First Quarter Portfolio Update: Purchase of Nanofilm and China Construction Bank, Sale of Few Companies

While Sea Group has run up in share prices, my holdings in Elite Commerical fell. So its both happiness and sadness. I have sold both of these companies and bought Nanofilm & China Construction Bank. A partial divestment was done for my long held Yangzijiang Financial to fund the nanofilm purchase because nanofilm seems to have better recovery prospects.

Nanofilm is a company that does coating using its unique technology and has factories across Asia with its largest factory in China. It is a proxy to the state of China's manufacturing and consumer activities. In my view, the lowest point in China's manufacturing has past and therefore, I have bought 27,000 shares in Nanofilm. 

China Construction Bank's (CCB) purchase is to maintain a good dividend yield and I do feel the bank's results is strong despite the real estate downturn. CCB has a large segment of its loan book portfolio in real estate and construction. 

Portfolio Valuation

Due to the surprise suspension of dividend by Keppacoak, my portfolio has taken a beating. However, I have not sold off any of my US REIT shares, reason being, I do feel we are at one the lowest end and therefore, holding it will be wiser.

Readers would notice my PRIME US Reit has increased by 30,000 shares. This was not due to a purchase but because these are bonus shares given by the company in its latest year end financial results at no cost.

What's the Progress of Manulife US Asset Sales? Brookfield Sales Shows It Might not be Smooth Sailing

I am not vested in Manulife US REIT (MUST), but am following it because it reflects the state of the US Office market which affects my other 2 investments.

Recently, MUST insiders have been buying up shares which is good news. However, a recent news of Brookfield asset sale in Figueroa might dampen news, it does not seem like its good news in the progress of Tranche 1 asset sales for Figueroa.

BrookField Asset Sale

Just 1 block away from MUST's Figueroa property, Brookfield has sold off its 777 South Figueroa street at US$145 million and with 15 offers. The office tower was only 50% occupied and sold at 25% of its 2020's valuation. The good thing is MUST's Figueroa property is 81% occupied, so it is on a better footing. Hence in my view, it is possible for MUST to start selling it at 35% of its 2020 valuation of US$337.6 million. This means about US$118 million.

For MUST, it is a definite it cannot sell its property at say 25% of its 2020 valuation. This is due to the Decemeber EGM circular which was approved by shareholders in its recap plan.

The Dec 2023 Recap Plan

Shareholders of MUST approved the share sale for Tranche 1 assets at the following parameters:

Pre-approved MUST can only sell its Figueroa asset at the lowest price of US$106.2 million, if it happens. Right now, at its current year end valuation, it can only be sold at US$132 million. However, with the recent comparable sale of Brookfield's asset one block away, I will not be surprised a further downward valuation happens for MUST's Figueroa, this should bring it near to the floor price of US$106.2 million. My baseline valuation is US$118 million. To why I think the value of MUST's Figueroa value would fall, this is because BrookField's Figueroa has a larger floor area by 40% and is 1 year younger than MUST's. The saving grace for MUST is its higher occupancy rate. Nett nett, I do think MUST should be able to fetch about US$118 million based on sales comparable approach. However, given that Centrepoint is below the circular agreed sale, the sale of Tranche 1 office assets seems to be increasingly hard.

Secondly, its worth noting in the recent devaluation, Centrepoint's value is now lower than the pre-approved price to sell its Tranche 1 asset. While MUST can still sell, the lenders approval to sell at the lower price has to be sought. This hinders the target goal of raising US$328.7 million from sale proceeds. 

I am not surprised the sale of a few Tranche 2 assets may occur. The sale of US$230 million target is important as well because failure to meet it results in a higher interest rate levied by lenders. And while Centrepoint can be excluded, it makes the required sale execution to be close to perfect. Diablo is already at the bottom price range of the circular.

The above are my opinions.

Progress of MUST's Tranche 1 Sale?

I hope MUST brings good news that it has sold at least 1 of its Tranche 1 property during the AGM or release of its Q1 results. The progress of the sales has been rather quiet thus far. A sale at its current end 2023's value would bring good news.

Yangzijiang Financial Holdings 2023 Results Review

 Yangzijiang Financial Holdings (YZJFH) delivered a result which was within expectations.

Summary

• Earnings per share of 5.5 cents
• Dividends of 2.2 cents
• Done slightly more than 10% of share buyback since spin off

Currently YZJFH trades at a share price of 32 cents or SGD$1.13 billion market cap.

$900 Million in Cash and Cash products in Singapore

One important point from the year end results is that YZJFH has transferred a significant amount of cash from China to Singapore. With the cash in Singapore, it can be easily verified and reduces the allegations that the cash items in its balance sheet is fake. 

The rest of its $340 million of Singapore funds are in investment funds, investments in other companies shares and funds. The total amount of funds in Singapore is now SGD$1.246 billion. This exceeds its current market cap. 

The market is currently valuing YZJFH at 10% discount to its Singapore assets and I find this rather undervalued. Currently, 80% of the market cap is in liquid cash in Singapore.

China Investments

Based on current market prices, the stock market is valuing its China investments at zero value. One concern is that the allowance YZJFH has set aside for its debt investments have risen from 8.8% to 13.3%. This means the company sees an elevated risk of getting all its money back from China companies it has lent to. In my view, the concern is valid. Given that YZJFH gets about 10% returns from its debt investments, this means the individuals it is lending to are not of blue chip status but of lower credit ratings. 

In China, the prime lending rate is 4.35% and the blue chip companies in China are borrowing at 4-5% interest. For YZJFH to be earning 10% interests (PRIME + 5.5%), this means its borrowers are not of strong credit profile. To worsen the situation, China is in a credit crisis. However, I do not think a zero value is fair value of its debt investments. Its parent company Yangzijiang Shipbuilding sold all its debts at 56% value of principal. To me, in a worst case scenario, the debt investments held by YZJFH is at 50% of its principal value. It currently holds SGD1.92 billion of debts and I think the fair value of this debt is SGD$0.96 billion.

In addition, the company has SGD$0.72 billion of cash and short term cash investments in China. In total, I do think its China investments carry a worth of at least SGD$1.68 billion. Netting off the 10% tax for transferring the cash from China to Singapore as dividend. The China portfolio should be worth SGD$1.4 billion.

Fair Value of YZJFH

I would say $1.246 billion of YZJFH assets are real because it has been shifted to Singapore. With potentially another SGD$1.4 billion from China and netting off its $0.25 billion in liablities, the company is worth SGD$2.4 billion. This places it at 68 SG cents fair value.