These have become two of the most recurring questions in the marketplace since the end of 2016 – and my apologies to those who find my conclusions unpleasant reading.
“Yang Ming labelled the new Hanjin by Drewy” ran the January headline in Splash 24/7, when speculation grew stronger about the possible demise of the ocean carrier.
Yang Ming hit back soon after, stating it was not “in default of any obligations and suggestions otherwise are patently false”.
Following the release of its annual figures last week, the news outfit pointed out that massive losses had prompted “recapitalisation concerns”, although in February Yang Ming revealed the Taiwanese government had upped its stake in the carrier, and would likely do so again.
Drewry Financial Research Services’ most recent words on the matter were that it awaits “further actions to review our stock recommendation on YMM, expecting a highly dilutive and large equity injection”.
In the aftermath of its recent trading update, most observers looked to the headline figures contained in the profit and loss statement. However, I was more interested in its balance sheet, which showed that cash and cash equivalents (as of 31 December) halved to TWD11.9bn ($380m) from TWD23.7bn one year earlier, while receivables rose 22.3% to TWD7.2bn ($233m) during the period.
On this basis, the situation does not look good, although to determine how critical it could be, we need to figure out how its total assets are financed.
Of course, everybody in the industry knows that Yang Ming’s capital structure is ultimately untenable – the question is whether it has the time to sort out its finances without any help from outsiders, excluding the government?
Not only is it burning cash at a fast clip, but it appears to be finding it more difficult to collect credits, which is not unheard of in the container shipping industry – think of France’s CMA CGM, a major player with a much larger asset base worth $18.6bn, and whose trade receivables grew inorganically to $2.6bn in 2016 from $2bn one year earlier.
With TWD136bn ($4.3bn) of total assets, Yang Ming is a much smaller entity, but TWD85bn of those assets – “property, plant and equipment” (PP&E) – remain highly illiquid, meaning that a relatively small change in the value of its assets base could wipe out a significant portion of its equity, prompting a large cash call.
Its book value of equity halved to TWD16bn from almost TWD32bn in 2015.
OK, so here’s where it all hinges:
At the end of 2016, short-term borrowings and notes totalled about TWD7bn ($220m), while the current portion of long-term debt stood at TWD15.1bn ($483m), which came on top of non-current debt in the form of bonds valued at TWD13.2bn ($422m), as well as TWD50bn ($1.6bn) of other borrowings – all of which adds up to a total gross indebtedness of about TWD85bn ($2.7bn), which was broadly in line with the value of its PP&E – mainly ships, containers and chassis.
Given the TWD11.9bn of gross cash on the books, its net debt position was TWD73.1bn at the end of 2016, which is high when its cash flow statement is taken into account. Consider that cash outflows from operations were TWD8.6bn; add TWD2.1bn of cash outlays used to service interest payments; and during the past year, Yang Ming’s cash-burn rate was almost TWD30m ($1m) per day before any heavy investment was made in the form of capital expenditures.
On a pro-forma basis, it means that its gross cash pile should have stood at about TWD9bn at the end of March, assuming a constant cash-burn rate in the first quarter and barring proceeds from a recent fundraising, which is understood to be worth TWD1.7bn – essentially this is small change, although it will likely give it some breathing room with lenders.
If it keeps performing as it has done in the past few months, and excluding state aid, Yang Ming would run out of money in less than nine months, although it is unlikely to have nine months at its disposal, because TWD22bn ($700m) of debts are classified as short-term borrowings and that part of its long-term debt due for repayment within a year.
The company is not technically insolvent, as it can use state money to kick the can down the road, but there’s no escaping the fact that it is in trouble – indebtedness must fall more rapidly, and I would have thought that new equity ought to be an essential component of a more comprehensive restructuring.
Its market value of TWD21bn has appreciated 60% since a 52-week low of TWD4.4 a share in December. At about 2x its gross cash pile and 1.3x book value, its equity valuation does not factor in all the risks involved – investors are still willing to bet on additional government intervention, which might prevent it from sinking, but also represents a money pit with little value at current prices, especially based on available information concerning its future refinancing and industrial plans.
A merger with its compatriot Evergreen was previously ruled out as it would undermine the recently rearranged shipping alliances, among other things, but such an idea could be back in vogue if market conditions disappoint the bulls and Yang Ming’s competitiveness erodes further, I gather. Either way, it is my view that a more appropriate capital structure could be achieved if it raised between TWD50bn ($1.6bn) and TWD80bn ($2.5bn) of new equity – as a reference, the low end of that range is worryingly close to the amount of the relief package so far approved to bail out the entire local industry.