Valuation
· Maintain BUY with a higher target price of S$0.65, pegged at a 21.8% discount to our RNAV of S$0.83/share, in line with the average discount for Chinese developers under our coverage. We raise our RNAV to S$0.83/share as we input a higher plot ratio for San Ya Wan in our forecast.
· Although share price has gained 50% since our last report dated 20 Nov 12, we believe this run still has got legs.
Investment highlights
· Revision of San Yan Wan’s (SYW) plot ratio could be the kicker. Currently, the land is zoned commercial with a plot ratio of 1.5x. In 2010, Ying Li’s original intention was to develop this 89,700sqm site into a commercial property with a GFA of 140,000sqm. However, since 2010, there have been a lot of redevelopments in the area with the government committed to develop the Liangjiang New Area (两江新区) to house a new city centre,Cuntan Bonded Port and an industrial base for airport electromechanical exports. In short, thisarea will be the new growth engine for westernChina.
· Management has been tight-lipped on the SYW project as it is negotiating with the local government on the change of use of the property from commercial to residential with a subsequent upgrade on the plot ratio. Talks have been in place since 2010 and we believe a decision will be announced by this year. We conservatively upgrade the plot ratio from 1.6x to 3.2x in our earnings model. Our sensitivity analysis suggests that our RNAV will increase 3.6% if we input a higher plot ratio of 4x.
· Near-term catalyst will be the repayment of the S$200m convertible bonds (CB) due next month. As a recap, Ying Li issued the CB to finance the purchase of a plot of land for the Chongqing Financial Street project. The bond holders have a put option for the company to redeem. 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 redeem this CB.
Earnings Review
· Ying Li will announce 2012 results on 26 February. We expect revenue of Rmb651.5m and core profit of Rmb125.0m, excluding non-recurring property revaluation gains. This will be driven by strong sales of office units in the IFC and retail units in SYW. 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 in 2014. This corporate action will be a medium-term catalyst for the stock price to re-rate towards our target price.
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