Jul 09, 2014

    Is China fear clouding Ying Li's valuation?

    INVESTORS would typically be excited when a stronger entity takes a stake in a company. Especially when the stronger entity is linked to state-owned conglomerate China Everbright Group, and the company in question is a property developer which could use some funds to reduce its debt levels and grow.

    Not so this time.

    Since asset manager China Everbright Limited announced it was investing $284 million in Singapore-listed Chongqing developer Ying Li International Real Estate, market reaction has been cold.

    Ying Li traded at 28.5 cents before last week's deal was announced. After the announcement, shares traded up to as high as 32.5 cents in initial reaction, before coming back down to 29.5 cents.

    Last week, more than 60 million shares traded at 29 to 29.5 cents, roughly where they started and a third below the 43 cents they were trading at just a year ago. Yesterday, they traded down to 28 cents.

    What gives?

    Ying Li, of course, is in a sector that's out of favour.

    The China residential property market is seeing widespread price declines. A lack of data on the shadow banking sector - investors putting money in wealth products lending money to companies - combined with rising local-government debt levels, leave people afraid of a systemic financial crisis.

    Ying Li is not really involved in the residential market. Rather, it operates in the commercial space.

    In Chongqing, the office sector is facing an oversupply situation, property consultant Jones Lang Lasalle's Chongqing head of strategic consulting and research, Jasmine Ma, told The Business Times. Demand for office space is not expected to increase as fast as supply. Vacancy rates were at 38.1 per cent in the first quarter.

    Ying Li plays in a slightly different field. It is known as a premium developer in Chongqing, having built high-quality landmark office towers in centrally located areas, many in the prime Yuzhong district. Occupancy rates last year for its investment properties were 86.9 per cent, according to a Voyage Research report.

    Ms Ma said that in her own office tower, Metropolitan Plaza, located in Chongqing's Jiefangbei downtown, there are almost no vacancies.

    Investment-grade commercial property capital values have also been holding steady, she noted.

    This means Ying Li's revenue stream is less at risk when it decides to sell its properties.

    Nevertheless, investors who are not familiar with Chongqing are likely to stay leery.

    Also affecting sentiment could be how Ying Li has seen some high-profile management turbulence.

    Former CEO Ko Kheng Hwa, who was past CEO of Singbridge and JTC Corp, resigned in February, just a year after being hired in 2013. No replacement has yet been found, and chairman Fang Ming is holding the role which he relinquished last year.

    Chief operating officer Tan Kiang Hwee, former CEO of consultant Surbana Corporation, resigned in May, less than a year after he joined last July.

    The sudden departure of two well-connected Singaporeans was a blow to the firm.

    But as his ability to rope in Everbright showed, Mr Fang is no lightweight himself. He is the vice-president of Chongqing's general chamber of commerce and chairman of the real-estate branch of Chongqing's federation of industry and commerce. A veteran property investor, he should have the experience and political nous to keep Ying Li profitable.

    Will shareholders benefit? And what of Ying Li's price?

    Valuation is a notoriously imprecise affair. Voyage Research analyst Liu Jinshu values Ying Li, pre-deal, at a revised net asset value (RNAV) of 84.5 Singapore cents a share.

    Analysts typically set price targets for developers at a 30 per cent discount to RNAV. But given market conditions, a conservative investor who does not quibble with the valuation model might still prefer to take a 60 per cent discount instead. This works out to 34 cents.

    Assuming the benefits from Everbright's entry at least equal the resulting dilution, prices can rise from current levels. This can happen either with the stabilisation of Chongqing's commercial market, or once investors see Ying Li delivering on its projects and are reassured about the company's management team.