DBS Group Research has reiterated its “buy” call and $2.15 target price on Yangzijiang Shipbuilding (Holdings), with the impending spin off of its investment arm.
“The listing of the investment arm improves corporate governance and catalyses the re-rating of its shipbuilding business,” notes DBS on April 12.
Yangzijiang Financial Holdings (YZJFH) is the investment arm that is now part of YZJ, one of the largest private ship builders in China and a component stock of the Straits Times Index.
YZJFH will commence trading on April 28, following a distribution in specie to existing shareholders of YZJ. It is aiming for a return on equity of 8 to 10%.
The management of YZJFH, headed by executive chairman Ren Yuanlin and CEO Vincent Toe, is also aiming to pay at least 30% of its earnings in the form of dividends for FY2022 to FY2024.
Assuming earnings of $400 million, that will imply a payout of 3 cents per share, notes DBS.
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As an asset manager, YZJFH’s initial pool of capital and funds will be from what has been accumulated by YZJ over the years. It has added an external pool of around $500 million to its AUM, with a target to grow this by 20% a year.
YZJ, in spinning off YZJFH, has an initial portfolio of assets worth some $4.2 billion, or $1.08 per share.
Out of this, 70% of the assets are in the form of debt investments and the remaining 30% in cash. The company plans to reduce the proportion of debt investments to 50% by end of this year, and further reduced to 30% by end of 2023 – that’s when the bulk of the debt investments mature.
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The assets will be redeployed to other investment and wealth management activities, which, according to DBS, will lean more towards private or alternative assets. Such asset classes suffer from lower liquidity but can potentially give higher returns.
YZJFH plans to have around 20% of its portfolio in liquid assets and 10% in specialised real estate.
According to the company, China, its home market, will be allocated 50% of its portfolio, with rest of the world such as Southeast Asia, US and Europe sharing the remaining half.
Within China, half the assets will be in fixed income and the remaining half in equities.
YZJFH has no debt now and plans to keep it this way.
It is now run by a team of ten investment professionals and the team is seen to double in a year.
YZJFH has already drawn EDB Investment and Alexandrian Worldwide as two of its strategic investors and the company is in talks to bring on board more.
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If YZJFH trades below its book value of $1.08 per share when listing commences, it will start buying back its own shares “for an immediate boost to returns”.
Assuming a price to book value of 1.3x for YZJ’s shipbuilding business, 1x for its shipping operations and 0.7x for the investment business, YZJ’s current market cap of $6.1 billion reflects a discount of $2.6 billion.
YZJ shares, as at 4.46 pm, changed hands at $1.59, down one cent for the day, but up 18.52% year to date.
