Yangzijiang Financial Holding

[weijian]

@Big Toe,
I think the old adage "amend, extend and pretend" applies here. How it deals with NPI was presented in 1H23 FAQ.
https://www.valuebuddies.com/thread-1076...#pid169281

@CY09,
Mr Market has already called its bluff on the value of its collateral some time ago. So your "commonly thought" is not really common, but taking what is presented as face value. As I presented some time back, how much parent sold all its NPI for from its 1H23 results, is what the debt is really worth on the market. Whether it has gone worst or will be better in time to come, it's anyone guess.

[weijian]

This is EC World REIT news but it could be applicable to the collateral that YZJFH takes in when it dispenses its money to the property related borrowers. The legal team at YZJFH will have their workload full if they realize that their collateral is "junior ranking" to more senior obligations.

EC World Reit says 3 properties mortgaged without consent

THREE properties owned by EC World Real Estate Investment Trust (Reit) have been mortgaged without the consent or knowledge of its manager. The loans were in connection with the Fuyang local government in China providing Forchn Holdings, the sponsor of EC World Reit, with rescue funds.

Most of the mortgages are third ranking, except for those in favour of Zhejiang Fuyue Finance Lease which are fourth and fifth ranking. This means that they do not have priority over EC World Reit’s existing first and second ranking mortgages on existing facilities, and the mortgages of its existing lenders will not be affected.

https://www.businesstimes.com.sg/compani...ut-consent

[Squirrel]

This is EC World REIT news but it could be applicable to the collateral that YZJFH takes in when it dispenses its money to the property related borrowers. The legal team at YZJFH will have their workload full if they realize that their collateral is "junior ranking" to more senior obligations.

EC World Reit says 3 properties mortgaged without consent
THREE properties owned by EC World Real Estate Investment Trust (Reit) have been mortgaged without the consent or knowledge of its manager. The loans were in connection with the Fuyang local government in China providing Forchn Holdings, the sponsor of EC World Reit, with rescue funds.
Most of the mortgages are third ranking, except for those in favour of Zhejiang Fuyue Finance Lease which are fourth and fifth ranking. This means that they do not have priority over EC World Reit’s existing first and second ranking mortgages on existing facilities, and the mortgages of its existing lenders will not be affected.
https://www.businesstimes.com.sg/compani...ut-consent

Hi Weijian,

I believe there needs to be a mental exercise on the possibility of what you have outlined to happen to YZJ, or even anyone for that matter.

“if they realize that their collateral is "junior ranking" to more senior obligations.”

Let’s take the scenario that it is possible to sneak ahead and have the pledgor pledge an asset to another creditor in a more senior claims position. How would that make the current mortgage market? Anyone would be able to pledge their homes to multiple banks and get loans multiple times of their own property’s value. The fact that this is not happening means that there are guard rails in place to prevent it.

From my understanding, there is a central registry in place to record pledges on real estate. Unlike containers of copper or warehouses of nickel, real estate is perfectly identifiable and not mobile. The registry allows for lenders to be granted liens by the borrowers for certain real estates owned by the borrowers by putting an entry in the registry. A subsequent lien on the same real estate can still be done at a more senior level but only with consent by the current creditor holding first lien. More junior liens can theoretically be granted since it doesn’t reduce claims on the first lien but it depends on terms of the senior loan and whether consent is required.

I am not a lawyer, but the fact that the mortgage market has been functioning properly in China for decades does suggest that probably something similar to the above is in place to ensure an orderly market.

[Squirrel]

In short, I find the scenario painted by

“ if they realize that their collateral is "junior ranking" to more senior obligations”

to be highly unlikely. It would either mean they did not check the register before signing the docs (very unlikely for someone in the industry), or someone was able to be pledged as a more senior claimant and circumvent the legal system without getting their consent.

[weijian]

hi Squirrel,

Thanks for your insight. Just to clarify, i similarly believe it is highly unlikely.

In the location where I stay, the financiers (ie. banks) and buyers will pay for the lawyers to conduct due diligence by checking on the caveats lodged with the land authorities. So a bank will lodge a caveat on a title whenever someone takes out a mortgage loan from them. The legal rep of a buyer will also lodge a check with the land authorities to see all the caveats on the title that she/he wants to buy. This system looks foolproof enough but doesn't mean it can't fail. When it fails, it is probably someone along the chain did not do their work, for reasons of incompetency or maybe of more nefarious nature?

"A functioning property market for decades" suggesting that the system is robust enough, is correct. But we all know the adage "You only know who's been swimming naked when the tide comes down". So would it be right?

Will be interesting to see EC World REIT revealing more details (hopefully so) in time to come.

[weijian]

hi Squirrel,

Thanks for your insight. Just to clarify, i similarly believe it is highly unlikely.

In the location where I stay, the financiers (ie. banks) and buyers will pay for the lawyers to conduct due diligence by checking on the caveats lodged with the land authorities. So a bank will lodge a caveat on a title whenever someone takes out a mortgage loan from them. The legal rep of a buyer will also lodge a check with the land authorities to see all the caveats on the title that she/he wants to buy. This system looks foolproof enough but doesn't mean it can't fail. When it fails, it is probably someone along the chain did not do their work, for reasons of incompetency or maybe of more nefarious nature?

"A functioning property market for decades" suggesting that the system is robust enough, is correct. But we all know the adage "You only know who's been swimming naked when the tide comes down". So would it be right?

Will be interesting to see EC World REIT revealing more details (hopefully so) in time to come.

It seems like the Fuyang Financial Institutions are fine with much lower ranking mortgages (3rd/4th/5th) for some of these properties, probably to be packaged together with others on first ranking I suppose?

Lower ranking mortgages been taken out normally means there is equity. It also means in the situation of an orderly liquidation, there will probably be some money left for EC World REIT shareholders?

It is however quite incredible that lenders are ok with 3rd/4th/5th rank mortgages though.

UPDATE IN RELATION TO THE IMPOSITION OF MORTGAGES OVER FUZHOU E COMMERCE, FUHENG WAREHOUSE AND HENGDE LOGISTICS

The Sponsor had provided a list of assets (including the Relevant Properties) to the Fuyang Financial Institutions;

(ii) the relief funds from the Fuyang Financial Institutions amounted to approximately RMB 120 million and RMB 100 million;

(iii) in connection with the foregoing, the Fuyang Financial Institutions requested the 3rd, 4th and 5th ranking mortgages (the “Relevant Mortgages”) to be imposed on the Relevant Properties for a value of RMB 268.6 million as well as other mortgages and/or securities imposed on the Sponsor’s other properties and other assets that are not related to EC World REIT;

https://links.sgx.com/1.0.0/corporate-an...1530babf52

[dreamybear]

EPS up; DPS up; Cash/Cash equivalents up from 620m to 1.4b ....
NAV is up slightly and with the share price staying constant, I think the mkt is primarily using P/B to value YZJ FH ?

If so, next question for OPMI may be what r possible alternatives - SG Banks ? China Big 4 Banks ? And which is the best bet among them to put your money in ?

---------------
https://www.businesstimes.com.sg/compani...-3-million

Financial Statement
https://links.sgx.com/FileOpen/Announcem...eID=790305

[weijian]

hi dreamybear,
I am not sure how Mr Market values YZJFH but I tend to want to use liquidation value. Retrieving my posting 6months ago as below.

hi Yoyo,

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.

My notes:

Taxes from declaring dividend at Chinese subsidiaries and repatriate them out of China
- From recent FY23 results, it seems the balance sheet has already accounted for the taxes as below:

Deferred income tax liabilities decreased by 25% or S$56.47 million, from S$228.91 million as at 31 December 2022 to S$172.44 million as at 31 December 2023. The decrease was mainly due to withholding tax paid on distributed profits of China subsidiaries during the year.

- Mgt has stated a tax rate of 5-10% and if we assume the mid point (7.5%), paying 56.5mil tax translates to 753mil of declared dividends at its Chinese subsidiaries' level. So actual dividend received based on tax calculations = 750mil - 56.5mil = 696.5mil. Its asset base in Spore is 1.25bil (FY23) compared to 534mil (FY22) --> delta of 690mil and that is very close to the figure of 696.5mil based on the tax calculation.

- At end FY21, deferred income tax liabilities was 72mil. With FY23's end tax liabilities of 172mil, it means there is another 100mil of taxes to be paid --> translating to 1.33bil it has accounted for to be declared as dividends/capital reduction. Net of the taxes, that is 1.33bil-100mil=1.23bil to be expatriated out of China.

So how is Mr Market valuing YZJFH now?
- I am replicating my previous "liquidation" formula below:
Market valuation = 70% discount of (Total equity - market expectation of impairment*DI sum)
0.33*3597mil shares = 0.7*(3719mil - X*1679mil) --> where X = market expectation of DI impairment.
X = (((0.33*3597)/0.7) - 3719)/1679 = 1.2 --> Since X>1, this means Mr Market expects a 100% write down of its China's DI.

- So now, we assume China's DI=0 and refit the equation below to see how much Mr Market discounts its remaining asset.
0.33*3597mil shares = Y*(3719mil - 1679mil)
Y = (0.33*3597)/2040 = 0.58

- So in other words, Mr Market is currently valuing its China DI at zero and all its remaining assets at 58% of stated accounting value.

- Out of its remaining assets at 2040mil accounting value, 1400mil or 70% of it is actually cash. So in essence, Mr Market is currently assigning a ZERO value to its China DI and all other non-cash investments, while giving a slight haircut to the cash it is holding.

[CY09]

Hi Weijian,

<just logging my analysis on the DI as well>
For context, the presented DI value of 1.679 billion has included YZJ own internal assessment where they have provisioned 258.6 million in allowance. The principal value of YZJFH DI is 1.928 billion.

The million dollar question (if one truly owns that much YZJFH) is how much of the principal is lost upon maturity. This is a black box. To shed some light, on a YOY basis. YZJFH's allowance for impairment rose from 255.1 million to 258.6 million (2023 vs 2022); this was after setting aside an allowance of 39 million in its income statement. This year they redeemed about $0.980 billion and the actual impairment was about 36 million.

Comparing 2022 vs 2021, YZJFH's allowance fell from 398million to 255 million which meant when they redeemed their debts there was quite a substantial amount of losses. This was on top to the 130 million of allowance it recognised for 2022. For year 2022, there was a substantial amount of DI which turned sour and liqudated value was lower than the principal. That year YZJFH redeemed about $1.02 billion in debts. So the amount of realised impairment was [(398-255)+123] million. Approx 266 million was impaired when they redeemed $1.020 billion in DI

Right now, YZJFH has set aside 258.6 mil in allowance against 1,928 billion in loan. This is a 13% discount by YZJFH own internal accounting team. In my view, another 30% discount by us investors is quite pessmisitic given the track record of the company's redemption thus far.

Of course the worry is that the amount of non-performing loan has been growing year on year. 11%-->41%-->41%; Underperforming 3%-->6%-->10%

[weijian]

Hi CY09,
Yes you are right. In theory, I should be using the "pre impaired" principal value of 1.928 billion. But I think in practice, it does no harm (and probably doesn't change the numbers much) to use the impaired number 1.679 billion and from there, see how much discount Mr Market is expecting.

So how much discount is realistic? Is it really a black box? Are Mgt's estimates of allowances correct?
- First, we have to understand that "realized impairment loss" is a lagging indicator. Generally, lagging indicators are not useful at all when equity markets are forward looking.

- So what are leading indicators? It would be Mgt's estimates of allowances and also the NPL/UPL %. If we look at Mr Market's valuation of the company, it is very clear that it does not agree with Mgt's estimates.

- For context, let's go back to parent YZJSB's disposal of the "problematic DI" in its 1H23 results (pg26):

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.

In essence, the above statement tells us that the true impairment loss upon realization is 1221/(1576+1221) = 1221/2797 ~44% (or recovery is 56cents to the dollar) for parent YZJSB in 1H23. We can say that parent was holding the "most problematic loans" and so realized loss was 44%. Based on your calculations of YZJFH FY22's 1.02billion SGD of debt redemption with ~266mil SGD impairment realized, the realized loss is ~26%.

- As lagging indicators, realized loss are 26-44% from above studies. So I believe Mr Market is justified to question whether Mgt estimates of 258.6 million/1.928 billion = 13% is right (as a leading indicator) for end FY23 is justified? Between 1H23 and now, have conditions worsen? Or is it the case of "amend, pretend and extend"?