Ying Li International

Kim Eng on 28 Feb 2012

Maintain Buy. Ying Li’s 4Q11 recurring net profit was largely within our expectations, after excluding the RMB230m gain from the fair value revaluation of its investment properties. Revenue of RMB495.4m (+1,286.1% YoY) was mainly boosted by the recognition of 15,000 sq m of International Financial Centre (IFC) office space, with the remaining 5,000 sq m to be recognised this year. Maintain Buy.

More office space for sale. On the flip side, gross profit margins for 4Q11 and FY11 narrowed by 14.1ppt and 26.7ppt, respectively, to 40.9% and 39.6%. This was due to sales of revalued investment properties yielding lower margins and an absence of consultancy income. To enhance cash flow, management plans to sell another 20,000-25,000 sq m of office space at about RMB25,000 psm.

Balance sheet in comfortable position. Ying Li’s net gearing rose to 56.9%, from 41.1% last year, due to new borrowings for the incremental project cost incurred for IFC and Daping. However, finance costs were lower as interest income received from the buyback portion of its convertible bonds (CB) was offset against the bonds’ interest expense. Moreover, part of the interest expense was capitalised as project cost.

Project execution on track. With the completion of its office building, Ying Li has leased out 22% of the total space to international and domestic clients, including DBS Bank, JCDecaux, Heidrick & Struggles, CBRE and Taikang Insurance. It is also in advanced negotiations with other potential tenants. Management has noted a strong response to the launch of Ying Li International Plaza Phase 1 residential units last December. The project is expected to be fully completed in 2014.

Still has 32% upside potential. Even though Ying Li’s share price has gained 29% since our report last month, we are maintaining our Buy recommendation and target price of $0.50, which is pegged at a 40% discount to the stock’s RNAV per share of $0.83. Our target price still offers 32% upside potential. One positive catalyst is successful refinancing for its early redemption of CB due March 2013.