Tuesday, August 23, 2011


Yangzijiang: of the Rmb 1169m in pretax profit generated in 2Q, half came from forex gains, subsidy gains, and interest income.

i) Interest income of ~Rmb 330m was generated from held-to-maturity (HTM) investments. These are offered by various Chinese banks and trust companies, and are used in the financing of Chinese corporations and entities in various industries, such as Real Estate, Manufacturing and Local Govt Project, etc. These pdts yield an avg return of approx 10 - 15% p.a., and are backed by various securities such as listed shares, land titles and other forms of collateral and guarantees.

ii) Interest income of Rmb 14m came from Runyuan, the company’s subsidiary in the micro financing business.

iii) Other gains of Rmb 229m was largely due to exchange related gain received from USD/RMB currency forward contracts due to the gradual appreciation of RMB against USD, USD/SGD currency forward contracts entered by the company to hedge currency risk on SGD dividend payout, and the positive mark to market variation for the outstanding orders denominated in EUR.

YZJ issued an announcement yday, clarifying that it has a sound investment process and conservative approach in investing in the products. See link for details: http://info.sgx.com/webcoranncatth.nsf/VwAttachments/Att_C86E6F7F0E671319482578F2003EE293/$file/CorporateClarifications.pdf?openelement

Mgt says the invmts are secured against various collaterals and it insists on a collateral to debt coverage ratio of no less than 2x, and that the collaterals have to be unencumbered. Adds, YZJ has not experienced any default of such invmts since 2008.

Nevertheless, we have come across industry news reports that highlight the risk of investing in such products. China banks have apparently been repackaging commercial / infrastructure loans into short term, high risk products not unlike what the US banks were doing with the subprime loans. And in some cases, no one is really monitoring the collateral.

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