airlines do not own the planes but instead lease the planes from specialised firms.
Within this space, Ren sees more opportunities. YZJ Shipbuilding used to focus on building bulk carriers and container ships. On Oct 26, YZJ Shipbuilding announced that it has broken into the “lucrative” market for building liquefied natural gas carriers, with two orders placed by an unnamed European customer for an undisclosed sum, bringing its total order book to a record of more than US$10 billion ($14 billion). The market for these specialised vessels is now a stronghold of the Korean yards.
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To him, ship financing and leasing is a business that melds his expertise, and he is confident this is a “bright spot” for YZJFH. “We will be like a tiger with wings,” says Ren. To this end, YZJFH has set up a maritime-focused fund with an initial fund size of US$250 million. Of this, the company has committed US$100 million, with the remaining US$150 million to be raised from other parties. “I’ve changed from a shipbuilder, to an investor of shipbuilding,” says Ren.
Other funds under YZJFH include the ICH Gemini Asia Growth Fund, with $120 million under AUM; the GEM Tech Holding VCC, which has an expected size of $217 million; the Golden Ox Fund VC, which is expected to have $36 million. The GEM Asia Growth Fund, meanwhile, will have an initial expected fund size of $100 million, with YZJFH itself chipping in $80 million and $20 million to be raised from other investors. In the pipeline are also several other funds, focusing on private equity or fixed income, and with different investment strategies ranging from growth and tech companies, cleantech companies, unicorn opportunities and absolute returns.
Tapping the Jiangyin base
Setting up these funds is a conscious move on YZJFH’s part to move a bigger proportion of its assets to be redeployed outside China and to also diversify the allocation of the funds to other asset classes.
YZJFH’s assets were dominantly in the form of short-term loans of one year or so, to local SMEs within China. One reason Ren has listed YZJFH in Singapore is so that he can make use of Singapore as an international financial services platform to try and capture businesses outside China. As at Dec 31, 2021, the company’s debt and equipment investments portfolio stood at 83% and 17% respectively.
As at June 30, the debt investments portfolio has been reduced to just 57% of the total, as the company redeployed funds from short-term loans that have matured. Cash and so-called “yield enhancement” products and equity investments constituted 29% and 14% of the total portfolio. As at June 30, 11% of the assets are outside China, largely in Singapore. The plan is to gradually increase the proportion to 20%, then 40%, before having an equal split eventually.
Besides investing its own funds, and to form joint ventures with other investors, YZJFH believes it can grow a significant wealth management platform too. Ren’s optimism with the wealth management business stems from his familiarity with the city of Jiangyin, where YZJ Shipbuilding is based. Ren points out that Jiangyin and the surrounding region are home to some 600 listed companies — versus the total of some 5,000 listed companies in the whole of China. The owners and shareholders of these companies, many of whom he knows, are potential clients for YZJFH’s wealth management business. So far, YZJFH has signed an agreement to provide investment advisory services for an unnamed family office, with an AUM of $500 million.
YZJFH is in the midst of applying for the Qualified Domestic Limited Partnership (QDLP) programme, which allows foreign and domestic Chinese asset managers to raise Chinese yuan from high-net-worth and institutional investors in China to be channelled towards offshore investments through a Chinese product or fund.
According to YZJFH, for an offshore entity to participate in the QDLP programme, it will first have to apply for the “QDLP allocation quota” from the local authority, which it has already obtained. To utilise its allocated quota, YZJFH is seeking a licence under the Asset Management Association of China (AMAC) and be registered as a QDLP manager. YZJFH can also repatriate funds via dividend payments, of which full provision for the withholding tax has been made.
Now, with all the uncertainty in China, is Ren perhaps already considering to have the majority of the assets deployed outside China, instead of an equal split? Ren says that the move from 10% to 20% is already a one-fold increase, and thus this shift has to be carried out in a steady manner. “Let us do so one step at a time,” he says. For now, Ren wants to address the market’s perception. “We hope to show we’ve put in the effort, and show investors the intrinsic value of our shares.”