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Tuesday, July 25, 2006

Yanlord @ 1.08 ( Property / China ) 1 comments

Final Poll Results: 3:3

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Main issues

1.Will be affected by Chinese government clampdown on luxury housing

2. Stretched comparative valuation vs peers

This is one stock that just looks wrong from several angles: sector risk, company exposure, valuation.

My latest writeup on HotTrendsWatch ("Tapering of China's property boom") has highlighted the risks associated with the China property market, and why I believe it is due for a slowdown soon. The Chinese government has, through a series of credit tightening measures and more sector-specific policies (eg. strict requirements for foreigners buying into China property), made it clear that they are determined to cool down what they consider as one of the most overheated sectors in their economy – property. This policy commitment is driven by social discontent caused by rising unaffordability of residential property--- that is a powerful motivation. It generates a powerful headwind against further property developments straightaway.

Next check out the functional and geographical property exposures of Yanlord, both historical and present. The strongholds of Yanlord appear to be Shanghai and Nanjing; 60% of Yanlord’s previously total completed property GFA were in the former, and another 33% in the latter. For properties currently under development or being held for future development, the distribution is more diversified, but 37% is still in Shanghai, with the balance being distributed among Nanjing, Zhuhai, Suzhou, Chengdu, Tianjin. Shanghai, of course, is one of the areas undergoing skyrocketing property prices, and probably to a lesser extent Nanjing, Suzhou (both in Yangtze River Delta area together with Shanghai) and Zhuhai (Pearl River Delta area). The picture gets more ominous, when we consider Yanlord’s functional property exposure: about three-quarters of total property under development belong to residential developments, and probably all luxury --- Yanlord sees itself as a high-end residential property developer. From reports, it appears that buyers of luxury housing are disproportionately foreigners, which means Yanlord's customer base will be badly hit and probably will continue to be in the future.

Valuation-wise, typically RNAV is used for calculation of actual worth of property portfolio but since I don't have any broker calculations here I just revert to net asset value (NAV) per share. Yanlord's NAV per share is ~$0.50 which means it trades at 2X NAV; for comparison, Capitaland and Keppel Land, both listed as Yanlord's competitors in its propspectus, trade at ~1.7X NAV, while Singapore property developers trade at 0.8-1.3X NAV (eg. Wheelock, Wing Tai, Allgreen, Guocoland). Capitaland and Keppel Land both have strong exposure to China, and it is worth noting that both have been downgraded by brokerages immediately following the Chinese government's recent announcements on property purchase restrictions.

Given the huge IPO fund raised (S$260M), it is not difficult to see that Yanlord is probably a notable player in China's property market, particularly in Shanghai I would imagine. As much as a sector uptrend benefits the big sector players most clearly, it also works the other way: a downturn will also impact big players who have nowhere to hide. The earnings trend of Yanlord does give a clue of what government curbs can do to its bottomline: check out its 2004 results, where profit plunged (partly due to high exceptional income from a property development in 2003, to be fair) and the company admitted to lowering selling prices to stimulate demand. 2004, of course, was the year when Wen Jiabao initiated a soft landing through a series of administrative curbs targeting overheating sectors, one of which was property. Now we are in Round 2. Signs are that this is a sign of further measures to come. Avoid this stock, and perhaps check out Singapore high-end property if you really like property stocks.




Blogger Thiruppathy Raja said...

what an exciting experience!/Hilorious! Delightful! True!

Property Development

10/14/2010 6:56 PM  

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