Spin-off unlocks more value

■ We think shareholders can unlock more value in YZJ with its plan to list its debt investment business on the mainboard of SGX via dividend-in-specie.
■ We estimate a total of c.Rmb17bn (c.S$3.5bn) assets will be transferred, potentially being valued at 12-15x P/E on the fund management platform.
■ Upside/premium of valuations or new listco could come from stronger-than-expected AUM growth and focus investments into ESG-related assets.

Dividend-in-specie of debt investment spin-off on SGX Mainboard

Yangzijiang Shipbuilding (YZJ) issued a follow-up announcement that it is looking to list its debt investment business on the Mainboard of SGX, with its shares distributed proportionately to YZJ’s shareholders through dividend-in-specie. We believe more details will be announced in the coming weeks, and we expect the exercise to be completed by 1H22F, subject to relevant approvals. Post spin-off, the debt investment business will venture into asset management and direct investments, not restricted to China. We believe the existing lending business could remain, though it may be gradually phased out if asset management proves to be more lucrative. This mitigates the volatility from net interest income and credit risks.

Estimated c.Rmb17bn of assets to be transferred

We estimate that about Rmb17bn (S$3.5bn) of assets will be transferred to the new listco. This comprises: 1) a c.Rmb10.9bn (S$2.3bn) net debt investment balance in 3Q21, 2) investments in venture capital (VC) funds worth c.Rmb1.9bn (S$0.4bn), as well as 3) cash balances of Rmb3.9bn (S$0.8m), based on the proportion of debt investment’s gross profit contribution (about 40%) to YZJ group GP over the past 5 years.

Peers trade at 15-22x P/E

Historically, YZJ had been able to achieve a return/GP margin of c.10% from debt investments. We believe a clear strategy of investment mandates and AUM growth strategy communication is key. Assuming the new listco is able to keep up with its 10% return targets and invest into long-term assets, including REITS or private equity funds, we believe the market could value the new listco up to 12-15x P/E. The recently transacted ESR Cayman’s acquisition of ARA Group was valued at 22.2x P/E, while other property-related asset management companies, such as Keppel Capital and Capitaland Investment Management (CLIM), are valued at 15x.

Reiterate Add, with a TP of S$1.91

Based on the S$3.5bn assets to be transferred and PAT margin of c.8%, we estimate the new listco’s annual income at S$280m p.a with potential valuations of S$3.4bn and S$4.2bn (on 12x and 15x P/E respectively), or S$0.87 and S$1.09 per share. Our current SOP valuations for YZJ’s debt investment at 1x P/BV, with a 10% ROE, is Rmb17.5bn (S$3.5bn), or S$0.89 per share. Catalysts: successful spin-off of debt investment and stronger-than-expected order wins. Downside risk: spin-off of debt investment falling