hi dreamybear,
I am not sure how Mr Market values YZJFH but I tend to want to use liquidation value. Retrieving my posting 6months ago as below.
(12-09-2023, 08:45 PM)weijian Wrote: [ -> ]hi Yoyo,
A "closed end fund" will only not trade at a discount to accounting NAV if the assets are recorded at historic cost on the balance sheet, indicative of potential hidden value. Since all of YZJFH's holdings are updated and at FV, we have to accept that it will never trade at NAV. For example, if YZJFH eventually liquidates itself, it probably has to do a capital reduction first. To do a capital reduction, the Chinese authorities have to agree (where probably >50% of ownership belongs to non PRCs). And let's say if the Chinese authorities agree to a capital reduction and YZJFH proceeds to pay out its liquidated monies as dividends, there is the 10% withholding tax. As such, I suspect a 30% discount to NAV is probably the "fair value" if we assume the "loss of control", taxes to repatriate the money and liquidation costs.
So working backwards on this 30% discount as fair value:
Market valuation = 70% discount of (Total equity - market expectation of impairment*DI sum)
0.36*3649mil shares = 0.7*(3839 - X*2622mil) --> where X = market expectation of DI impairment.
X = (((0.36*3649)/0.7) - 3839)/2622 = 0.75
In other words, at current market price of 36cents, the market expects a 75% haircut to its entire DI (debt investments at amortised cost), or 25cents to the dollar.
My notes:
Taxes from declaring dividend at Chinese subsidiaries and repatriate them out of China
- From recent FY23 results, it seems the balance sheet has already accounted for the taxes as below:
Deferred income tax liabilities decreased by 25% or S$56.47 million, from S$228.91 million as at 31 December 2022 to S$172.44 million as at 31 December 2023. The decrease was mainly due to withholding tax paid on distributed profits of China subsidiaries during the year.
- Mgt has stated a tax rate of 5-10% and if we assume the mid point (7.5%), paying 56.5mil tax translates to 753mil of declared dividends at its Chinese subsidiaries' level. So actual dividend received based on tax calculations = 750mil - 56.5mil = 696.5mil. Its asset base in Spore is 1.25bil (FY23) compared to 534mil (FY22) --> delta of 690mil and that is very close to the figure of 696.5mil based on the tax calculation.
- At end FY21, deferred income tax liabilities was 72mil. With FY23's end tax liabilities of 172mil, it means there is another 100mil of taxes to be paid --> translating to 1.33bil it has accounted for to be declared as dividends/capital reduction. Net of the taxes, that is 1.33bil-100mil=1.23bil to be expatriated out of China.
So how is Mr Market valuing YZJFH now?
- I am replicating my previous "liquidation" formula below:
Market valuation = 70% discount of (Total equity - market expectation of impairment*DI sum)
0.33*3597mil shares = 0.7*(3719mil - X*1679mil) --> where X = market expectation of DI impairment.
X = (((0.33*3597)/0.7) - 3719)/1679 = 1.2 --> Since X>1, this means Mr Market expects a 100% write down of its China's DI.
- So now, we assume China's DI=0 and refit the equation below to see how much Mr Market discounts its remaining asset.
0.33*3597mil shares = Y*(3719mil - 1679mil)
Y = (0.33*3597)/2040 = 0.58
- So in other words, Mr Market is currently valuing its China DI at zero and all its remaining assets at 58% of stated accounting value.
- Out of its remaining assets at 2040mil accounting value, 1400mil or 70% of it is actually cash. So in essence,
Mr Market is currently assigning a ZERO value to its China DI and all other non-cash investments, while giving a slight haircut to the cash it is holding.