Yanlord - Small but packed with goodies

Four reasons why Yanlord is our top-pick. Yanlord continues to be one of our top choices in the sector as: a) 60% of its NAV is exposed to Shanghai and the neighbouring cities where property prices going forward will benefit from the development of Shanghai into a major global financial hub, b) its landbank is situated in urban locations where demand is more assured and prices firmer, c) it boasts one of the best corporate governance track records among mainland developers, and d) there is further upside potential on its NAV if the Yanlord brand continues to command premium prices on the new projects and as it ventures into new cities.

Sales so far this year came mainly from Shanghai. Following an amazing April, Yanlord generated another Rmb1.4b (52% from Shanghai Yanlord Riverside City and 25% from Yanlord Peninsula in Suzhou) contract sales in May. Some 72% of the total Rmb5.3b generated up to May this year came from Shanghai Yanlord Riverside City. As a result, almost 85% of the 0.2m sqm completed but unsold inventories brought forward from 2008 have been sold. The bulk of the remaining unsold space relates to the 30,000sqm at Nanjing Yanlord International Apartments. As inventories have already come down sharply, there is no rush to sell any units now.

Sales progress exceeded expectations. The rate of sales has exceeded expectations. Contract sales in the first five months this year are already 13% above that generated in the whole of 2008, and account for some 58% of the Rmb9b that could be generated this year assuming all units that are available for sale are sold.

Non-compromising sales strategy pays off. Unlike its peers, Yanlord did not resolve to price cuts to clear stocks around the end of last year. Hence, contract sales only started to pick up in March when Yanlord took advantage of the improved market conditions to sell. Yanlord’s patience has paid off handsomely. Gross development margins improved to 64% in 1Q09, from 2008’s average 56%, and we expect margins will rise further to close to 70% in 2Q09. This means Yanlord’s interim results will compare favourably with that of its peers whose development margins are likely to suffer as a result of the earlier price cuts.

Selling prices sustained by brand. But Yanlord is only able to have a margin-focus strategy because it has built a successful brand over the years. As can be seen from the table below, ASP of the major projects have not softened along with the market in 2008.
Upcoming launches. Yanlord has projects in seven cities. While revenues have concentrated in Shanghai and Nanjing, the geographical spread will widen as projects in other cities mature. Yanlord Riverside Plaza, the Group’s first project in Tianjin and indeed northern China, will be launched next month. The response will indicate how well Yanlord can replicate its success in a city where its brand is not known. This will be followed by Yanlord Yangtze Riverside City in Nanjing in 4Q. The initial batches of both projects are expected to price at Rmb15,000-16,000psm, or a 10% premium to neighbouring projects, and the gap will eventually rise to a typical 20-30% in subsequent phases.

Cash call? We estimate Yanlord’s gearing is only about 50% at present. But as can be seen from the various cash calls made by mainland developers, high gearing is not a pre-requisite for fund-raising. Rather, companies are tempted to take advantage of this unusually liquid market to beef up their coffers. So in this sense, one can never rule out a cash call by Yanlord.

Some 90% of 2009 revenue already secured. As Yanlord’s contract sales in May have again beat expectations, this has given us confidence that Yanlord’s brand carries a solid premium. As a result, we are now using more upbeat ASP assumptions in our model, raising our 2009 net profit forecast by 9% to S$265m, representing a 60% yoy growth, followed by a 20% upgrade for 2010. Some 90% of our 2009 revenue has been secured through sales.

Raise target price by 10%. We have replaced our original assumption of a 10% increase in property prices in 2009 by a more upbeat 20% to take into account Yanlord’s premium brand, thereby raising our NAV from S$2.61 to S$2.88/share. Our target price is based on a three-tier system whereby target price for Yanlord, regarded as a solid private enterprise, is set at a 10% premium to NAV, equivalent to S$3.17, 10% above our previous S$2.87. Our target valuation is above the historical average discount to NAV and can be justified by the re-rating of Shanghai as far as property price potential is concerned.

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