The honorary chairman of Yangzijiang Shipbuilding brought the company to list on SGX back in 2007. Fifteen years later, the self-styled “old soldier” is taking personal charge of an investment spinoff
Fifty-five-year-old Lim Ah Seng has been holding shares of Yangzijiang Shipbuilding (Holdings) from the time he started investing. The former engineer at an offshore marine company recalls scooping up shares in the company shortly after his work brought him to China in 2008. “Everybody there has heard of Yangzijiang,” he tells The Edge Singapore. “The company is really big and has operations across China. I heard they even got orders from abroad, so I thought it was good for me to put my money in it,” he adds.
His interest in Yangzijiang started about a year after the shipbuilder went public on the Singapore Exchange (SGX) on Apr 16, 2007, raising $624.1 million. The shares, offered at 95 cents each, were oversubscribed by 39 times, pushing its debut trading price up to $1.35. Amid the wave of investors’ interest, Yangzijiang’s share price hit a peak of around $2.70 in October 2007 but when the Global Financial Crisis struck soon after, it dropped to around 30 cents in October 2008.
Still, Yangzijiang continued to win new orders to sail through the crisis. Along the way, it had also started to actively build another business in finance and investment. Still, even though Yangzijiang managed to grow its earnings and maintain a steady dividend payout, its share price could get nowhere close to the peak, trading persistently at a significant discount off its book value and low valuations.
“We were seen as neither shipbuilding nor investment,” says Yangzijiang’s honorary chairman in an interview with The Edge Singapore. “Investors were asking us; banks were asking; regulators were asking too.”
Ren Yuanlin was more conscious of this blot than anyone else and wanted to do something about it. Last November, the company announced plans to spinoff its burgeoning financial and investment arm for a separate listing under Yangzijiang Financial Holding (YFH) on the SGX. As of April 27, holders of each Yangzijiang share would have received a share of YFH.
See also: SGX welcomes YZJFH to Mainboard as shares start trading at 68.5 cents
With the split, investors now get a pure-play shipbuilder and a firm focusing solely on investments. “By doing so, I feel that we can then be accorded a more accurate valuation by investors. Those who like shipbuilding, go buy Yangzijiang; those who like investment, go buy YFH,” says Ren.
The way Ren sees it, Yangzijiang is already among the top 10 shipbuilders in the world. Its finance and investment business now owns some RM20 billion ($4.2 billion) in assets and can fully function as an independent entity. “If we stay as a combined entity, there are more disadvantages than advantages. If we split into two, it won’t be a bad thing for shareholders, for either company,” he adds.
YFH started trading on the afternoon of April 28. It opened at 69.5 cents and closed the day at 62 cents, valuing the company at $2.43 billion. Yangzijiang meanwhile, closed at 89 cents on April 28, valuing the company at $3.54 billion. Just before the ex-entitlement, Yangzijiang shares traded at $1.54.
See also: Brewing liquidity
Old soldier at the helm
Yangzijiang can trace its roots back to 1956 as a shipbuilding cooperative located along the Yangtze River (hence, the company’s name). Following a series of restructuring and corporatisation led by Ren, who joined the company in the 1970s, the listed entity known today was created. In the mid-2000s, Yangzijiang actively expanded into finance and investments as a concurrent activity. Amid the wave of S-chips that were listed (and de-listed) on the SGX, Yangzijiang stands out for its market value and is a constituent stock of the Straits Times Index.
As Ren explains, the finance and investment business came about because China’s private companies, unlike the state-owned enterprises, do not enjoy easy financing from large state-owned banks. “Banks can’t lend; private businesses can’t borrow. Many of these smaller enterprises with turnover in the tens of millions [RMB] are actually the ‘cells’ that make up China’s economic body. Yet, they have difficulty borrowing,” says Ren.
Capital for the finance and investment business came from the surplus funds accumulated by Yangzijiang. According to Ren, Yangzijiang has been generating on average a surplus of RMB2 billion ($420 million) a year — not a lot in a given year but a considerable amount over a decade or so. As the company’s shipbuilding customers are obliged to make progress payments, Yangzijiang does not really need to hold a lot of cash if it wants to grow, he adds.
Cash, if deposited in a bank in a low-interest-rate environment, actually incurs a high opportunity cost. Instead, Yangzijiang was able to lend out the money at four times the benchmark rates indicated by the People’s Bank of China. “We’ve come to a point where earnings contribution from shipbuilding and investment has become almost similar but the latter is growing faster,” says Ren.
Ren says that his son Letian will continue as executive chairman of Yangzijiang and focus on managing the shipbuilding business. Meanwhile, Ren is taking personal charge of YFH as he says he is an “old soldier” in the financial sector.
He recalls how he was often at the front of developments of the capital markets since the 1980s when China was first opening up its markets. Besides the 2007 SGX listing, he had also led the listing of Yangzijiang’s Taiwan Depository Receipts between 2010 and 2015. “After all, finance is something I am more specialised in. If I take charge, I have more advantages than Letian,” explains Ren.
Still, Ren has given himself about three years to get YFH going before he hands over the leadership to YFH’s CEO Vincent Toe, who was an independent director of Yangzijiang. The two men have known each other for nearly two decades and are longtime business partners. “I can then remain as a shareholder,” quips Ren, who holds a deemed stake of 21.6% in YFH.
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Ren (second from right) with Letian marking Yangzijiang Shipbuilding’s 10th anniversary as a Singapore-listed company in 2017 (Image: Yangzijiang Shipbuilding)
Not starting from zero
The listing of YFH will mark a departure in the way investments are made by its top management. Of its initial net tangible asset base of RMB20 billion or $4.25 billion, $3.4 billion is in short-term domestic China debt investments. These have a typical maturity of not more than two years. The rest is kept largely in cash.
YFH plans to recycle part of the money into investments outside China with a longer horizon, via private debt and mezzanine funds and various other instruments, in various markets and asset classes. YFH has earmarked around half or some $2 billion to be invested offshore. YFH is aiming for a return on equity of 8%–10% because it is not “starting from zero”, says Toe.
In conjunction with the listing, YFH plans to acquire Singapore-based GEM Asset Management, which has an existing capital markets services license and can then be used by YFH as a base to scale up its investment management activities.
GEM, which was previously called ICH Gemini, has three existing shareholders. Besides Ren himself and Toe, who each holds 30%, the remaining 40% is held by Xu Fan, one of the co-founders of GEM. YFH plans to pay $840,000 each to Ren and Toe, which is at one-third discount off GEM’s equity value appraised last November. Xu, meanwhile, will be paid $1.62 million. As explained in YFH’s introductory document, the higher value to be paid to Xu is to make up for him giving up his control premium of GEM.
YFH is eyeing a piece of the wealth management business too. The city of Jiangyin, near Yangzijiang’s corporate headquarters, is a hotbed of entrepreneurial activities and wealth creation. On top of its own $4.2 billion, YFH aims to manage some $1 billion in external funds. As a wealth manager with deep local ties, Toe believes YFH will have an advantage, not only as a listed entity with solid corporate governance and a proper structure but also with the infrastructure to do cross-border deals in and outside China.
Toe: There’s strong demand for wealth management services from Jiangyin, where Yangzijiang Shipbuilding is based (Image: Albert Chua/The Edge Singapore)
EDB as shareholder
Despite the spinoff into two separately listed entities, there will be synergistic opportunities between Yangzijiang and YFH, says Toe. In March, Yangzijiang announced it will issue $50 million worth of convertible bonds which carries a maturity date of 12 months. Half of this was taken up by Alexandrian Worldwide Incorporated, an entity held by four unnamed senior Yangzijiang management members. The other $25 million was subscribed by EDBI, the investment arm of the Singapore Economic Development Board, which will become a YFH shareholder with the distribution.
In conjunction with this deal, Yangzijiang is setting up an advanced maritime R&D centre in Singapore. The first by Yangzijiang outside China, the centre will look into areas such as green vessel technologies and autonomous vehicles, cyber-physical simulations, digital twinning and advanced low-latency communication systems.
While Yangzijiang will be a potential user of new technologies of products from the R&D centre, YFH will benefit from EDBI’s shareholding and the latter’s potential as an investor that can help commercialise new technologies. EDB, meanwhile, scores for weaving a vibrant economic and investment ecosystem based out of Singapore.
As indicated in YFH’s introductory document, Singapore will act as a second core market and a base for expansion and help diversify “potential risk on China’s growth slowdown”.
YFH notes that the volume of private equity and venture capital assets under management in Singapore has doubled over the last five years, including an increase of 50% in 2020 despite the pandemic. YFH believes making its base in Singapore will keep it in good company as well. Currently, some 370 global and regional PE/VC managers are based here, adding to the “resilience” of the ecosystem.
Better value
Following the listing, YFH is likely to have a busy pipeline of announcements. As indicated in its introductory document, YFH is putting together different ventures with various fund managers. For example, it is in talks with “Fund A” for private equity investment and mulling investments in fixed income growth and tech companies with “Fund B”.
In addition, YFH is eyeing purpose-built student accommodation in the UK with “Fund C” and planning private equity investments in growth companies with “Fund D”. With “Fund E”, YFH is targeting private equity investments in “unicorn opportunities”. Last but not least, it is also looking to ride the spac wave and is in talks with “Fund F” for one in Pipe (Private investment in public equity) or absolute returns.
The flurry of activities comes at a time when there is a higher risk of a global slowdown. “Ironically when the market is not so good, it presents better value for us,” reasons Toe. “Portfolio allocation helps to capitalise on the investment [and] economic cycle,” he says, adding that YFH is in “a sweet spot” of mid-sized deals of between $10–$60 million that is not too big to be unwieldy, yet not too small to be insignificant.
As the poster boy for successful S-chips, Ren has an eye on the bigger picture. The way he sees it, there are possible ways to attract more China-based companies such as Yangzijiang and YFH to list on the SGX.
To “deepen the connectivity between domestic and overseas markets”, the Shenzen and Shanghai exchanges on March 25 laid down a set of “interim measures” where they will consider applications from overseas listed companies with a market value of at least RMB20 billion to list as Chinese depository receipts (CDR). As of April 28, Yangziiang has a market value of $3.54 billion.
Ren says a China-based company can first list in Singapore and then list back in China as a CDR. This could help address the perceived issues of liquidity and valuation of the Singapore market, says Ren.
However, strong regulatory and government support is needed not just in the capital markets but also for other issues like allowing more foreigners into Singapore, says Ren. If things go this way, Lim, the former engineer, might have more stocks to invest in.
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Sidebar: Yangzijiang deserves re-rating after spinoff
The spinoff of Yangzijiang Financial Holding (YFH) as a separate listing will result in a $4.2 billion drop in the asset value of Yangzijiang Shipbuilding (Holdings).
However, what is left of the original listed company is still a sizeable entity that could enjoy a re-rating now that its business is “cleaner” and more focused, and better understood by investors.
Other possible stock price catalysts include potential privatisation offers, accretive acquisitions in the region at “reasonable valuation multiples” as well as a faster-than-expected upturn in the shipbuilding market, notes OCBC Investment Research in an April 22 note. “It has performed better than many other Chinese shipbuilders during the downturn and now stands to benefit in a recovering shipbuilding industry.”
OCBC, which has a “hold” call and 95 cents fair value on the stock, notes that Yangzijiang is seeing better prospects with a recovery of the shipping and shipbuilding industry. Data from market research firm Mordor Intelligence shows that the shipbuilding market is anticipated to grow at a CAGR of 4.84% from US$132.5 billion ($183.01 billion) in 2021 to US$175.98 billion in 2027.
Yangzijiang now has a record order book of some US$8.5 billion to build 157 vessels. These include 12 orders won in the most recent 2HFY2021 ended December 2021. This means its yards will be full till FY2024, giving the management the luxury to remain selective on the orders the company takes on.
From the perspective of DBS analyst Ho Pei Hwa, the market has “over-penalised” Yangzijiang for perceived risks of its debt investments, even though most of the investments are backed by collaterals of greater value than the loans.
Ho believes Yangzijiang, with the record order book, offers potential upside in terms of earnings growth and dividend yield. She is hopeful that Yangzijiang can deliver stronger than expected shipbuilding margins for its mainstream containership contracts that make up around 80% of the order book value. Ho has a “buy” call and $1.38 target price on the stock.
Similarly, UOB Kay Hian analyst Adrian Loh is of the view that Yangzijiang’s shipbuilding business is “materially” undervalued. “Since its IPO in 2007, Yangzijiang has significantly grown and transformed its shipbuilding business, and in addition has the tailwind of high asset prices and charter rates that will benefit its shipping fleet,” writes Loh. His pro forma sum of the parts (SOTP) valuation for Yangzijiang ex-YFH is $1.16.
Yangzijiang is among the top 10 shipbuilders in the world
