Yangzijiang Shipbuilding - DBS Research 2019-08-15: Clearing The Air On Chairman’s Assistance In Investigations


Yangzijiang Shipbuilding - Clearing The Air On Chairman’s Assistance In Investigations

  • Refuting allegations on Chairman’s disappearance and YANGZIJIANG SHPBUILDING (SGX:BS6)'s implication in investigations.
  • Business and operations of the Group are unaffected with CEO at the helm.
  • While overhang may persist, knee-jerk share price reaction seems overdone.
  • Reiterate BUY; Target Price unchanged at S$1.82.

What has happened?

  • Yangzijiang’s stock price tumbled 20% on high volume of c.84m shares (3-4x usual daily volume) before a trading halt was called last Thursday morning on swirling rumours in the market.
  • Executive Chairman and controlling shareholder (21.6% stake) of Yangzijiang Shipbuilding, Mr Ren Yuanlin (Ren), has reportedly been missing since June, with rumours implicating he is involved in the government’s anti-corruption investigations into Mr. Liu Jianguo (Liu), former party secretary of Jingjiang City, where Yangzijiang Shipbuilding’s shipyards are located.
  • Global shipping news service TradeWinds reported that Mr. Liu, a "veteran political patron of the shipbuilding industry", was under probe for "serious disciplinary violations" by Beijing’s Central Commission for Discipline Inspection (CCDI), which is the organisation under the Communist Party of China that investigates infringements by party members.
  • The article states that Mr Liu's career had been "especially closely connected" with Yangzijiang Shipbuilding. In 2014, Mr. Liu, who has since retired from his position as Jinjiang Party Secretary, was appointed as Chairman of the management committee of the Jiangsu Yuanlin Charity Foundation set up by Mr. Ren, funded by his personal annual dividends (~S$40-50m p.a.) received from his shareholding in Yangzijiang Shipbuilding.

Yangzijiang’s response

  • In the company’s reply to SGX’s query on the unusual share price movement last Thursday, Yangzijiang Shipbuilding provided possible explanations to the rumours about Mr. Ren and the group being spread on certain publications. It has since instructed Duane Morris & Selvam LLP to provide legal advice. See Yangzijiang Shipbuilding's announcements.

Key points of clarification:

  • Yangzijiang Shipbuilding has acknowledged that Mr Ren, Executive Chairman and controlling shareholder (c.21.6% stake) of the company is currently assisting in a confidential investigation carried out by certain PRC governmental authorities.
    1. To the best of the Board’s knowledge, besides Mr. Ren, none of the other Directors and the group’s executive officers have been requested by any PRC governmental authorities to assist with or to be involved in the Investigation. None of Mr. Ren Yuanlin, or any of the other Directors and executive officers as well as companies in the group, are the subject matter of the Investigation.
    2. Mr. Ren had a decision-making role in respect of major matters of the company, including his recent approval of 2Q19 financial results. However, starting 9 Aug, Mr Ren has been granted a leave of absence by the Board to expedite the completion of the investigation so that he may resume his full-time duties as soon as possible. During his absence, Mr Ren Letian, CEO and alternate director to Mr Ren, will assume his role as a Director.
    3. The businesses and operations of Yangzijiang Shipbuilding, including micro-finance and financing businesses are unaffected by the investigation and continue to operate as usual.

Our thoughts

  • The clarification should alleviate some concerns over the shipyard’s involvement in the investigation. Day-to-day operations seem unaffected at this juncture. CEO Mr Ren Letian is capable to run the company given that he had been rotated to manage various divisions of the shipyard for nearly 10 years prior to his appointment as CEO in Mar-2015.
  • Order win momentum, which was expected to pick up strongly over the next few months, would be crucial, serving as a confidence booster on the yard’s operations and ability to win new contracts.
  • Chairman’s assistance in the investigation could remain an overhang and cause volatility in share price until the dust settles.
  • Having said that, share price decline appears overdone with 25% plunge over 2 days, considering yards’ non-involvement in the investigation as well as intact operations and fundamentals of the group at this point.

Reiterate our BUY and Target Price S$1.82.

  • Including financial assets, net cash stands at c.95 Scts out of Yangzijiang Shipbuilding's book value per share of ~S$1.55.
  • Stock will resume trading from 15 Aug morning.

Pei Hwa HO DBS Group Research | https://www.dbsvickers.com/ 2019-08-15
SGX Stock Analyst Report BUY MAINTAIN BUY 1.820 SAME 1.820