CAN YANG MING HOLD OFF INSOLVENCY?

Analysis: can Yang Ming's new bid to raise cash keep insolvency at bay?

© Jason Row

By Alessandro Pasetti

20/07/2017

I’m afraid that Yang Ming remains in a limbo – and its latest announcement is proof of this.
The embattled Taiwanese container shipping company said last Friday that, “as the subsequent round of private offering continues with amounts pledged exceeding the first round, the board of directors of Yang Ming on July 14, 2017 has approved a resolution allowing for the public offering of an additional 500m shares of company stock”.
It continued: “Under this plan, the existing Yang Ming shareholders, Yang Ming employees and the general public will have an opportunity to purchase company stock at a price to be determined. This public offering is made largely in response to the interests shown by current shareholders to invest in Yang Ming.” (Emphasis in bold is mine)
An opportunity?
Its partners, clients as well as financial markets have been waiting to hear from the company about the level of appetite, if any, from new investors in a recap, but its promises have done little to satisfy third parties, despite a decisive marketing push aimed at reassuring the entire industry.
What it called in its latest announcement “a steady path of recovery” in the wake of decent growth rate figures in June, is actually the least it needs to secure a bit of time, in my view – but that alone is not sufficient to keep the risk of insolvency at bay.

Yang Ming growth rate, company filing with the Taiwan Stock Exchange

In fact, given its stretched capital structure and bloated cost base, Yang Ming needs a normalised sales growth rates of 40-60% year-on-year to the end of 2017, which would help it generate some positive free cash flow once capital expenditures are taken into account – although it would not be enough to address a structurally weak balance sheet.

Yang Ming cost base at the end of Q1, company filing with the TSE

Admittedly, it has stopped the bleeding, thanks to relatively more stable cash balance changes in recent months, but its enormous debt pile means its latest fundraising attempt hardly qualifies as an opportunity, and unfortunately testifies to a company that remains desperate for a sizeable cash injection, which is likely to occur at a steep discount against the market value of its stock.
Cash is king
Following recent news of the $6.3bn purchase of OOCL by Cosco, chief executive of SeaIntelligence Consulting Lars Jensen told The Loadstar: “Evergreen, Yang Ming and HMM and their owners need to contemplate exactly what their options are, longer-term, in the face of the size advantages held by the six super carriers.” And that is absolutely right – it is my view that of those three container shipping lines, Yang Ming is the one under the most pressure to provide reassurances to the markets short-term, at least financially.

Yang Ming cash flows at the end of Q1, company filing with the TSE

In my latest Yang Ming coverage, in early April, I said the risk was that the group would run out of money by early 2018. Cash balances trends have been a bit more satisfying over the past few months than previously, reading: TWD10.6bn (US$350m) in May; TWD7.6bn in April; TWD11.1bn in March; and TWD12.4bn in February.
(The average gross cash figure currently represents approximately 50% of its market cap.)
But it means this money pit is only on a slightly more solid financial footing since the turn of the year, when its cash and equivalent stood at TWD11.9bn, down from almost TWD24bn ($792m) one year earlier.
So, it is now looking to issue 500m of new stock, boosting its share count by 35% from about 1.4bn of shares outstanding, only a few months after it decided to shrink it. That decision, very possibly, was made to reduce opportunistic trades by speculators willing to bet on likely weakness in its stock price, going forward, and its market value has been virtually unchanged since.
Interestingly, while cash and equivalents have been relatively stable since 31 December, up to now, cash on hand still doesn’t cover for short-term funding needs – typically liabilities that mature within a year – that comprise short-term debt, short-term payables and long-term liabilities maturing within 12 months.
Moreover, the company is only barely at break-even in terms of core operating cash flows, based on its first-quarter figures ended 31 March, before capex is considered, and cash outflows from financing are significant.
The picture looks nicer than in the first quarter of 2016, as the table below shows, but Yang Ming is by no means safe.

Yang Ming cash flows break-down and comparision, company filing with the TSE

Placement
If it gets away with a private placement priced at TWD10 a share (which would equate to raising TWD5bn, or $165m), it will raise just about half of the total represented by the difference – about TWD10bn – between cash on the balance sheet and all the aforementioned short-term debt obligations.

If the deal is fully priced in line with the market price of the stock, it would raise almost TWD7bn ($226m). However, some TWD5bn is more likely, assuming – and this is not a given – it manages to wrap up the fundraising successfully. Such a sizeable deal would represent a discount of about 25% on its current market value of TWD13.7bn – a discount that was also implied in its offering earlier this year, but on a much smaller size of TWD1.6bn.
Either way, it might need either another round of funding or state intervention, or a mix of both, by the end of the first quarter 2018, assuming its lenders do not pull the plug beforehand.

Yang Ming cash balances and trading update, company filing with the TSE

At the end of June, the carrier informed us that “the business relationship between Yang Ming and lending banks is going well. The loan facility will be renewed. The improvement of operating performance is the primary objective of Yang Ming”.
Aside from the fact that it needs a proper PR and marketing agency, vague and inaccurate statements such as “working capital could also be enhanced” will provide little comfort to new investors. Meanwhile, double or quits could be a painful game for existing equity holders.