Yanlord Land

Too much 'guan xi'
26 Sept 2008


A number of years ago, anyone who went to China to do business must know the phrase, 'guan xi'.

The phrase means having the right connections. No 'guan xi' means no business in China.

Perhaps S-share Yanlord Land carried it a bit too far.

The Chinese property developer is linked to a bribery trial, and investors are losing confidence in this company. Its stock price is going down, down, down, as investors offload their shares. Its stock has already lost 37% within these 3 days.

And Yanlord is part of the Russell Singapore Value Index, supposedly a value stock!

Company crisis aside, let's see if this stock fits the value stock criteria.

It has a P/B of 1.24, but if its stock keeps going down, its P/B will only go south. In the meantime, we don't think it's cheap enough for a value stock, so it gets a cross here.

Its P/E is 9.13, soon to go down further. Since it's below 12, it makes our cut for a value stock. A tick for Yanlord here.

It paid out 1.27 cents for its first and final dividend in FY2007. Based on its current share price of S$0.99, its dividend yield is 1.28%. Not high enough – the average inflation rate is 2% per annum and we want a stock that gives us back at least 2% on our investment. It gets a cross here as well.

For H1 2008, Yanlord burnt S$163.3 mln in cash on operations compared to the S$335.5 mln it also burnt in H1 2007. It had a negative free cash flow of S$65.9 mln. But it had S$674.7 mln of cash on hand.

It also burnt S$842 mln in cash on operations in FY2007, with most of it tied up in properties for development.

For its negative cash flows, Yanlord gets a cross.

To put it nicely, management is a mixed bag.

A mainland Chinese magazine called Caijing said Yanlord allowed a former Shanghai official to buy an apartment at a deep discount. The apartment is in Yanlord Garden, a development by the Chinese company. The official later sold Yanlord the same apartment, then bought a bigger apartment from Yanlord at the same price!

According to Caijing, this is because the official used his power to help Yanlord buy several plots of land in Pudong, China.

The official is currently on trial in China for suspected corruption.

Of course, Yanlord issued a statement today, saying that the allegations linking it to the official, Kang Huijun, were untrue.

It said it had indeed sold Kang a larger apartment, but it was an old show flat. And it reasoned that if Kang stayed in the show flat, it would bring more publicity to the development and boost sales.

Yanlord also said it got land use rights in the Pudong New District without the help of Kang.

Any old China hand will laugh at these two excuses given by Yanlord.

According to The Shanghai Daily, Kang went on trial yesterday for taking bribes, including accepting an apartment in 2001 in Yanlord Garden.

Which means the truth is not out, yet.

For its dubious excuses and unwillingness to hold a press conference, Yanlord's management gets a big question mark.

To recap, its P/B of 1.24 is higher than 1, so it gets a cross.

Its P/E of 9.13 is lower than 12, it gets a tick here.

Its dividend yield of 1.28% is not high enough, so it gets a cross.

It's burning cash on operations, so it gets a cross.

And for an uncertain management that is accused of corruption, it gets a question mark.

Looking at the trading pattern and volume of Yanlord over the past two months, there seems to be a sustained selldown of its stock from an institutional investor.

Just like China dairy companies hit by the melamine scare are engaging investors, Yanlord had better go into crisis PR mode and try to win back confidence, either from institutional or retail investors.

Yanlord Land is one of the 98 constituents on the Russell Singapore Value Index.

The index has been declining for this week, but managed to stop its slide on Wednesday. It gained 2.5% to end at 1,550 on Wednesday evening.

As always please seek professional help before making any investment decisions.

By Tan Jin San Investor Central

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