YING LI: "Low downside makes for worthwhile investment"

Excerpts from analyst's report

NRA Capital analyst: Liu Jinshu

With China Everbright as strategic shareholder, Ying Li has forayed into its maiden development project in a first tier city.
Above: its Beijing Tongzhou mixed development project.
Artist's impression

♦ High-average return/low-average risk. Ying Li International Real Estate Ltd’s customer advances from pre-sale activities (hidden in the balance sheet) rose by 227% during 1Q16 to RMB446.3m as of 31 March, suggesting that 1Q16 revenue of RMB91.3m is not reflective of full year performance. Our revised model values Ying Li at S$0.415 per share. However, we classify Ying Li as “high-average” return, as opposed to “high” return.

♦ Near-term upside catalyst is .....

"A near term upside catalyst is the handover of a large project in 2016 – we forecast 2016 revenue of RMB1.4 billion and PATMI of RMB164.5m. However, full value discovery in its share price will likely depend on other catalysts that will take time to achieve, such as higher yield over its investment properties and the recovery of capital from the sale of properties." -- Liu Jinshu (photo)

♦ However, low downside makes for worthwhile investment. The impending catalyst arising from the handover of units at the Ying Li International Hardware and Electrical Centre, coupled with strong demand at 15.1% owned Beijing Tongzhou, will likely limit share price downside in the near term.

Moreover, Ying Li has turned cash flow positive, with net operating cash flow of RMB109.8m, following the buyer advances in 1Q16. On balance, the worst would appear to be almost over for Ying Li whose PATMI fell by 48.6% in 2015 after the completion of a large project in 2014.

♦ Improved market conditions to help sales process. Residential property prices in Chongqing have risen by 2.2% over January-April 2016, implying steady demand for existing project San Ya Wan Phase 2. Sub-Phase A has been substantially handed over, while Sub-Phase B has been 73.8% presold, leaving sub-phases C and D to be sold over the next one year, thus progressively freeing up Ying Li’s capital.

♦ Risks mainly from external factors. We are mindful of weakness in Chongqing’s office and retail property sectors. However, we can expect rental rates to approach that of other top cities in the PRC in the long run, with sustained investments into Chongqing. Currently, Chongqing’s Grade A office rental rates are about 39% of Shenzhen’s and 26% of Beijing’s. In the near term, Ying Li is repositioning its retail malls to improve their appeal to target consumers, to raise rental income.

♦ Near term visibility justifies low-average risk classification. Lately, concerns have risen over excessive debt in China. If China’s economy were to slow down sharply, Ying Li being in the real estate sector will likely be affected; albeit mitigated by its quality projects and low share price. Fortunately, funding risk is low, as Ying Li has just issued US$50m (RMB328m) of bonds. We considered an average risk classification due to the low share price. However, the forward visibility provided by existing presales is comforting, leading us to decide on a low-average risk classification.

Full report here.