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China Yuanbang: Recurring Income Paving The Way Forward
Corporate Digest | 28 May 2014
By: Shane Goh
Articles (99) Profile

In China Yuanbang Property Holdings’ recent earnings briefing, Shares Investment met up with the company’s management team to understand the firm’s direction moving forward and touch on key figures within its financial statements.

Since turning the corner in FY12, China Yuanbang Property Holdings has painted two fiscal years in black ink.

Based on its nine-month financial performance ended 31 March, China Yuanbang looks set to record a hat trick of profitable years.

Growing Revenue Supported By Profitable Bottom Line

The positive results from its income statement led to a rise in cash and cash equivalents. In the past five annum, China Yuanbang’s cash balance has improved 22.7 percent compound annual growth rate (CAGR) to Rmb432.9 million.

Despite the expansion of its purse strings, the firm’s net debt to equity ratio has remained consistently above 1 over the past half-decade, ranging from 1.1 to 1.7.

Although a leverage ratio above 1 warrants concern for any frugal investor, one needs to remember that a property developer rarely finance construction works solely with cold hard cash.

Thus, we should focus on the company’s ability to generate revenue. China Yuanbang’s chief financial officer, Stephen Chong, provided guidance for this aspect.

A peek into their balance sheet would uncover a line item named: Receipts in advance. Chong explained that in China, a property developer requires two separate approvals to sell the properties and handover the properties.

The receipts-in-advance figure reflects apartments sold, but not handed over. While this provides insights into the company’s future turnover, an investor must be concerned with the firm’s collection capabilities.

Since 31 December 2009, China Yuanbang’s receipts in advance has risen over five-folds to hit Rmb1.3 billion as of 31 March.

Net Debt To Equity Ratio Hovers Above 1 While Receipts In Advance Grows

Needless to say, if homebuyers decide to withhold payment on their purchases, the company could be stuck with unsold properties.

Stringent Property Development Selection Criteria

Presently, China Yuanbang is working on 10 property development projects. Four of them are located in Guangzhou, China, a Tier 1 city while the balance are scattered across Tier 2 and Tier 3 cities.

    Regardless of the geographical differences, chief executive officer, Zhou Xiaoxiong, divulged the firm’s criteria when selecting a project to invest into.

  • Strong top and bottom line returns
  • A comfortable working relationship with local partners
  • Managing expectations from all parties involved

Zhou believes fulfilling all three conditions will lead to a positive outcome for the company, and ultimately, shareholders.

Recurring Income Paving The Way Forward
Apart from a growing property development segment, China Yuanbang has begun incorporating recurring income into its turnover as it seeks to diversify its revenue streams.

Currently, the firm manages hotels, luxury residences and commercial properties in Guangzhou, China.

Additionally, Zhou shared plans on a tourist destination development in Sichuan, China.

In 2011, China Yuanbang inked a deal with the Wanyuan Government for the proposed development of the Batai Mountain – Longtan River National Park.

Spanning across 1.3 million square meters of land, the company will develop visitor centres, offices, four-star and five-star hotels and other attractions.

The project, expected to cost China Yuanbang Rmb500 million by end 2017, aims to attain a 5A-grade national scenic area, the highest grade obtainable from the National Tourism Administration of the People’s Republic of China, within 10 years.

Although the project will be capital expenditure-heavy at the start, the development is expected to contribute positively to the firm’s coffers over the mid-to-long term.

Zhou explained that the move allows China Yuanbang to further diversify away from property development and increases its base of recurring income by collecting admission fees into the attractions.

    Investment Merits

  • Strong cash balance allows China Yuanbang to pounce on business opportunities
  • Growing turnover in the last half-decade
  • Diversification of income sources

    Investment Risks

  • High gearing ratio with net debt exceeding equity
  • Growing receipts in advance over the past five years
  • Potential property market correction in China could impact average sale prices of properties and buyers’ demand

SI Research Takeaway
While China Yuanbang hold a bright promise for investors down the road, a net debt-to-equity ratio above 1 and a large figure displayed as receipts in advance casts a gust of caution into the wind.

Currently pursuing his Chartered Financial Analyst qualification, Shane provides coverage on the property, consumer and environmental sectors at Shares Investment.

Please click here for more information about this author.

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