Ying Li International Real Estate

UOBKayhian on 20 Nov 2012

Valuation
·      Maintain BUY and target price of S$0.42, pegged at a 35% discount to our RNAV of S$0.65/share, larger than the 24.1% average discount of Chinese developers under our coverage.

9M12 Results
·      Ying Li posted a net profit of Rmb54.6m for 9M12, reversing from a loss of Rmb33.4m in 9M11, as revenue rose on strong property sales. Revenue jumped more than three- fold yoy to Rmb426.4m mainly due to sales from the IFC office space and several investment property units. Gross margin improved from 33.2% in 9M11 to 44.0% due to its low-cost structure coupled with strong demand for its Grade A office units.
·      Selling expenses escalated to Rmb31.2m (+156.7% yoy) on higher sales and marketing costs for Ying Li International Plaza. Cash level rose to Rmb484.4m from Rmb342.8m in 9M11 as the group collected presales from Ying Li International Plaza and rental deposits.

Our view
·      2012 earnings to fall but cash flow to improve. We postpone the profit recognition of Ying Li’s International Plaza to 2013-14 as the group intends to accelerate its construction for presales instead of handing over and booking in the profit this year. Currently, more than 95% of all four phases have been sold with pre-sales proceeds of Rmb717m. With the cash in hand, a S$100m loan facility by Standard Chartered Bank and trade receivables of Rmb278m, Ying Li has more than adequate cash to refinance its S$200m convertible bonds (CB) due Mar 13, if necessary.
·      As a recap, Ying Li issued the CB to buy a plot of land for the Chongqing Financial Street project. The CB holders have a put option for the company to redeem in Mar 13. Along with the sales of the IFC office space, Ying Li can generate over Rmb1b in cash in 2013. We view the postponement of profit recognition as positive, despite taking a hit in the P&L statement, as it will alleviate concerns over whether the company can refinance these bonds.
·      We expect revenue of Rmb651.5m for 2012 with a core profit of Rmb125.0m if we exclude non-recurring property revaluation gains. This is driven by strong sales of the office units in the IFC and retail units in San Ya Wan. Ying Li remains focused on developing the retail mall in Ying Li International Plaza and with the retail malls from IFC and Future International, the group may launch these assets into a commercial REIT.