Excerpts from NRA Research report
All Roads lead to Chongqing
Current Price: S$0.18
Fair Value: S$0.550
» New G2G project between Singapore and Chongqing puts focus on Ying Li. In early November, the President of China, Xi Jinping, announced a pact to launch a third government-to-government project in Singapore and Chongqing. We believe that Ying Li (YL) stands to benefit from this arrangement, as such projects may potentially attract new businesses, e.g. legal firms, consultancies and investors, and raise demand for real estate, especially commercial and residential properties for third party developers like YL. At this moment there are few details on the government-to-government partnership, so we are unable to quantify the extent to which Chongqing can benefit from this project.
» Mall repositioning continues to bear fruit. The mall rebranding exercises have started to generate benefits for YL. 2Q15 rental revenue was revised from RMB61m to RMB54m due to the reclassification of about RMB7m to consultancy income. Nonetheless, rental revenue still increased qoq to RMB57m. The increase in rental income is in line with the expected rebalancing of the retail mall at YL IMIX Park Daping (YLIPD), with more growth to be expected as retail space gets taken up over FY16. The management has indicated that new shops have been signed on at better terms than what YL could have gotten on their own, likely due to the influence China Everbright Limited (CEL) has over retailers on their mall management side.
» Immediate concerns are manageable, maintain Overweight. 3Q15 revenue of RMB111.9m is 57.1% lower than 3Q14 because of lower revenue from sales of development properties. This is unsurprising given that the remaining development properties YL has available for sale are office units at YL International Plaza. 3Q15 net profit margin fell to 2.2% compared with 4.2% in 3Q14, mainly due to higher selling expenses in 3Q15 due to marketing costs associated with projects that are in the sales phase, such as San Ya Wan Phase 2 and IEC. Revenue will be recognized later during handover. YL’s net gearing rose to 69.9% due to new financing requirements to service working capital obligations. This is in line with our expectation that FY15 would be a down year compared to the swathe of new projects being completed from FY16 onwards. We maintain our full year expectations and our fair value estimate of S$0.555.
» Excess office space supply to moderate. Surplus office space in Chongqing has caused net vacancies to remain at 39.6% a decrease of 0.5% points quarter on quarter. Office absorption rate decreased by 30.8%, while new office supply decreased by 44.5%. This seems to confirm our observation made in our initiating report whereby we posited that the pace of office construction seems to be slowing, and we should see office absorption rates begin to outpace new office supply.
|» Patience means profit. We are not surprised by the muted performance of YL for 3Q15. The gradual increase in rental income is in line with our expectation that existing tenants are being gradually replaced as leases expire, with longer term benefits to accrue as stated above.
The main thing to note is that the revenue for YL will come from the handing over of their projects in 2016 onwards, beginning with IEC Phase 1A and San Ya Wan Phase 2 (SYWP2). From then on, the phased completion of YL projects will allow revenue to be registered on a less lumpy scale and provide a smoother revenue profile.
Pre-sales figures to be released by YL over 4Q15 and 1Q16 for SYWP2C, ICC Phase 1 and IEC Phase 1A will be the leading indicators by which we can project the future revenue for YL.
Full report here.