Yangzijiang Shipbuilding (YZJS) was the best performer among Singapore blue chips in 2024. Powered by a surge in new orders of more than US$14 billion — well in excess of the company’s US$4.5 billion target — the share price doubled by the end of the year to $2.99, giving YZJS a market cap of more than 2½ times its latest reported book value.
Investor interest in Yangzijiang Financial Holding (YFH) was more subdued. Shares of the investment firm, which was spun off from YZJS in April 2022, rose 28% last year — still highly commendable, and even better than the benchmark Straits Times Index’s 17% gain in 2024. The stock stayed well below YFH’s book value, though, a situation it has been stuck in since its trading debut more than two years ago.
It may not be entirely fair to compare the two counters with each other, considering YZJS is a shipbuilder while YFH is a financial investor. But some of their interests overlap and centre on the same industry trends that both companies are riding high on. Besides, YFH is led by Ren Yuanlin, who previously helmed YZJS and is a self-styled “old soldier” of capital markets and the marine industry.
A case in point: With the global focus on decarbonisation, demand for ships that run on clean fuel has been on the rise. YZJS is a clear beneficiary, with eco-friendly vessels accounting for more than two-thirds of its order book value.
On its part, YFH is raising a US$600 million ($813.1 million) fund to invest in so-called green vessels for chartering as well as in related maritime services, such as shipbroking and financing ship owners’ fleet decarbonisation efforts. Some US$325 million has already been used to buy dozens of vessels for deployment worldwide.
The maritime industry’s decarbonisation drive is big business. The UN-backed International Maritime Organization, which regulates global shipping, wants to achieve net-zero greenhouse gas emissions by 2050. The deadline is still years away, suggesting there could be many more jobs ahead for companies like YZJS to build green vessels.
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Still, following YZJS’s bull run last year, is it time for investors to book some profits and consider rotating into YFH? Would YFH be a better bet for exposure to the maritime sector? Does it offer greater potential upside given that it trades at a discount of more than 60% to its book value?
De-risking from China
To address these questions, it is necessary to know how YFH invests and what it invests in. Its business model is fairly straightforward: pursue capital appreciation and dividend income, as well as fees from managing third-party investment funds and from providing wealth management services.
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Before it was spun off from YZJS, YFH focused primarily on debt investments in China, where it offers loans to small businesses and individual proprietors such as farmers. Its customers also included property developers. Collateral, mainly in the form of real estate, is usually required from borrowers before any loan is disbursed.
The downturn in China’s housing market, unfortunately, led to an increase in non-performing loans for YFH in recent years. Notably, the company set aside a $124 million allowance for credit losses in its FY2022.
China’s housing slump has also had a knock-on effect on its stock markets. This, too, has done no favours for YFH, which has also been trying to help businesses go public and raise funds.
To spread its risks, YFH expanded into Singapore to manage third-party funds and provide wealth management services. Its assets under management (AUM), totalling $4.07 billion as at June 30, 2024, are now split equally between China and Singapore.
Slightly more than 10% of its AUM is now in equities. YFH wants to bump this up to 60% over time. Debt investments will be brought down to 30%, from 42% in 2023. The remaining 10% will be in cash and yield-enhancement investments, which currently account for over 40% of its AUM.
Little to no downside?
How well and how quickly YFH executes on its overarching strategy will determine whether its share price follows in the footsteps of YZJS’s stock. China’s ongoing efforts to revive its economy will provide much-needed tailwinds should it succeed.
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In the meantime, is YFH’s recalibration — including diversifying beyond China and stepping up its exposure to the maritime sector — enough to help its shares move even higher after their 28% rise last year?
While that’s hard to tell, the odds of a major pullback in its share price should be low, barring any nasty surprises. For one thing, rising interest and investment incomes generated from Singapore are helping to mitigate lower income contributions from China. YFH’s 40% dividend payout policy is another draw.
Just as importantly, the company’s strong net cash position can provide a buffer in times of stress. As at 30 June 2024, YFH had net cash of $0.38 per share. If yield enhancement products were added to its cash pile (it likes to group these products together with cash and report them as a single item in its financial statements), its net cash per share would be even more — at nearly 49 cents.
That is more than the stock’s 52-week high of 45.5 cents. It is also nearly half of YFH’s latest reported net asset value per share of $1.11. In other words, 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.
YFH’s report card for the year ended Dec 31, 2024, is due in February and will likely provide more clarity on its business progress. Watch out for it.
