Undervalued Gem Carved Out With Strong Catalyst From Share Buyback
YZJFH 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, YZJFH had a solid earnings track record of S$321m-345m in 2019-21,
implying a PE ratio of about 6x and dividend yield of above 6%. Based on YZJFH’s
historical mean P/B of 0.84x pre-split, this implies an intrinsic value of S$0.91. YZJFH’s
P/B is trading at a large discount vs peers. Catalyst: Share buyback.
• Solid track record of 9-15% pre-tax ROA since 2011. Yangzijiang Financial Holding’s
(YZJFH) 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, YZJFH’s investment business has generated an impressive return track
record of 9-15% pre-tax ROA. After the restructuring, YZJFH has plans to recycle its
investment principal from matured loans into its investments management business. Around
95% of YZJFH’s S$3.9b in debt investments is expected to mature by end-22. YZJFH 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, YZJFH intends to set up and provide fund/wealth
management services to third-party investors.
• Strong sign of confidence from share buyback and insider purchases. YZJFH held an
extraordinary general meeting on 8 Jun 22 and successfully obtained shareholders’ approval
for a share buyback mandate. The proposed mandate would authorise YZJFH 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 YZJFH 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 YZJFH. In
addition, YZJFH’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.
• Attractive valuation with huge upside potential vs historical and peers’ valuations.
With zero debt and about S$4.2b of cash and short-term investments, YZJFH is trading at an
attractive valuation of 0.5x 2021 P/B. Strong operating cash flows from its debt investments
business would support YZJFH’s proposed dividend policy of at least 40% of net profit after
tax, implying a 2022F dividend yield of above 6% (assuming 40% dividend payout from the
lowest net profit achieved in the last three years of S$321m). Based on the historical P/B
band of 0.5-1.2x of YZJFH pre-split, this implies a valuation of S$0.50-1.29. On the other
hand, YZJFH’s 0.5x 2021 P/B is at a deep discount compared with the peers’ valuation of
0.5-2.1x 2021 P/B (excluding outliers).
• Targeting to grow in new markets and sectors. YZJFH has identified Singapore as its
secondary core market, aiming to extend its investment footprint abroad via joint
investments, a newly-established offshore investment business and the completed GEM
acquisition. With its current investments portfolio solely focused in China, YZJFH expects a
50:50 split between China and Singapore as about S$2b of capital gets deployed from its
core debt investment business. By the end of 2022, YZJFH would deploy around S$1b of
capital in Singapore, which will be split evenly between the investments management
business and the fund/wealth management business. YZJFH 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.
• Debt investments generated recurring income with solid track record. Accounting for
84-95% of YZJFH’s overall revenue, interest income from YZJFH’s core debt investments
segment has historically been the main contributor of revenue. 2021 interest income posted
an 11.3% yoy decrease largely due to lower debt investments made during that year.
However, after the restructuring, YZJFH is expected to funnel capital from maturing loans in
2022 to the investment management and funds/wealth management segments, generating
longer-term and recurring revenue. As of end-21, debt investments made up 70% of YZJFH’s
net tangible assets which the groups plans to pare down to below 50% and 30% at end22/23 respectively.
• Strong balance sheet consisting mostly of short-term debt investments. YZJFH 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 YZJFH’s debt
investments are from diverse industries including manufacturing (37%), real estate (24%),
services (15%) and wholesale/retail (10%). To safeguard YZJFH’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, YZJFH 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).
• Investment management. Shifting away from its core debt business, YZJFH 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. Besides
Singapore, YZJFH 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