Ren Yuanlin, executive chairman of Yangzijiang Financial Holding YF8 (YFH), is making one of his regular visits to Singapore, where the company is listed. Besides meeting the investment community to update them about the company, he has lined up a few property viewings as he expects himself to be here more frequently. “If not, I’m always staying in hotels. It is always nicer to have a home,” says Ren.
In a way, buying a “home” here is out of necessity. On Oct 20, the company announced that its Singapore-based CEO Vincent Toe is resigning and will end his tenure next April — completing a two-year term at the job. Ren, who is the single largest shareholder with 23.7%, will double up as CEO.
The market did not react well to Toe’s resignation, sending the share price as much as 7.5% lower when trading began on Oct 23 before recovering to close at 31.5 cents on Nov 29, valuing the company at $1.15 billion.
Toe and Ren go way back. Toe was running his own corporate advisory business when he convinced Ren to list Yangzijiang Shipbuilding Holdings i SO7 n Singapore. As the Jiangyin-based company grew, its financial arm, which was dealing with debt investments, grew as well. Toe was instrumental in spinning off the financial arm in a listing of its own, with Yangzijiang Shipbuilding shareholders receiving one YFH share for each Yangzijiang Shipbuilding share they hold.
The move created value for Yangzijiang Shipbuilding’s shareholders but not so thus far for shareholders of YFH. It started trading at 64 cents last April and has steadily declined since. Despite the company reporting better earnings, plus constant buybacks, YFH’s share price has remained stuck at just half of the initial levels.
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In 3QFY2023 ended Sept 30, Yangzijiang Shipbuilding’s cash balance of $1.25 billion is roughly equivalent to its market cap. Out of the total NAV (net asset value) of $3.84 billion as at June 30, just over half is made up of $2.1 billion worth of China-based debt investments, plus a growing proportion of investments being made outside China.
At an interview with The Edge Singapore on Nov 24, Ren and Toe dismissed market talk that Toe was taking the fall for the poor share price performance. Rather, the move is to let Toe rejoin ICH Group, which he co-owns with his younger brother Danny Toe, and to remove any potential conflict of interest that may arise as both entities might chase after similar deals across the region.
Instead of going separate ways, Ren and Toe, via YFH and ICH respectively, are planning to work more actively together. For one, they will be making use of the Qualified Domestic Limited Partnership (QDLP) that YFH holds. The QDLP is a scheme that lets YFH transfer money out of China more easily and then channel the funds to regional business opportunities.
The collaboration will also allow Toe to resume some of his IPO advisory activities, bringing companies in China that are interested to list here in Singapore or other regional bourses. When such deals do take place, YFH can act as a cornerstone investor or lend support in other ways.
Ren says that Hong Kong, which traditionally offers better liquidity and valuations, is no longer an attractive market to list. The US, another hot favourite, is no longer popular too because of geopolitical tensions with China. This makes Singapore a more alluring listing destination. Besides the established capital market here, business owners from China are also drawn by the stability of Singapore as a place for their families to work, live and study, and for their offshore wealth to be managed.
In a way, the collaboration complements YFH’s long-stated strategy of allocating half its assets outside China as it trims its exposure to debt investments that have been the bulk of its portfolio. As of Sept 30, China-based debt investments accounted for 52.4% of its total portfolio, down from $2.4 billion or 61.1% as at June 30. According to Ren, the partnership is a prudent move. “Debt investments give us the best returns but it is also the most dangerous minefield,” he says.
In recent years, no thanks to the pandemic and subsequent regulatory requirements, large swathes of China’s economy — especially in real estate — have come under stress. Ren notes that the biggest proportion of non-performing loans now held by YFH come from lending to this sector.
In its 3QFY2023 update, the proportion of NPL or non-performing loans, which YFH stresses is classified using a very conservative set of policies, was at 42%. This is similar to 41% for the whole of FY2022 when the outstanding loan balance was higher. He is confident that with lending terms that include assuming ownership over land used for development, YFH can recover its money eventually.
Shipbuilding roots
True to his roots in shipbuilding, Ren seems most enthusiastic talking about the potential returns from this sector. “I’ve 50 years of experience in this industry,” says Ren, referring to the early years when he led what was then a shipbuilding co-operative into what it is today.
As at Sept 30, YFH has an existing, growing maritime fund of $142.8 million, up from $82 million as at June 30. This fund is used to capture various parts of the shipping and shipbuilding value chain from funding construction to sale and leaseback to reselling. A key driver of activity in this area comes from increasing orders by shipowners capitalising on the shipping boom amid the pandemic, where supply chain kinks caused rates to surge. Overnight, hitherto near-bankrupt shipping firms were able to turn their fortunes around. “One trip to the US and he was able to make back the cost of the ship we built for him,” says Ren, referring to one of his Singapore customers.
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However, since the start of the year, shipping rates have normalised with the pandemic over. Major shipping firms have reported a big drop in earnings and even losses. Ren is unfazed that with lower shipping rates, orders will dry up. “The correlation has reduced,” he notes.
According to Ren, the growing requirement imposed on shipping lines to operate their business in a greener and planet-friendly way, amid the wider global push towards sustainability. Certain European ports are already imposing carbon taxes and shippers, in response, are starting to place more orders for new vessels that can run on greener fuel such as liquified natural gas or hydrogen. Yangzijiang Shipbuilding, which is now led by Ren’s son Ren Letian, has built up an order book of more than US$14.8 billion ($19.8 billion) with delivery scheduled until 2027. “Orders are now placed according to who can deliver faster, not cheaper,” says Ren.
He readily says that returns from the maritime fund are not going to be as high as the debt investments, which can be a couple of percentage points more but come with higher credit risk as well under current market conditions. “I prefer the better certainty but lower returns than the higher returns but higher risks,” says Ren.
Reaffirms buybacks
Nonetheless, Ren is not very upbeat about China’s economy. He agrees that the government has put up some measures to help support the property market but it will take some time before the enthusiastic level of activity comes back. Private companies and investors, he laments, face various forms of restrictions from overzealous regulators too, thereby further dampening entrepreneurial fervour.
Another reason why China’s economy is not growing as fast as before is the ongoing trade war with the US. At the recent Apec summit, both presidents met in a seemingly cordial atmosphere. If one were to splice and dice the rhetoric, China has beefed up its positioning. When Barack Obama was in office, the words used by Xi Jinping were that “the vast Pacific Ocean has enough space for the two large countries.” When Xi met Biden recently, a similar message, with a key difference, was delivered: “Planet Earth is big enough for the two countries to succeed.” In short, despite some tentative signs of friendlier ties, competition remains very intense between the two countries and has escalated to a higher plane, says Ren.
At the interview, Ren reaffirmed the company’s policy of paying out 40% of the full-year earnings as dividends. Even as he tries to generate the returns that show up at the bottom line, Ren also reiterated the company’s ongoing plan to actively buy back shares, in a bid to support the price and highlighted how undervalued it is.
The company has spent a total of $129 million to buy back shares equivalent to 8.8% of its total base, closing in on the $200 million allocated. At current levels, the stock is trading at just 0.3 times book value. Ren is realistic to know he cannot expect the share price to trade at book but he is at the very least, gunning for a level in between. “We will look to keep buying back below 0.5 times book value,” he says.
