• Risks from financing business still there
• Share price has appreciated
• Downgrade to HOLD

Earning from entrusted loans

Having weathered the recent shipbuilding slowdown well, Yangzijiang Shipbuilding (YZJ) has amassed a cash pile of RMB7.6b, in addition to its held-to-maturity (HTM) assets of RMB13b as at 2Q14. At the same time, the group also has borrowings of about RMB11.4b. From our understanding, a significant portion of Yangzijiang’s held-tomaturity assets are entrusted loans, in which an agent bank (trustee) arranges a loan between two commercial enterprises. In addition to allowing companies with idle funds to earn higher rates of interest, it may also allow stronger borrowers to borrow from banks at lower rates and lend out to weaker companies at higher rates, thereby pocketing a spread.

Valuing the HTM assets

Looking ahead, we expect YZJ to pare its RMB13b HTM assets down to about RMB12b by the end of this year. It may take some time before the group is able to unwind most of its HTM assets, and we value them on 0.55x book, at a discount to Chinese banks which are trading at an average of 0.74x P/B. We believe a lower multiple is justified given YZJ’s relatively short track record in the financing business and its likely less developed system of credit control compared to Chinese banks.

Lower asymmetries of information?

Huang Yukon, a senior associate at the Carnegie Endowment and former World Bank director for China, mentioned that the risks of entrusted loans may be lower compared to other forms of shadow banking due to lower asymmetries of information 1 . For YZJ, we note that 38% of borrowers in its HTM assets (as at 2Q14) were in real estate, 30% were in manufacturing and 25% in “others”. It is hard to determine how deep an understanding YZJ, a shipbuilder so far, has in real estate and other unrelated industries.

Limited upside now

We update our CNY/SGD exchange rate assumptions, and our fair value estimate is tweaked from S$1.21 to S$1.24. Meanwhile, YZJ’s share price has appreciated by about 11% since we upgraded the stock to Buy on 6 Aug, compared to the STI’s flattish performance over the same period. As we now see limited upside potential after its good price performance, we downgrade our rating to HOLD.

Source: OCBC Research - 24 Sep 2014