CGS International (CGSI) analysts Andrea Choong and Lim Siew Khee have kept “add” on Yangzijiang Financial Holding YF8 (YFH) with a lower target price of 42 cents from 45 cents previously although its 1HFY2024 ended June results beat expectations.
For its 1HFY2024, YFH posted net profit of $112 million, down 31% y-o-y. This was 5% above CGSI’s $107 million estimate, forming 53% of its FY2024 forecast. The beat was primarily due to lower taxes at 50% of CGSI’s estimate.
Profit before tax for the period was 7% below CGSI’s estimates due to fair value changes on financial assets and foreign exchange gains, more than offset by weaker interest income which dropped 30% y-o-y as well as heftier-than-expected impairment allowances on continued headwinds in China’s real estate market.
The analysts note that YFH’s debt investment portfolio further shrank by 18% h-o-h to $1.3 billion in 1HFY2024 on the back of redemptions over the period. As a result, the company achieved its target of reducing debt exposure to China to about 30% of the total assets under management (AUM).
In line with the shrinkage of its debt portfolio, 1HFY2024 impairments eased 22% h-o-h. Cash and yield enhancement products accounted for a larger 42% of portfolio assets in 1HFY2024, the analysts highlight.
Moving forward, YFH will maintain its strategy of reducing debt exposure in China. Choong and Lim note that new additions to this portfolio will be minimal going forward, unless the projects are deemed to be sound with reasonable rates of return.
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“Management said during its earnings briefing that it will remain focused on recovery of its debt portfolio, but it noted that the macroeconomic environment in China remains challenging and could take more time to recover. On this end, YFH has been bringing debtors to court to work out monthly instalments to allay the build-up of non-performing loans (NPLs),” they add.
In 1HFY2024, YFH reclassified about $152 million debt exposure out of NPLs following the resumption of monthly repayments. That said, its NPL ratio stayed fairly stable at 43.5% in 1HFY2024 given its smaller portfolio size, the analysts point out.
YFH aims to further deploy its cash holdings into maritime-related assets and private credit funds in Southeast Asia. It targets about US$900 million in maritime-related AUM in the medium term.
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The analysts expect the improving macroeconomic conditions to support asset valuations and improve YFH’s NPL recovery efforts. Their target prices are reduced as they factor in a higher proportion of cash AUM (lower yields) while management seeks out investment opportunities.
As at 10.39am, shares in YFH are trading 0.5 cents lower or 1.4% down at 34.5 cents.
