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Yangzijiang Financial 'deeply undervalued' but CGS-CIMB sees headwinds, cuts TP

The analysts think sustained Covid-19-related lockdowns could prolong lacklustre home sales and further dampen property values.

Yangzijiang Financial Holdings (YZJFH) is “deeply undervalued” but its business could hit a trough in the current 2HFY2022 and heading into 1HFY2023, given its loan exposure to China’s real estate which has added to the company’s non-performing loans, say CGS-CIMB Research analysts Izabella Tan and Lim Siew Khee.

In a Dec 5 note, Tan and Lim maintained their “add” call on YZJFH but with a lower target price of 64 cents from 74 cents. The new target price represents an 85.5% upside against a traded price of 34.5 cents.

Real estate loans accounted for some 32% of YZJFH’s debt portfolio as at end-1HFY2022 in June. Gross non-performing loan (NPL) ratio spiked to 30.8% as at end-3QFY2022 in September, more than double the 14.4% average over FY2018-2021.

YZJFH has a 2.3x coverage ratio backed by land/building collaterals as at end-1HFY2022, and had made a provision for loan losses of $14.8 million in 3QFY2022.

The analysts think sustained Covid-19-related lockdowns could prolong lacklustre home sales and further dampen property values in 1HFY2023.

“We believe YZJFH has 80% of its debt investments slated to mature by 1HFY2023, and hence NPL increases and mark-to-market losses could weigh on its 2HFY2022 earnings. We estimate a 37.8% h-o-h net profit decline in 2HFY2022.”

Liquidity pool scheme

Tan and Lim note YZJFH’s recently established liquidity pool scheme can help speed up the company’s on-going redeployment of funds from within China to outside the country.

“YZJFH secured from the People’s Bank of China (PBOC) a liquidity scheme to facilitate cross-border fund transfers of up to RMB10 billion ($1.95 billion) from China, equivalent to some 50% of its total asset under management (AUM) of RMB22 billion, in our estimates.”

At its listing in April, YZJFH had targeted to transfer $1 billion to Singapore by end-FY2022. Tan and Lim think some $610 million has been transferred as at end-3QFY2022, including $99 million spent on share buybacks, and transfer of the remaining sum has been delayed to end-January 2023.

“We believe the liquidity pool scheme increases the certainty of transferring funds to Singapore, spurring offshore investments, taking YZJFH’s fund management business out of limbo,” say the analysts.

“However, we think YZJFH’s cash drag situation could be extended as the volatile macroeconomic environment weighs on investment opportunities. Investments also take time to reap returns, and track records take time to build.”

YZJFH is transitioning from a 70%/30% to a 30%/70% debt investments/private equity (PE) business by FY2023, and management has a three-fold strategy for its three categories of PE: fund of funds, direct investments and maritime funds.

Tan and Lim now ascribe a 30% discount to PE peers in their sum-of-parts SOP valuation.

As at 9.46am, shares in YZJFH are trading 1 cent lower, or 2.90% down, at 33.5 cents.

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