After a delay, Yangzijiang Financial (YZJFH) has released the slides about how they have been investing.
Doubling Down on China's Real Estate
YZJFH shows how the breakdown of their debt investments. One thing that stood out for me was how the company has increased its exposure in real estate debts. This has increased from 29% in Dec 2022 to 35% in June 2023.
This was despite a decrease in the debt portfolio from SGD$2.4 billion to SGD$2.33 billion. This shows the company has deployed more cash into the distressed China Real Estate Sector. Given YZJFH is charging high single to double digit interest on their debt investments. We can safely infer that the China property developers YZJFH lends to are not the State Owned Tier 1, but Tier 2 private developers in distress. This is because these state own Tier 1 developers publish their cost of borrowing to be only 3-4% interest.
Figure 1: YZJFH Debt Investments Breakdown (Dec 2022)
Situation of Tier 2 Private Chinese Developers
The situation of China's private developers is not good. The amount of new sales they have secured is declining (4%) currently. With the inability to secure sales for their land bank, these developers are struggling to finance their existing projects under construction. Based on recent reports, 40% of projects under construction in China are facing liquidity distress and this is a large amount, for Singapore this amount is in the low single digit percentage.
While YZJFH is able to extract double digit interest, there is an inherent risk that capital deployed to these Tier 2 developers is permanently lost when they go under and restructure. Even if there is an offer to pay back the full capital, what happens is that the maturity is extended years later. China evergrande and Shimao are recent examples. This reduces the efficiency of the capital deployed by YZJFH.
Other Observations of YZJFH Debt Investments
Another point that caught my attention was how the maturity of debt investments for more than 2 years grew from 5% to 18%. This shows YZJFH capital is now locked up for a longer term in the troubled Chinese debt markets.
Deployment of Capital to Singapore is Very Slow
The proportion of portfolio into Singapore is still very slow and only rose from 12.9% to 14.5%. YZJFH has a goal of allocating 25% of its portfolio in SIngapore by end 2023. This is now a pipe dream.
All in all, the 1HFY2023 presentation is not rosy and shows the company has doubled down on the troubled China real estate sector. A lot of the company's fortune will now hinge on how swift and resolute the Chinese government will be in resolving its debt crisis.
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