SINGAPORE (Sept 23): Rumours of the supposed disappearance of Yangzijiang Shipbuilding executive chairman Ren Yuanlin have prompted a flurry of activity at China’s largest private shipbuilder.
Shares in the company, one of the 30 Straits Times Index component stocks, plunged some 30% from $1.30 to $1 on Aug 8, on reports that Ren was under investigation. By that time, he had allegedly been “missing” for more than two months.
Specifically, Ren is being investigated over the corruption case involving Liu Jianguo, a “veteran political patron of the shipbuilding industry” who is “closely connected” to Yangzijiang. Liu, who hails from Ren’s hometown, is under probe for “serious disciplinary violations”, according to a statement released in June by Beijing’s Central Commission for Discipline Inspection — the anti-graft body of the Chinese Communist Party.
As Yangzijiang shares crashed on Aug 8, the company had to call for a trading halt. “We did not want investors to lose confidence in Yangzijiang, so we asked for the trading halt to cool down the market,” CEO Ren Letian, Ren’s son, tells The Edge Singapore in a phone interview on Sept 16.
Ren (cutting the cake, with Letian on his right) celebrating the company’s 10th anniversary of listing in 2017
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The company had clarified on Aug 14 that Ren was “assisting in a confidential investigation” and trading in the shares resumed on Aug 15. Investors were spooked, though. The share price fell another 18 cents to hit a year-low of 86 cents, although there was a mild recovery later in the day.
In any case, the public image of S-chips — or Chinese companies listed in Singapore — which was already under a cloud of gloom because of a spate of corporate governance scandals and business failures, did not improve with the developments at Yangzijiang.
“There have been several cases of such S-chips that eventually delisted or have low trading volumes because of fraud and misrepresentation,” says a professor who focuses on corporate governance. He adds that Yangzijiang may be viewed through a similar lens, given the probes on Liu and Ren’s disappearance.
Letian, on the other hand, does not think investors have cause to doubt Yangzijiang. He points to the company’s 12-year track record as a Singapore-listed company.
According to Bloomberg data, the company has several fund managers such as BlackRock and Vanguard Group listed among its larger shareholders. BlackRock and Vanguard hold stakes of 4.97% and 2.06% respectively. As their shareholding is below 5% each, they are not obliged to file changes in their shareholdings. Letian claims these fund managers have not sold shares since the saga broke.
Seeking to reassure
The company’s single-largest shareholder is Ren himself, who holds the shares via an entity called Yangzi International Holdings. Other substantial shareholders are one Wang Dong, via Lido Point Investments, and Chang Liang’s Hengyuan Asset Investment. Wang, Yangzijiang’s deputy general manager, and Chang control 10.05% and 5.03% respectively.
Letian also stresses that Liu, the former official under probe, was never involved in the management of Yangzijiang. In fact, most of the management team have not seen Liu before, he adds.
Nevertheless, personal ties between Ren and Liu are tight. Liu chairs the Jiangsu Yuanlin Charity Foundation — an initiative kicked off in 2011 with the older Ren’s dividend payout of about RMB270 million ($52.4 million) from his shareholdings in Yangzijiang. “My father invited him to head the charity fund after [Liu] retired because of his capability in negotiation,” Letian says.
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He stresses that the foundation — which primarily funds facilities for the elderly, financially needy and technological innovations — is managed separately from Yangzijiang. According to the company’s 2018 Sustainability Report, in addition to Liu, the foundation has four staff specialising in administration, investments and engineering.
Letian adds that his father has not been involved in Yangzijiang in recent months because he is assisting with investigations on Liu, and that Ren “wants to separate this event from Yangzijiang so as not to affect investors’ perceptions of the company”.
When asked, Letian declines to comment on where his father is. He also cannot say for sure when the older Ren will return, except that it has to be after the investigations are concluded. Until then, it has fallen on Letian to hold the fort.
Acutely aware that he has big shoes to fill, the 37-year-old internet and multimedia science masters graduate from the London South Bank University has already accumulated 13 years of working experience in Yangzijiang. He has held roles ranging from shipyard management to repurchasing and sales.
Prior to the saga, Yangzijiang was already reporting lower earnings. For the 2QFY2019 ended June 30, the company recorded revenue of RMB7 billion, down 12% y-o-y, as it delivered two fewer vessels than the year-earlier quarter. Earnings declined 6% y-o-y to RMB936 million.
Shipbuilding, its primary revenue generator, suffered lower margins of just 18% for the quarter, down from 21% in 2QFY2018. Interest income from its sizeable investments activities was up 25.3% y-o-y, however, to RMB503 million.
So far this year, Yangzijiang’s shares have dropped 16% to close at $1.05 on Sept 19. At this level, it is trading at a historical price-to-earnings ratio of just 5.65 times, valuing the company at $4.1 billion.
Positive on the company
What is the company’s outlook? How badly will the global economic slowdown and the ongoing trade war affect its business? Interestingly, Letian claims that the company is gaining, instead of suffering, from the US-China trade war. This is because the company books its cost in renminbi but bills its overseas clients in the US dollar. As the renminbi depreciates, the company is getting better returns from older orders, he says. Furthermore, some of its clients are European shipping companies, which are less affected by US tariffs on Chinese goods.
Letian says it is “hard to measure the company’s performance for 3QFY2019”, but he is looking forward “to favourable appreciation of the renminbi against the US dollar to help boost the company’s earnings”.
In the wake of his father’s news in early August, the company has launched a series of share buybacks. The most recent purchase was made on Sept 4, with one million shares bought at 94 cents each. This brings the company’s total treasury shares to 52.3 million, out of a total base of 3.92 billion shares. “When the company started the buybacks, the share price was less than $1. Now, it has grown to $1.10,” says Letian. He believes this has been an effective way to “show investors that we still believe in our stock and are confident of its value”.
Besides buying back shares, the company tried to dish out other kinds of good news as well. On Sept 4, the company announced new orders for five vessels: three 82,000 DWT bulk carriers and two 325,000 DWT bulk carriers. Coupled with two other orders announced in August, Yangzijiang has added new orders worth US$395 million ($542.8 million) so far in 3QFY2019.
Danish Maritime watchdog Danske Maritime estimates new orders for the global bulk carrier fleet to be 2,955 ships between 2019 and 2023 — 7% higher than the previous five years. Letian wants to ride this wave and win more orders. On top of just shipbuilding, Yangzijiang has plans to diversify its revenue source by moving into different markets, such as the development of liquefied natural gas storage equipment, he adds.
Eight brokerage houses — Daiwa Securi-ties, JPMorgan, UOB Kay Hian, Credit Suisse, CIMB, CICC, DBS and Morgan Stanley — maintain active coverage on the stock. In the wake of chairman Ren’s news, seven are maintaining “buy” or “add” calls, with price targets ranging from $1 to $1.82. Adrian Loh of UOB, who has a “buy” call, notes that the company’s performance is in tandem with the positive shipbuilding outlook in the medium term. Loh also believes that the “hands-on” nature of Letian puts Yangzijiang in good stead to continue growing.
Likewise, Patrick Xu, Karen Li and Calvin Wong of JPMorgan maintain “buy” calls, following “legit orders for 3Q” as well as the likelihood that orders will rebound next year. Daiwa Securities has a “hold” call, amid the risks that the company faces with the absence of the older Ren.
