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OCBC calls ‘buy’ on Yanlord despite poor 1H20 results

Ng Qi Siang
Ng Qi Siang • 3 min read
OCBC calls ‘buy’ on Yanlord despite poor 1H20 results
Yanlord is an established presence in 16 key high-growth cities within the six major economic regions of the PRC.
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It was a disappointing 1H20 for Chinese developer Yanlord Land Group following weakened profits. Still, OCBC Investment Research has issued a “buy” call on the counter on the basis of a high contracted sales target for FY2020. The team likes that it is a “high quality” developer with strong exposure to key economic regions in China like the Yangtze River Delta, Bohai Rim and Greater Bay Area.

Listed on the main board of SGX in June 2006, Yanlord is a China-based real estate developer focusing on the development of high-end fully-fitted residential, commercial and integrated property projects in strategic and high-growth Chinese cities. It is currently an established presence in 16 key high-growth cities within the six major economic regions of the PRC.

Still, 1H20 was below expectations for OCBC Research as gross profit fell 8.6% to RMB3.275 billion ($645.7 million) y-o-y, with gross profit margins falling 35.9% y-o-y as a result of a change in product mix. Worse, profit after tax and minority interests (PATMI) fell 58.5% y-o-y to RMB492.9 million due largely to higher finance costs and SG&A expenses, as well as a larger proportion of non-controlling interests.

“Although we expect FY20 to be a backend loaded year given the delays caused by Covid-19, we still consider this set of results to be below our expectations,” writes the OCBC research team in a broker’s call issued yesterday.

Fortunately, Yanlord has recorded strong sales of RMB35.7billion for 7M20, which translates into y-o-y growth of 57.3% -- a figure well above the industry average. Contracted ground floor area was 998,300 square metres. Yanlord has also accumulated contracted pre-sales pending recognition of RMB75.8billion as of 30 Jun 2020, which the team sees to hint at stronger growth momentum in 2H20 and FY21.

Yanlord’s FY20 contracted sales target of RMB70 billion hints at growth of 25.7%, with OCBC believing that the counter will beat its guidance. They are forecasting growth of 30% to RMB72.4b in FY20. “We are also positive on Yanlord’s sales composition, as 70.7% and 16.3% of its 1H20 contracted sales were derived from the Yangtze River Delta and Greater Bay Area, respectively,” the team adds, noting that it has a high cash collection ratio of about 90%.

This cash collection will be crucial considering Yanlord’s extremely high net gearing of 88.2% as of June 2020, an 8.1% rise compared to its 80.1% net gearing at the end of FY2019. Management hopes to reduce gearing by year’s end. Yanlord’s land acquisition strategy in 2H20 would depend on its contracted sales performance.

OCBC cuts its FY20 and FY21 core PATMI forecasts by 40.3% and 10.3% respectively. This is on the back of lower gross margin assumptions, higher finance costs and higher non-controlling interests as a percentage of net profit. It has thus cut its fair value estimation for the stock from $1.45 to $1.41.

Potential catalysts for the stock would be easing price caps in the cities where Yanlord is exposed to, stronger than expected pre-sales and a boost in dividend per share. Further property cooling measures, rising offshore funding costs and forex risks on top of land bank acquisitions could, however, see share prices fall.

As of 3.37pm, Yanlord is trading at $1.29 with a price-to-earnings (P/E) ratio of 3.65. Earnings per share is $0.3530 with dividend yield of 5.23%.

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