Yangzijiang Financial Holding

[dreamybear]

At current share price. It would still be a bargain even if ALL of the allowance for impairment are realized and that ALL of the NPL are written off. China real estate and to a large extent, the overall chinese economy is in bad shape. On the ground, things are worse than what is reported.

I am not sure whether it's a "bargain" for OPMI; I believe it's a bargain if one buys a controlling stake at the current share price. Notwithstanding the mkt can remain irrational for long period of time saying, it is gd for OPMI only if the mkt is willing to price it much higher in the future(considering things like risks, opportunity costs). 

Will it happen ? Well, I don't know but I think we can draw some reference from the long term valuations of the China big banks.

Although the context of the below post is different(i.e. privatization), I believe the idea still applies here.  

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"...Buying at 60-70% NAV does not give a margin of safety..."
https://www.valuebuddies.com/thread-9588...#pid167931

[Big Toe]

My 2 cents on China Banks Vs YZJ finance.

First china banks are incorporated in china and is very heavily regulated. YZJ finance is not
Also there is a strong link between the Central Government and the chinese banks.
There is little question that one of the key role for china banks is for nation planning/objectives.
Time and again we see that Profit Vs National objectives, they do not mix well.

One can also argue that capital controls are just as tight since both have most of their debt assets/investments in china, and that is a fair arguement. Personally I have a much higher tolerance for things to go awry because in all likelyhood things will eventually go awry for majority of the companies if you hold them long enough. What happens then? (in the case of YZJ finance, what happens now?) One has to judge if a company is a good candidate to survive the storm and come out stronger.

[CY09]

I do agree YZJ finance is in a tight spot politically. We must be aware that the chairman can be taken away by the Chinese Authorities to correct his behaviour.

As mentioned above:

"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."

YZJFH could have decided not to invest in new debt instrument, taking out SGD$452 million from China Credit market. Instead it opts to invest back the entire amount in debt investments which are 1 year or more. This runs countrary to the compay's goals of shifting assets out of China, making it fall far behind its target published last year. Shareholders should question if the funds could be set to better investments where currently it is earning double digit returns and likely in a less risky area. This is what its fund mgmt arm is achieving in Singapore.

I have no doubts what YZJFH is doing is to prevent the chairman from being taken away by political authorities and the company is now placing national interest ahead of its profits. Similar to what ICBC, CCB, BOC & ABC are forced to do.

It is likely shareholders will see a large amount of debt investments on the balance sheet for years, akin to loans made to zombie companies in China. Until China cleans up its debt problem, we have to contend with the 7-8% dividends from YZJFH.

Given YZJFH is giving 7-8% dividends while the Chinese national banks are giving 8% dividends (nett of overseas tax levied by China on overseas shareholders), there is not much value difference. Hence I expect YZJFH to continue floundering in its 34-38 cents range until China's credit situation improve and YZJFH is able to start redeeming its debt investments to shift it out of China

[gzbkel]

So far, has there been examples of any CEO in China been "taken away by Chinese authorities" for making purely business decisions? Excluding corruption or making political statements

[CY09]

https://links.sgx.com/1.0.0/corporate-an...98ca31226d

The usual SBB is back! 3 million @ 0.36

Hopefully they will maintain a daily buyback of 3 million

[dreamybear]

It is likely shareholders will see a large amount of debt investments on the balance sheet for years, akin to loans made to zombie companies in China. Until China cleans up its debt problem, we have to contend with the 7-8% dividends from YZJFH.

Given YZJFH is giving 7-8% dividends while the Chinese national banks are giving 8% dividends (nett of overseas tax levied by China on overseas shareholders), there is not much value difference. Hence I expect YZJFH to continue floundering in its 34-38 cents range until China's credit situation improve and YZJFH is able to start redeeming its debt investments to shift it out of China

yeah, looks to be stretching over a long period .... but good to have dividends / SBB while waiting ....

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Yangzijiang Financial H1 profit up 19.2%; looks to boost investments outside China
https://www.straitstimes.com/business/ya...est-income  (emphasis added)
"....The company said it remains focused on diversifying its assets under management, and is looking to gradually increase its investments outside China over the next five years...."

[d.o.g.]

At a very high level, YZJFH and Chinese state-owned banks have similar underlying exposure to Chinese real estate (around 30%). So if the Chinese banks are trading at less than 0.5x book and paying 8% yields, it is hard to expect YZJFH to trade at signficantly higher valuations.

Note that the Chinese property crisis has spread to even state-owned developers like Greenland and Sino-Ocean. If a state-owned developer cannot get funding from a state-owned bank, obviously there is a big problem, equivalent to Capitaland being unable to borrow money from DBS.

Bond Supermart recently published a page showing the bid prices of 30 Chinese developers' bonds:

https://www.bondsupermart.com/bsm/articl...CMS_255744

Note the bimodal distribution (2 broad groups) - less than 20% of par, and 47-98% of par. Basically if you are in distress, the markdown is immediate and severe. The prices are definitely out of date for Country Garden, as they've since defaulted - the bonds now trade below 10 cents on the dollar.

For YZJFH to mark their book down only 8% means either they only had exposure to the very strongest issuers like Vanke/COLI/CR Land, or they are using "mark to model" accounting. For 1H23 they reported $142m of interest income on a book of $2.6bn, this would be 10.9% annualized interest rate. For all of 2022 they reported $332m of interest income on a book of $2.6bn, or a yield of 12.8%.

Average cost of debt as per their respective 2022 annual reports:
COLI: 3.57%
China Vanke: 3.88%
CR Land: 3.75%

The simple conclusion here is that YZJFH does not hold super-safe debt issued by the likes of COLI, China Vanke or CR Land. In fact, most likely its debt portfolio is dominated by sub-prime borrowers. Therefore there is a high chance that its debt investments will suffer meaningful defaults. Investors should assume that debt recoveries in the property sector will be low, as the Chinese government will prioritize completion of units for homeowners, then payments to contractors, before worrying about institutional investors, whether lenders or shareholders.

If we conservatively assume 50% of the debt portfolio defaults with no recovery and the rest is money good, then the debt portfolio is worth $1.3bn. Group book value drops to 2/3 of the reported value i.e. 70c instead of $1.05. Is 0.5x adjusted book value a safe price? The investor must decide for himself.

Of course, 70% of the debt portfolio is not directly linked to property, so it may not be fair to tar it all with the same brush. But common sense suggests that 8% markdown is too little, given that property permeates all of China's economy and is estimated to account for 70% of household wealth.

YMMV.

[Squirrel]

At a very high level, YZJFH and Chinese state-owned banks have similar underlying exposure to Chinese real estate (around 30%). So if the Chinese banks are trading at less than 0.5x book and paying 8% yields, it is hard to expect YZJFH to trade at signficantly higher valuations.

Note that the Chinese property crisis has spread to even state-owned developers like Greenland and Sino-Ocean. If a state-owned developer cannot get funding from a state-owned bank, obviously there is a big problem, equivalent to Capitaland being unable to borrow money from DBS.

Bond Supermart recently published a page showing the bid prices of 30 Chinese developers' bonds:

https://www.bondsupermart.com/bsm/articl...CMS_255744

Note the bimodal distribution (2 broad groups) - less than 20% of par, and 47-98% of par. Basically if you are in distress, the markdown is immediate and severe. The prices are definitely out of date for Country Garden, as they've since defaulted - the bonds now trade below 10 cents on the dollar.

For YZJFH to mark their book down only 8% means either they only had exposure to the very strongest issuers like Vanke/COLI/CR Land, or they are using "mark to model" accounting. For 1H23 they reported $142m of interest income on a book of $2.6bn, this would be 10.9% annualized interest rate. For all of 2022 they reported $332m of interest income on a book of $2.6bn, or a yield of 12.8%.

Average cost of debt as per their respective 2022 annual reports:
COLI: 3.57%
China Vanke: 3.88%
CR Land: 3.75%

The simple conclusion here is that YZJFH does not hold super-safe debt issued by the likes of COLI, China Vanke or CR Land. In fact, most likely its debt portfolio is dominated by sub-prime borrowers. Therefore there is a high chance that its debt investments will suffer meaningful defaults. Investors should assume that debt recoveries in the property sector will be low, as the Chinese government will prioritize completion of units for homeowners, then payments to contractors, before worrying about institutional investors, whether lenders or shareholders.

If we conservatively assume 50% of the debt portfolio defaults with no recovery and the rest is money good, then the debt portfolio is worth $1.3bn. Group book value drops to 2/3 of the reported value i.e. 70c instead of $1.05. Is 0.5x adjusted book value a safe price? The investor must decide for himself.

Of course, 70% of the debt portfolio is not directly linked to property, so it may not be fair to tar it all with the same brush. But common sense suggests that 8% markdown is too little, given that property permeates all of China's economy and is estimated to account for 70% of household wealth.

YMMV.

Hi

I think it should be highlighted that the link you provided to those are offshore bonds, and all USD denominated. There is a pretty big difference in terms of seniority in claims between onshore and offshore debt. Thus I believe you are not comparing apples to apples. The rest of your analysis would be moot if you agree the two are different.

I am not saying YZJ FH isn’t in a pickle. But it’s just not right to compare to the list of offshore bonds and their MTM when what they holding is much higher in claims seniority and well collateralised.

Just my two cents worth.

[Big Toe]

Chinese Bond universe, a lot of numbers to crunch.
In summary.
On shore/ offshore bond defaults mainly coming from property developers.
Lights are flashing Amber in default risk/credit quality for property developers.
Other issuers are generally green.

It is still largely a property crisis for now. But since it a significant part of the economy, contagion risks are real.
Esp now with weak export numbers.

Property prices need to be stable and people will need to start buying properties(eventually they will) in order for the developers to become healthy again. No amount of help or extension of bond maturities can aid recovery if people avoid properties like a plague for a prolonged period.

On a brighter note, valuation for YZJ Finance is so low now that even if ALL NPL is written off, its NAV is still a nice figure. Also even for a bond to be in defualt, especially for chinese onshore bond, historically, cash recovery is still decent. We can apply the same principal here as well.

[CY09]

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

The latest presentation is out, 2 things that stand out.

Page 16- Investments into DI with maturities of more than 2 years has grown from 5% to 18%
DI with Real Estate has grown from 29% (Dec 2022 presentation) to 35% (June 2023)

Page 14- Singapore portfoilo has grown from 12.9% to 14.5%, still rather far away from its 50% long term target.

My inference: YZJFH has been forced to double down on real estate. As financial allocators, I do not think it is them who are bottom fishing but instructions from CCP to finance companies to save the property market. Its going to be a painful ride for shareholders where national interest comes before shareholders even for private companies. If this is the case, can the communist party consider a takeover of all private entities