YANGZIJIANG FINANCIAL: Can It Mirror Yangzijiang Shipbuilding's Rise?

The Edge Singapore has put out an insightful article analysing Yangzijiang Financial Holding, an investment firm spun off from the highly successful Yangzijiang Shipbuilding 3 years ago. While the shipbuilder saw a dramatic share price increase in 2024 due to surging shipbuilding orders, the financial company's performance, although strong, lagged behind. The article explores whether Yangzijiang Financial (market cap: S$1.6 billion) represents a worthwhile investment opportunity, considering its diversification strategy away from China's real estate market and its increasing focus on the green maritime sector. It has a strong net cash position and an appealing 40% dividend payout ratio.   And it is trading at a steep discount of over 60% to its book value. One negative point the article missed is Yangzijiang Financial's high non-performing loan ratio of 43.5% (as at 1H2024).  Actual losses remain low due to the company's conservative strategy to ensure that loans are overcollateralised with sufficient buffer for asset deterioration. The company has said it is using legal actions to deal with bad loans and speed up selling the collateral (assets pledged as security) to get back the money owed, including both the original loan amount and any interest.

Key Themes and Ideas from The Edge article:

• Yangzijiang Financial's Subdued Rise: Yangzijiang Financial saw its shares increase by 28% in 2024.
  
  It has consistently traded "well below its book value" since its listing.
  
  
• Industry trends: The article speculates if "Yangzijiang Financial [would] be a better bet for exposure to the maritime sector" given its discount and exposure to maritime industry trends of decarbonisation.
  
  Yangzijiang Financial is investing in green shipping and related maritime services.
  
  

• Green Investments: One of Yangzijiang Financial’s standout strategies is its commitment to green shipping. 
  
  It is raising a US$600 million fund to invest in "so-called green vessels for chartering" and related services like "shipbroking and financing ship owners’ fleet decarbonisation efforts." $325 million of this has already been deployed.
  
  
• There is significant market potential for green shipping, given the International Maritime Organization's goal to achieve net-zero greenhouse gas emissions by 2050.
  
  

  "Going forward, we are focussing on redeploying more funds into maritime-related investments. Given our entrenched network and deep knowledge in the maritime industry, we are well-equipped to recognise attractive prospects and successfully execute deals in this space. Our niche in maritime investments will give us an edge and set us apart from the rest of the players in the investment management industry, opening up doors for more growth opportunities in the future.” -- Ren Yuanlin, Chairman & CEO (Source: 1HFY2024 press release)

  
  
  Yangzijiang Financial's Business Model and De-risking Strategy:
  
  

• Business Model: Yangzijiang Financial aims for "capital appreciation and dividend income, as well as fees from managing third-party investment funds and from providing wealth management services."
  
  
• Historical Focus on China: Previously, Yangzijiang Financial focused heavily on debt investments in China, lending to small businesses, farmers, and property developers. Collateral, typically real estate, was required.
  

• Diversification: To mitigate risk, Yangzijiang Financial has expanded into Singapore, focusing on managing third-party funds and providing wealth management services. Its assets under management (AUM) are now split equally between China and Singapore.
  
  
• Portfolio Shift: Yangzijiang Financial plans to increase its equity exposure to 60% (from slightly over 10%), reduce debt investments to 30% (from 42% in 2023) and hold the remaining 10% in cash and yield-enhancement investments (down from >40%).
  
  Valuation and Potential Upside:

• Discount to Book Value: Yangzijiang Financial trades at "a discount of more than 60% to its book value".
  
  

  Strong Cash Position: Yangzijiang Financial has a strong net cash position of $0.38 per share, increasing to nearly 49 cents if yield-enhancing products are included. That is more than the stock’s 52-week high of 45.5 cents and nearly half of Yangzijiang Financial’s latest reported net asset value per share of $1.11. Attractive Dividend Policy: Yangzijiang Financial's 40% dividend payout policy makes it attractive to income investors.

  
  
  

• YZJ Financial dividends
  Period	FY22	FY23	1HFY24
  SGD cent	1.8	2.2	--
  Net profit (S$’m)	162.0	201.8	107.4

  Limited Downside: The article argues that a major pullback in Yangzijiang Financial's share price should be unlikely due to rising income from Singapore, its strong cash position, and its attractive dividend yield.
  
  It concludes with the striking observation: "if you buy the stock now, you’re getting 49 cents of net cash and 62 cents worth of debt and equity securities held in its investment portfolio. Not many stocks come with such tantalising freebies."