Result of the first reporting developer was a mixed bag. Yanlord’s endeavour to protect average selling price (ASP) results in higher gross margin but also a significantly higher inventory. Earnings turnaround in FY09 looks unlikely. However, Yanlord’s deal with GIC, struck on 28 Feb, will rake in RMB1.25b in offshore cash inflow that help lower net gearing and ease funding pressure well ahead of the likely redemption of its convertible bond in 1Q10. Hence, we see the risk reward, with the stock trading at just 0.78x price to adjusted book, as appealing. O-PF maintained.

Yanlord’s result reflects a very challenging FY08. Revenue was down 18% y-y, owed partly to a very slow market, and partly to Yanlord’s strategy to protect ASP and hence margin at cost of volume – the right strategy for a niche high- end developer with a robust balance sheet, in our view. As a result, gross margin rose to 56% from 45% in FY07 with gross profit up a marginal 1%. Underlying net profit attributable to shareholders (stripping out the net reval gain of S$50m in FY08 and S$30m in FY07) however still posts an 8% y-y decline due to higher tax.

Completed residential inventory level jumps sharply, from 25,000sqm end- FY07 to 114,000sqm end-FY08. Chairman Mr. Zhong admits during analyst briefing that outlook for the coming 2-3 years remain challenging, but states FY09 will improve from FY08 given the more supportive government policies.

A comfort with the inventory is that a significant amount is from the Yanlord Riverside City in Shanghai, where stock has moved reasonably quickly in January/February with over 10,000sqm of GFA sold without deep price incentive. The GIC deal announced over the weekend is another positive which will help lower net gearing by 15pp, or to below 45% - a level comparable to bigger peers COLI and Vanke. An additional comfort is that we believe up to end February, some 30% of FY09CL revenue and gross profit has been secured.

Without imminent earnings turnaround we see book as the more reliable bedrock value indicator. Our conservative adjusted book value, taking a 30% haircut on the company’s land acquisition values, is at S$0.91. We maintain our O-PF with our target price set at par to our adjusted book.