Yangzijiang Financial - UOB Kay Hian 2022-06-09: Undervalued Gem Carved Out With Strong Catalyst From Share Buyback

YANGZIJIANG FINANCIAL HOLDING LTD. (SGX:YF8)

Yangzijiang Financial - Undervalued Gem Carved Out With Strong Catalyst From Share Buyback

Yangzijiang Financial is trading at an attractive level and valuation, at around 25% below its first day IPO opening price and about 50% discount to its book value of S$1.08. Having S$4.2b of debt investments, Yangzijiang Financial had a solid earnings track record of S$321m-345m in 2019-21, implying a P/E ratio of about 6x and dividend yield of above 6%.

Based on Yangzijiang Financial’s historical mean P/B of 0.84x pre-split, this implies an intrinsic value of S$0.91.
Yangzijiang Financial’s P/B is trading at a large discount vs peers.
Catalyst: Share buyback.

Yangzijiang Financial (YZJFH, SGX:YF8)’s primary business consists of its debt investment business which invests excess cash into short-term loans and fixed interest debt instruments, generating recurring income. From 2011-21, Yangzijiang Financial’s investment business has generated an impressive return track record of 9-15% pre-tax ROA.
After the restructuring, Yangzijiang Financial has plans to recycle its investment principal from matured loans into its investments management business. Around 95% of Yangzijiang Financial’s S$3.9b in debt investments is expected to mature by end-22.
Yangzijiang Financial has completed the acquisition of a CMS-licensed fund named GEM Asset Management (GEM) in Singapore, which has provided investment management and advisory services for US$2.4b of assets since establishment. Also, Yangzijiang Financial intends to set up and provide fund/wealth management services to third-party investors.

Yangzijiang Financial held an extraordinary general meeting on 8 Jun 22 and successfully obtained shareholders’ approval for a share buyback mandate. The proposed mandate would authorise Yangzijiang Financial to purchase shares of up to 10% of its own issued ordinary share capital.
The rationale for the share buyback is to give management the flexibility to increase shareholder value and improve the return on equity when appropriate. As Yangzijiang Financial is trading at a huge discount to book value, the start of an aggressive share buyback after 8 Jun 22 could be a key catalyst for Yangzijiang Financial.
In addition, Yangzijiang Financial’s CEO and its independent directors have acquired a total of 1.7m shares at an average price of S$0.57/share in May 22, indicating their confidence in the company.

With zero debt and about S$4.2b of discount compared with the peers’ valuation of 0.5-2.1x 2021 P/B (excluding outliers).

Yangzijiang Financial has identified Singapore business and the fund/wealth management business.
Yangzijiang Financial has plans to diversify into new asset classes such as private debt, mezzanine financing and REITs, diversifying away from its concentration in fund investments. Some sectors and themes earmarked for investment include late-stage companies, ESG, new economy and real-estate such as data centres and purpose-built student accommodation.

Accounting for 84-95% of Yangzijiang Financial’s overall generating longer-term and recurring revenue.
As of end-21, debt investments made up 70% of Yangzijiang Financial’s net tangible assets which the groups plans to pare down to below 50% and 30% at end-22/23 respectively.

Yangzijiang Financial has a strong balance sheet with net asset value of S$4.2b, consisting mostly of short-term debt investments at amortised cost (S$3.5b). As of 2021, the borrowers of Yangzijiang Financial’s debt investments are from diverse industries including manufacturing (37%), real estate (24%), services (15%) and wholesale/retail (10%).
To safeguard Yangzijiang Financial’s interest in the event of default, it has obtained collaterals from the end-borrowers through third-party financial institutions for the majority of the loans. Such collaterals are project specific and cannot be used for any other purpose. As such, Yangzijiang Financial is the ultimate beneficiary of the collaterals.
Debt investments with collaterals have loan-to-value of an average of 46.09% from their borrowers (implying collateral coverage ratio of 1.96x).

Shifting away from its core debt business, Yangzijiang Financial seeks to achieve capital appreciation and investment income from both public and private markets. This includes investing across a broad spectrum of assets such as funds, growth equity, mezzanine financing, private investment in public equity deal and real estate.
See
Besides Singapore, Yangzijiang Financial also aims to diversify its portfolio away to the Asia Pacific emerging markets and global developed markets. As of end-21, the segment consists of twelve fund investments managed by 12 general partners in China, with deployed capital of around RMB4.6b.

Llelleythan Tan UOB Kay Hian Research | https://research.uobkayhian.com/ 2022-06-09

SGX Stock Analyst Report NOT RATED MAINTAIN NOT RATED 99998.000 SAME 99998.000