Yanlord Land Group - DBS Research 2018-11-29: More Incentive To Speed Up Presales

SGinvestors.io

YANLORD LAND GROUP LIMITED (SGX:Z25)

Yanlord Land Group - More Incentive To Speed Up Presales

• 2019 to see decent growth after guided down 2018 presales growth. 
• Cut FY19F earnings to reflect lower unbooked sales and sluggish presales. 
• Expect a slower pace of land acquisition to control balance sheet. 
• Maintain BUY but with a lower Target Price of SGD1.62. 

Maintain BUY on distressed valuations; Target Price lowered to SGD1.62 after earnings cut.

• Yanlord unveiled slower-than-expected 10M18 presales at Rmb20.3bn and lower unbooked revenue of Rmb11.3bn as at Sep-18. As such, with the decline in unbooked revenue at hand, we have cut our FY19F earnings by 16% and introduced new FY20F earnings. 
• As gearing has reached historical high, Yanlord is likely to focus on presales acceleration in 4Q and 2019 compared with more efforts spent on land acquisition ytd. 
• The counter is still trading at an attractive valuation after our earnings cuts at 3.8x FY19F PE, which is attractive compared with its historical trough level of 5.0x PE. We therefore maintain BUY on the stock, but with a lower Target Price of SGD1.62.

FY18F presales target guided down, but FY19 presales growth to speed up.

• Yanlord’s presales in 10M18 arrived at Rmb20.3bn, up 2% y-o-y. The sell-through rate remained firm at c.73%. Yet, Yanlord only achieved c.68% of its full-year presales target of Rmb30bn. The shortfall was largely led by Yanlord’s inability to secure presales approval for its Shenzhen project, which was estimated to generate Rmb3bn+ presales for the year.
• The Group has therefore guided down its presales target to Rmb27bn for the year. Presales target for FY19 is yet to be finalised but is expected to record decent growth as
  1. Yanlord has plans to have c.Rmb80bn of saleable resources in 2019;
  2. to deleverage, Yanlord has more incentive to launch projects at government guided price which are likely to achieve good sale through rate.
• Given Yanlord’s current gross margin as high as 46% in 9M18, we believe Yanlord can afford some gross margin compression with limited impact on net profit margin given LAT buffer.

Likely to slow down land acquisitions.

• The gearing ratio edged up higher to 91.3% as at Sep-18 (vs. 78% as at Jun-18), higher-than-expected given larger prepayments made for land acquisitions and slower-than-expected presales. To-date, Yanlord has acquired c.1.5m sm at an average land cost of c.Rmb18,000 psm, in Shenzhen, Nanjing, Suzhou, and Nantong which are cities Yanlord has had presence through mainly M&As.
• Admitting that this level of gearing is uncomfortable, alongside slower presales, Yanlord intends to moderate its land acquisition pace and take on a more conservative approach on landbanking near term.

Valuation:

• Our new Target Price of S$1.62 is based on 4.7x FY19F PE, the average forward PE among mid-cap developers in 2014, when there was a correction in the physical market.

Key Risks to Our View:

• Inability to obtain timely pre-sale approval at a reasonable price may pose downside risks on the Group’s profit margins and affect its ability to achieve pre-sales targets.

CRITICAL FACTORS TO WATCH

Contracted sales performances.

• Presales performance has always been seen as a key leading indicator that demonstrates a developer’s ability to turn its land resources into property sales for recognition of revenue and earnings upon project deliveries. Such a rule applies to Yanlord as well, whose forward PE valuation is fairly correlated to its annual contracted sales growth.
• After an accelerated period of growth in annual contracted sales, Yanlord’s contracted sales growth declined from 2013-2014 in tandem with the muted property market in China. Accordingly, Yanlord’s forward PE multiple followed the trend and the counter de-rated until 2015, when contracted sales bottomed and the group posted strong y-o-y presales growth of 127%. However, Yanlord’s valuation multiple had further de-rated again on slowing presales growth in 2016 and negative presales growth in 2017 led by the group’s hesitation to launch saleable resources under restrictive pricing policies, which had capped selling prices and thus profit margins on its premium development projects.
• Looking forward, 2018 presales growth target has been guided down to a flattish 2.5% (Rmb27bn) from 2017’s Rmb26.3bn as a result of delays in launches of saleable resources. As a result, Yanlord has a rich saleable resources pipeline that is expected to reach Rmb80bn in 2019. The group has yet to finalise the presales target for FY19, but we expect to see decent growth in terms of presales for the upcoming year.

Shanghai’s residential ASP growth.

• Known as a premium residential property developer with good exposure in Shanghai (3Q18: c.10% of completed but unsold projects and c.5% land resources for future development in GFA terms are located in the city), Yanlord’s forward PE multiple appears to have a correlation with Shanghai’s annual residential ASP growth, which is somewhat natural given its direct impact on Yanlord’s profit margins on its development projects in Shanghai.
• While Shanghai’s residential ASP has decelerated since 2015 and was in negative territory in 2017 on the back of restrictive pricing policies implemented by the government, Yanlord’s PE valuation was hit by another round of de-rating.

Danielle WANG CFA DBS Group Research | Carol WU DBS Research | Ken HE CFA DBS Research | https://www.dbsvickers.com/ 2018-11-29

SGX Stock Analyst Report BUY MAINTAIN BUY 1.62 DOWN 2.170