Yangzijiang Shipbuilding (Holdings)

[Squirrel]

I took a quick look at their 2020 annual report and I have some concerns.
Firstly their debt investments are all in RMB.  It means likely their portfolio is exposed to China property sector.  They will be significantly hit this year?  Their year-end is coming and I wonder is the announcement done with the year-end audit in mind?

From their 2020 annual report page 106, I noted there is major jump in their loss allowance provision on their debt investment, although as % of portfolio it is still small.  Maybe 2021 will be another major increase in provision?

"Management has determined the expected loss rates by grouping the borrowers according to internal
risk management grading. A loss allowance of RMB539,549,000 (2019: RMB128,118,000) for debt
investments at amortised cost was recognised during financial year."

Hi header

Yes that is a risk that I believe investors are pricing in now. I think for you to be more clear on the risks, you should look at their presentation for Q3. They have significantly pared down exposure to the sector, leaving only 26% in real estate out of circa RMB10.9bn exposure. And if you look at their collateral base, a large part is land. This in my opinion is the safest form of collateral out of those listed. So one would not expect the 26% of real estate debt to be fully written off. Even if debt related to real estate is written down by 20%, it’s very much manageable.

One would also have to note the difference between what’s hogging the headlines in recent months versus what the debt investments that YZJ holds. The bonds that are the focus are offshore dollar bonds that are typically unsecured and in reality likely to be the most junior in terms of recovery due to China’s capital controls. It’s likely that some of these can get totally wiped out in liquidation or get very low recovery under a restructuring. This is why many of these bonds are trading between 20-30 cents to a dollar. This is totally different from the onshore secured debts that YZJ is holding.

I believe the headline news is part of the reason YZJ’s value is depressed as people worry over their debt investments exposure. However I believe these concerns are overblown due to the nature of their debt investments. Therein lies the opportunity to pick up an investment that I deem undervalued.