Yanlord Land Group Limited - look out for capital

Expect 5% core net profit growth, dividend cut possible? Yanlord will announce FY08 results on 26 Feb 09 pre market. We expect core net profit and EPS (excluding revaluation gains) of S$191mil and S$0.10/share, up 5% and 2% YoY respectively. We also estimate 4Q08 contract sales to amount to S$211mil, bringing the full year contract sales estimates to RMB5.2bn, down 17% YoY. Given an extremely uncertain year ahead and the potential for CB put back option to be exercised in Feb 2010, it is likely for the group, in our view, to cut its FY08 dividend, estimated at S$0.01/share, to preserve cash.

Key things to watch for would include: 1) Strategy for FY09 on how the group would cope with potentially further price cuts in Yangtze River Delta (YRD)region. 2) Capital management – we expect the group’s gearing to trend higher to 70% (from 59% in 3Q08). Whether the group would chose cash flow over pricing power would be a crucial decision to look for.

Sales YTD beat our expectation, but too early to turn positive. Based on management’s estimates, contract sales for Jan and Feb-to-date has reached RMB420mil and RMB300mil respectively, higher than our estimates of about RMB350mil/month on average. However, we believe the stock would likely to remain range bound between S$0.75/share to S$0.95/share until we see sustained recovery in volume at the current price level.

We maintain our Neutral rating on the stock with Dec-09 price target of S$1.10/share, based on 50% discount to our RNAV estimates. Key downside risks include worse than expected property sales or the company’s inability to source funding for redeeming back the CB if the put option is exercised. Key upside risk would be a quicker than expected turn around in the China property market, YRD region in particular.

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