Following Chinese news reports that Yangzijiang Shipbuilding’s (YZJ) Chairman, Mr. Ren Yuanlin, has been accused of illegal activities by Tianjin Guoheng Railway Holding (Tianjin), YZJ’s share price fell 10.6% last Friday but subsequently rose 3.0% to close at S$1.04 yesterday after Mr. Ren dismissed the allegations. Given the limited information on hand and the possibility that Tianjin may or may not come up with proof substantiating its claims, it is not up to us to ascertain the veracity of the allegations. However, this development means that a protracted battle may weigh on the sentiment of the stock. More importantly, this development only goes to show the difficulty in controlling companies that may land on YZJ’s plate in the future by virtue of its financing business. Ascribing a 0.5x P/B on YZJ’s held-to-maturity assets in our SOTP-based valuation, we lower our fair value estimate on the stock from S$1.29 to S$1.04. Downgrade to HOLD.
What happened
Following Chinese news reports that Yangzijiang Shipbuilding’s (YZJ) Chairman, Mr. Ren Yuanlin, has been accused of illegal activities by Tianjin Guoheng Railway Holding (Tianjin), YZJ’s share fell 10.6% last Friday but subsequently rose 3.0% to close at S$1.04 yesterday after Mr. Ren dismissed the allegations. Mr. Ren had acquired 12% equity in Tianjin in Jan this year through one of his controlling companies, Liyuan Investment, and became the largest shareholder of Tianjin. Liyuan tried to reconstitute Tianjin’s board, but faced resistance, and we subsequently saw this recent development. On Liyuan’s part, it has confidentially submitted its responses and rebuttals to these allegations to the Shenzhen Stock Exchange. Mr Ren refers to these allegations as “mischievous”, and calculated to damage him and thwart Liyuan’s corporate objectives in relation to Tianjin. Meanwhile, no allegations have been made against YZJ.
What we think
Given the limited information on hand and the possibility that Tianjin may or may not come up with proof substantiating its claims, it is not up to us to ascertain the veracity of the allegations. However, this development means that a protracted battle may weigh on the sentiment of the stock. More importantly, this development goes to show the difficulty in controlling companies that may land on YZJ’s plate in the future by virtue of its financing business.
Re-pricing YZJ
We value YZJ using the sum-of-parts method and ascribe a 0.5x P/B to the group’s held-to-maturity assets. Chinese banks are currently trading at about 0.7x blended FY14/15F P/B and we believe that 1) YZJ’s shorter track record in the financing business and 2) its likely less developed system of credit control compared to licensed Chinese banks warrant a greater discount to its book value. Meanwhile, Chinese regulators have also issued stricter rules on interbank financial transactions as part of their continuing efforts to curb shadow banking and to deleverage the banking sector. Reforms, while necessary, could lead to a “turbulent period in which funding could dry up as the domestic market struggles to re-price risk”, to borrow the words of S&P. As such, we lower our fair value estimate from S$1.29 to S$1.04, and downgrade our rating to HOLD.
Following Chinese news reports that Yangzijiang Shipbuilding’s (YZJ) Chairman, Mr. Ren Yuanlin, has been accused of illegal activities by Tianjin Guoheng Railway Holding (Tianjin), YZJ’s share fell 10.6% last Friday but subsequently rose 3.0% to close at S$1.04 yesterday after Mr. Ren dismissed the allegations. Mr. Ren had acquired 12% equity in Tianjin in Jan this year through one of his controlling companies, Liyuan Investment, and became the largest shareholder of Tianjin. Liyuan tried to reconstitute Tianjin’s board, but faced resistance, and we subsequently saw this recent development. On Liyuan’s part, it has confidentially submitted its responses and rebuttals to these allegations to the Shenzhen Stock Exchange. Mr Ren refers to these allegations as “mischievous”, and calculated to damage him and thwart Liyuan’s corporate objectives in relation to Tianjin. Meanwhile, no allegations have been made against YZJ.
What we think
Given the limited information on hand and the possibility that Tianjin may or may not come up with proof substantiating its claims, it is not up to us to ascertain the veracity of the allegations. However, this development means that a protracted battle may weigh on the sentiment of the stock. More importantly, this development goes to show the difficulty in controlling companies that may land on YZJ’s plate in the future by virtue of its financing business.
Re-pricing YZJ
We value YZJ using the sum-of-parts method and ascribe a 0.5x P/B to the group’s held-to-maturity assets. Chinese banks are currently trading at about 0.7x blended FY14/15F P/B and we believe that 1) YZJ’s shorter track record in the financing business and 2) its likely less developed system of credit control compared to licensed Chinese banks warrant a greater discount to its book value. Meanwhile, Chinese regulators have also issued stricter rules on interbank financial transactions as part of their continuing efforts to curb shadow banking and to deleverage the banking sector. Reforms, while necessary, could lead to a “turbulent period in which funding could dry up as the domestic market struggles to re-price risk”, to borrow the words of S&P. As such, we lower our fair value estimate from S$1.29 to S$1.04, and downgrade our rating to HOLD.
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