Yangzijiang Financial Holding

(29-08-2023, 05:42 PM)weijian Wrote:

(12-08-2023, 09:55 PM)Yoyo Wrote: YZJFH 1H 2023 
Note 15 Debt Investment (DI)
Allowance for impairment loss
Opening 255,144
Ending 228,299
Reversal to P&L (ie writeback) 8,493
Debt Investment written off is 18,352 ie 255,144 - 228,299 - 8,493
(Update - 1H2023 Result Presentation stated that there is no utilisation, hence the difference is due to currency translation ).

Redemption 452,007 (vs 1H2022 of 1,187,773)
New DI 474,373 (vs 1H2022 914,656)

As at end Dec 2022, the current portion of DI is 2,264,600.  
1.  The 452m redemption (in the first 6 months) represents 20% of the current DI (to be redeemed within 12 months) 
2.  Some of these current DI may have been refinanced/repackaged with a longer repayment period, resulting in amount rollover to the non-current portion.

Issue - While it is management intention to scale down DI, is it reasonable to expect a complete STOP to approving new DI for the half year?  Don't get me wrong, I would very much like to see a meaningful reduction in the total DI amount.

Note 16 Trade and Other Receivables
1.  Allowance for impairment of loans to non-related parties – microfinance
The reduction is likely to be loan written off of 1,779
2.  Nature of the 105,309 increase in other receivable - non-related parties - other assets (money placement for some yet to disclosed business venture?)

hi yoyo,
Thanks for helping to explain the movement of the loss allowances here. Would you be able to see if my explanation of the NPL movement is correct? (it is found under slide 16/17 of the presentation

1H23 ppt: https://links.sgx.com/FileOpen/YZJFH%201...eID=769833

There is another item on YZJFH's ppt that I would like to seek VBs' confirmation of my understanding. This is in reference to slide 17 and 18 of 1H23, with regards to:

(1) NPL
(2) Allowances for/(reversal of allowances for) credit and other losses
(3) Utilisation of allowance for impairment loss

My understanding:

(1) Loan is classified as "NPL" immediately when no principal payments come due.

(2) "Allowances for/(reversal of allowances for) credit and other losses" are defined as loans where the terms are not amended and legal action is underway to seize the collateral/look for the guarantor etc. Allowances for credit loss are recognized in P/L (and hence to equity). In addition, from the cashflow statement, it is a cash item too (since there is no repayment). Recovery proceeds (if any) that exceed the amount recognized, will be reversed. The same will be reversed in the P/L, equity and cashflow statement

(3) "Utilisation of allowance for impairment loss" is incurred when there is no prospect of recovering the debt. Since it is already recognized in P/L in (2), there is no changes to the P/L and balance sheet anymore as well.

(1) Loan is classified as "NPL" immediately when no principal payments come due?
NPL is commonly understood to be payments of interest and principal are past due by 90 days or more.  But YZJFH may have a different definition.
In the AR 2022 Notes to Accounts 30 - 
Debt Investment is break down into 3 categories
- Performing (Stage 1) 
- Under-performing (Stage 2)
- Non-performing (Stage 3)

NPL (Stage 3) is defined as Principal and/ or interest payments past due; Borrowers facing litigations; or extension of principal repayment date due to financial difficulties;
Under-performing (Stage 2) Borrowers for which there is a significant increase in credit risk; significant increase in credit risk is presumed if there is a decline in internal credit risk grading (which could result from interest payments past due).
Performing (Stage 1) Borrowers have a low risk of default or a strong capacity to meet contractual cash flows. (it is silent on principal and interest overdue).

Though I vaguely recall reading that a loan is considered NPL once the payment is overdue, the above seem to suggest otherwise.  Stage 2 definitely has an element of overdue.

Risk Management Procedures (page 19) dictate commencement of collection process within 2 days upon default, and issue legal letter within 7 days if unsuccessful. At this point in time, I believe the loan should be categorised as NPL or underperforming loan.  Even if it is not considered NPL immediately upon default, the above treatment seems prudent to me (in comparison to our common understanding of NPL).

(2) "Allowances for/(reversal of allowances for) credit and other losses" ie Loan Impairment 
The Group assesses on a forward looking basis the expected credit losses associated with its debt financial assets carried at amortised cost. The impairment methodology applied depends on whether there has been a significant increase in credit risk. Note 30(b) details how the Group determines whether there has been a significant increase in credit risk
As such, allowance for impairment has been made for all the above 3 categories loans.
Allowance for credit and other losses is not a cash item.
https://www.perplexity.ai/search/09f454f...aeef30?s=u

(3) "Utilisation of allowance for impairment loss" is incurred when there is no prospect of recovering the debt. Since it is already recognized in P/L in (2), there is no changes to the P/L and balance sheet anymore as well.

YZJFH defined Utilisation of allowance incurred when there is No reasonable expectation of recovery.  Upon creation of allowance, it is recognised to P/L.  Upon utilisation of allowance, it is a deduction to the Provision amount in the B/S.
Upon utilisation
Dr Provision for allowance for impairment loss
Cr Debt Investments at amortised cost

Debt investments carried at amortised cost are written off when there is no reasonable expectation of recovery, such as a debtor failing to engage in a repayment plan with the Group. Where debt investments carried at amortised cost are written off, the Group continues to engage in enforcement activity to attempt to recover the receivables due. Where recoveries are made, these are recognised in profit or loss.

Hope this helps.

Hi Yoyo,

Thanks a lot. I took a more detailed look at note30 in AR22 with your explanation and is able to better appreciate it now. "Allowances for/(reversal of allowances for) credit and other losses" is not as straightforward as the ah-long recognizing that his debtor has run road with the entire sum, but utilizes mgt judgement (probabilities or expected losses and also collateral coverage) to impair all 3 stages accordingly.

- For NPL (stage3), FY22 was 153/1141 = 13%, compared to FY21 (1285/3011=42%) and 1075/3262=33%).
- For underperforming (stage2), FY22 was 10.9%, compared to FY21=4.7% and FY20=6.4%.
- For ECL for performing loan (stage1), FY22 was 5.6%, compared to FY21=4% and FY20-5.9%.

Since FY22 has gotten worst, it does make sense for stage 2's ECL rate to double, while stage 1 would slightly increase to 5.6% (but lower than FY20's 5.9%).

For NPL, the ECL for FY22 is 13%, compared to the past 2 years of 32-42%. I wonder what has changed for the ECL have such a drastic reduction?

P.S on the portion of "Allowance for credit and other losses is not a cash item", the layman (non accountants who try to learn accounting) understand it as things like goodwill impairment, fair value/gain losses are all non cash items because it is been added back as an item on the CF statement. But for FY22, the 123.8mil of allowances is not shown as a line item... After some thinking, it seems like it is added back under "Debt investments at amortised cost" at 45mil (Under note15, the 45mil is coming Redemption-Addition+impairment = 1638-1714+121=45mil). So yes, it is indeed not a cash cost (for now).

(11-09-2023, 03:51 PM)weijian Wrote: For NPL, the ECL for FY22 is 13%, compared to the past 2 years of 32-42%. I wonder what has changed for the ECL have such a drastic reduction?

2022AR Notes to Accounts 30 (b) (iv) - Spin-off process of 262,151 under Stage 3
https://links.sgx.com/FileOpen/SAR230100...eID=752711

There are certain assets that are left in YZJ SB and not transferred into the spin off entity in YZJ FH. The reasons for retention of the debt investments are especially important. The reasons include YZJ SB in current litigation proceedings for overdue payment, not transferred due to debt investments being in embroiled in financial difficulties and debtors disagreeing to transfer ownership. In short, these are the most problematic investments that are not spun off with YZJ FH.
https://www.thesquirrelsdrey.com/post/ya...uld-you-do

(11-09-2023, 11:30 PM)Yoyo Wrote: 2022AR Notes to Accounts 30 (b) (iv) - Spin-off process of 262,151 under Stage 3
https://links.sgx.com/FileOpen/SAR230100...eID=752711

There are certain assets that are left in YZJ SB and not transferred into the spin off entity in YZJ FH. The reasons for retention of the debt investments are especially important. The reasons include YZJ SB in current litigation proceedings for overdue payment, not transferred due to debt investments being in embroiled in financial difficulties and debtors disagreeing to transfer ownership. In short, these are the most problematic investments that are not spun off with YZJ FH.
https://www.thesquirrelsdrey.com/post/ya...uld-you-do

hi Yoyo,
I have read VB Squirrel's blog on this and also cross verified it from the prospectus previously. The movement in AR22 confirmed it as well.

While this takes away the bad debt and is a positive thing, the key question is what is the probable base rate for the existing NPL debt? Is it close to teens (end FY22 as estimated by Mgt), the historical 30-40% (FY20-21) or probably even higher with current stressed conditions? The market currently does not agree to it been valued at the teens and I agree. For context, I noticed Metro Holdings invested in a fund that purchases debt of developers of 3rd tier properties (backed by residential properties) and took a 36mil/120mil investment (30% impairment) in FY22 as well.

Also, we can think of YZJFH as a closed end fund? Closed end funds can trade at discounts between 50% - for those where there are obvious traps like iCapital Bhd and TIH, to the typical between 20-30%.

So here is my feeble attempt to value YZJFH (based on 1H23):
- Assume a 50% ECL for NPL, with NPL maintained at current ratio.
- All treasury shares cancelled.
- Since YZJFH is not shy to give a high payout ratio, it should not be trading like iCapital Bhd, and so I will assume a 30% discount to NAV as fair value.

50% ECL for NPL = 0.5*960mil = 480mil
Additional loss to be recognized in equity = 480 - 151 (existing loss) = 329mil
Total equity (40% ECL for NPL) = 3839mil - 329mil = 3510mil.
Market's fair value of closed end fund (30% discount) = 0.7*3510mil = 2457mil
NAV per share = 2457mil/3704mil shares = 0.66sgd

Somehow, YZJFH looks like a bargain no matter how Squirrel, you or me dice it....

Hi weijian

Minor amendment.
Figures as per June 2023.
Total Equity is 3839m
Issued shares exclude treasury shares is 3649m (Other Info Point 4)
https://links.sgx.com/FileOpen/YZJFH%20A...eID=768867

Scenario 1
Adjusted Total equity (40% ECL for NPL) = 3839mil - 329mil = 3510mil (AdjNet Asset Value)
Market's fair value of closed end fund (30% discount) = 0.7*3510mil = 2457mil
Adj NAV per share = 3510mil/3649mil shares = 0.96sgd
Adjusted market FV per share = 2457mil/3649mil shares = 0.67sgd


Scenario 2
What if we are aggressive and consider all DI as worthless, total write off
DI = 2622m
Adjusted Total equity = 3839mil - 2622mil = 1217mil (AdjNet Asset Value)
Adj NAV per share = 1217mil/3649mil shares = 0.33sgd
Share price @12 Sept 2023  0.36sgd
In another word, disregarding the premium/discount to market, the non DI business is almost enough to support the share price, with the DI business thrown in FOC (literally speaking). BUT is the DI really worthless, not to forget all the collaterals pledged by the borrowers.

hi Yoyo,

I had suspected that YZJFH "core" supporters would be using the more updated (and smaller) share count post 1H23 results announcement!

A "closed end fund" will only not trade at a discount to accounting NAV if the assets are recorded at historic cost on the balance sheet, indicative of potential hidden value. Since all of YZJFH's holdings are updated and at FV, we have to accept that it will never trade at NAV. For example, if YZJFH eventually liquidates itself, it probably has to do a capital reduction first. To do a capital reduction, the Chinese authorities have to agree (where probably >50% of ownership belongs to non PRCs). And let's say if the Chinese authorities agree to a capital reduction and YZJFH proceeds to pay out its liquidated monies as dividends, there is the 10% withholding tax. As such, I suspect a 30% discount to NAV is probably the "fair value" if we assume the "loss of control", taxes to repatriate the money and liquidation costs.

So working backwards on this 30% discount as fair value:

Market valuation = 70% discount of (Total equity - market expectation of impairment*DI sum)
0.36*3649mil shares = 0.7*(3839 - X*2622mil) --> where X = market expectation of DI impairment.
X = (((0.36*3649)/0.7) - 3839)/2622 = 0.75

In other words, at current market price of 36cents, the market expects a 75% haircut to its entire DI (debt investments at amortised cost), or 25cents to the dollar. For context, the last time I heard of such haircuts for mortgage debt, it was Merrill Lynch selling out its entire CDO position to another hedge fund as GFC2008 before moved towards its crescendo in Sept/Oct.

On January 17, 2008 Merrill Lynch announced further writedowns of $11.5 for its CDO positions and in July of 2008, it sold some $30.6 billion gross notional amount of U.S. super senior CDOs (which had been carried at a valuation till that point of $11.1 billion) to Lone Star for $6.7 billion

(11-09-2023, 11:30 PM)Yoyo Wrote:

(11-09-2023, 03:51 PM)weijian Wrote: For NPL, the ECL for FY22 is 13%, compared to the past 2 years of 32-42%. I wonder what has changed for the ECL have such a drastic reduction?

2022AR Notes to Accounts 30 (b) (iv) - Spin-off process of 262,151 under Stage 3
https://links.sgx.com/FileOpen/SAR230100...eID=752711

There are certain assets that are left in YZJ SB and not transferred into the spin off entity in YZJ FH. The reasons for retention of the debt investments are especially important. The reasons include YZJ SB in current litigation proceedings for overdue payment, not transferred due to debt investments being in embroiled in financial difficulties and debtors disagreeing to transfer ownership. In short, these are the most problematic investments that are not spun off with YZJ FH.
https://www.thesquirrelsdrey.com/post/ya...uld-you-do

I thought it would be interesting to take a look at what happened to the retained debt at parent YZJSB. Surprise surprise...They were totally liquidated based on 1H23 statements. (All transactions in RMB below)

(1) Based on parent YZJSB AR22 (pg178), all remaining DI were carried as NPL with the ECL = 1155mil/2730mil = 42%. There was remaining 1576mil of "problematic" DI left on the BS.

(2) Fast forward to 1H23, all 1576mil of DI has been taken off the balance sheet, with below statement:

The balance of debt investments at amortized costs decreased to zero as of 30 June 2023 from RMB 1,576 million as of 31 December 2022, as these investments were redeemed or disposed during the period. The loss allowance for debt investment at amortised costs decreased to zero as of 30 June 2023 from RMB1,155 million as of 31 December 2022, the movement being the loss allowance of RMB66 million recognised in profit and loss and utilisation of RMB1,221 million during the period.

So total realized credit loss with this transaction = 1155+66 = 1221mil, or 1221mil/2730mil = 45%.

(3) So basically, parent has taken a 45% haircut and got back 55cents on the remaining NPL (based on CF statement, they got it back as cash). Contrasting with YZJFH probably rolling over all its current DI (to maybe non current), parent YZJSB has liquidated 1576-66=1510mil rmb = 287mil sgd. They don't look as problematic as they sounded in the prospectus?

- Since most of them were probably in litigation, they definitely don't look like the debtors suddenly paid them all up.
- Did parent sell them off to a debt collector?
- A repo? (sell off to some financial institution with agreement to repurchase back in future) - Unlikely as this damages the Ren name.
- Was it a "familiar" party transaction? (unlike related party, which has to be disclosed)

parent YZJSB AR22:
https://links.sgx.com/FileOpen/YZJ%20-%2...eID=752703

parent YZJSB 1H23: https://links.sgx.com/FileOpen/Announcem...eID=767782

The provision for credit loss (ie ECL)
The ECL for non-performing investment is determined on an individual basis using a discounted cash flow methodology. The expected future cash flows are based on the management estimates as at the reporting date, reflecting reasonable and supportable assumptions and projections of future recoveries. Collateral is taken into account if it is likely that the recovery of the outstanding amount will include realisation of collateral based on its estimated fair value of collateral at the time of expected realisation, less costs for obtaining and selling the collateral. The cash flows are discounted at the original effective interest rate.

IMHO, it is mainly due to the encashment/realisation of the collateral and personal+corporate guarantee.

- Did parent sell them off to a debt collector? - will attract a high cost, thus lower realisable value (unlikely)
- A repo? (sell off to some financial institution with agreement to repurchase back in future) - Will need to report under contingent liabilities in the notes to accounts
- Was it a "familiar" party transaction? (unlike related party, which has to be disclosed).  If beneficial to the "familiar" party - may risk stewardship and governance issue, if not beneficial why throw money into the sea.

(15-09-2023, 02:01 PM)Yoyo Wrote: IMHO, it is mainly due to the encashment/realisation of the collateral and personal+corporate guarantee.

Hi Yoyo,

Let's try to further expand on your humble opinion with mine. I thought the speed and magnitude of this encashment/realization is interesting.

The speed ~287mil was realized into cash within half a year. Looking at the way YZJFH rolled over its DI, I think parent did a good job with those transferred to its BS. Was it because it wasn't that "problematic" after all? Was it because parent was in a hurry to get this asset off its main business since it is not core now?

The magnitude We know that the parent "settled" by getting back 55cents to the dollar. From the prospectus, the average collateral (assets and guarantees) itself was ~100/0.75=125cents to the dollar. So that is a bigger haircut from the collateral (55% haircut of collateral compared to 45% realized loss). Did the collateral deteriorated in value? Or they were just in a rush to divest non core business at speed?

Many unanswered questions. But I suppose things wouldn't be cheap if the future were certain. But with parent's disposal of its DI within 6 months at this particular price (55cents to the dollar), I like to think that this disposal provides a credible base valuation of YZJFH's own DI assets, Of course, the parent's disposal is only ~10% of YZJFH's entire DI portfolio but I am sampling this 10% of debt and assume this sample is representative in terms of "problematic loans" and 'similarity in the quality and coverage of its collateral".