Yanlord Land Group - DBS Research 2019-05-16: Embracing The Dark Before Dawn

SGinvestors.io

YANLORD LAND GROUP LIMITED (SGX:Z25)

Yanlord Land Group - Embracing The Dark Before Dawn

• Sluggish presales in 2017/18 and 1Q19 will start to drag earnings performance in FY19/20.
• Yanlord Land's balance sheet deteriorated further on land premium payments.
• Cut FY19F/FY20F earnings by 30%/9% to reflect limited bookable presales.
• Downgrade to HOLD with a lower Target Price of S$1.47.

Downgrade to HOLD after FY19F/20F earnings cuts with reduced Target Price.

• YANLORD LAND GROUP LIMITED (SGX:Z25)'s unbooked revenue declined further to Rmb11.8bn as at Mar-19 as a result of the sluggish presales performance over the past two years and limited pick-up during 1Q19.
• Even if its targeted presales growth of 66% can be achieved for the full year, meaningful earnings contributions will likely come through only from 2021 onwards. To reflect this, we have cut our FY19F and FY20F earnings by 30% and 9%. This translates into a valuation of 6.0x/5.8x FY19F/FY20F PE, which is no longer attractive.
• We believe current market consensus estimates have sizeable downside potential. Downgrade to HOLD with a lowered Target Price of S$1.47.

Where we differ?

• Decent presales in FY19 will only offer meaningful earnings contributions from FY21 onwards. While we believe Yanlord Land is still within reach of achieving its Rmb42bn presales target on the back of its rich saleable resources pipeline, meaningful revenue and earnings contribution from these presales will only come through after 2020.
• Our FY19/FY20 earnings forecasts are 28%/28% lower than market consensus estimates.

Key cities of scheduled project launches showed improving sentiments.

• Suzhou, Tianjin, Zhuhai and Nanjing are among the selected cities in which Yanlord Land has the most exposure in terms of scheduled project launches in 2019. The residential ASP of Suzhou, Tianjin, Zhuhai and Nanjing (which collectively represents c.58% of its c.Rmb84bn saleable resources) exhibited promising growth of c.4-17% y-o-y (or c.1-10% m-o-m) in April. This indicates upbeat market sentiments and is supportive for Yanlord to achieve its presales target.

Valuation:

• Our new Target Price of S$1.47 is based on a higher 6.0x FY19F/FY20F average PE, its 3-year historical average of forward PE from FY16- 18, to reflect Yanlord Land’s improved presales outlook in 2019.

Key Risks to Our View:

• Inability to obtain timely pre-sale approval at a reasonable price; further policy tightening in key cities.

CRITICAL FACTORS TO WATCH

Contracted sales performance.

• Presales performance has always been seen as a key leading indicator that indicates 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 Land as well, whose forward PE valuation is fairly correlated to its annual contracted sales growth.
• Looking forward, presales growth target in 2019 is set at a decent Rmb42bn, up 66% from 2018 on the back of a rich saleable resource pipeline of Rmb84bn. This translates into a modest targeted sell-through rate of 50% as compared to Yanlord Land’s historical track record of 60%+.
• In 4M19, Yanlord Land’s presales reached Rmb8.4bn, up 72% y-o-y and represents c.20% of the company’s full-year target.
• Alongside improving sentiments in the physical market, particularly within those cities such as Suzhou, Tianjin, Nanjing and Zhuhai where Yanlord Land has a meaningful number of project launches scheduled for 2019, we believe the company is still within reach of achieving its targeted presales growth despite its 2H tilted saleable resources launch schedule. This may offer upward re-rating opportunity for the counter. We therefore believe Yanlord should trade at a higher PE valuation multiple.

Shanghai’s residential ASP growth.

• Known as a premium residential property developer with good exposure in Shanghai (1Q19: c.7% of completed but unsold projects and c.6% land resources for future development in GFA terms are located in the city), Yanlord Land’s forward PE multiple appears to have a correlation with Shanghai’s annual residential ASP growth. This is somewhat natural given its direct impact on Yanlord Land’s profit margins on its development projects in Shanghai.
• 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, which coincided with Yanlord Land’s de-rating in terms of PE valuation over the period.

Danielle WANG CFA DBS Group Research | Ken HE CFA DBS Research | Jason LAM DBS Research | https://www.dbsvickers.com/ 2019-05-16

SGX Stock Analyst Report HOLD DOWNGRADE BUY 1.47 DOWN 1.620