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Can Yongmao Withstand A China Property Slump?
Corporate Digest | 19 December 2014
By: Shane Goh
Articles (99) Profile

Against the backdrop of a China slowdown, Shares Investment caught up with Yongmao’s management team to discuss the impact of a deceleration in the world’s second largest economy.

Domestic Troubles Brewing

The slowdown in China looks real.

China’s gross domestic product (GDP) expanded 7.3 percent in the three months ended 30 September, its slowest pace since 1Q09. This was back in the global financial crisis.

One culprit for the weakening growth is the slump in the country’s property sector, which accounts for about a quarter of China’s GDP when related industries are included.

According to China’s National Bureau of Statistics (NBS), housing sales fell 10.8 percent by value in the nine months ended 30 September.

This has led to a 12.4 percent year-on-year growth in property investment in the January-to-October period, the slowest since July 2009.

In order to offset the drag from the property segment, China has shifted its focus to infrastructure projects.

The National Development and Reform Commission, the country’s top economic planner, has approved new infrastructure projects worth more than Rmb760 billion in October and November.

Yongmao’s general manager, Sun Tian, shared that the firm is exploring opportunities within the infrastructure space where the firm’s tower cranes can be utilised.

Some projects where the cranes could be used include highways, nuclear/power stations, heating plants and windmills.

Solace Found Overseas

As China’s market may prove to be challenging moving forward, Yongmao has decided to place more emphasis in expanding its overseas sales contribution.

Presently, Yongmao’s global reach extends to close to 60 countries across six continents.

One method of growth is through the participation in trade shows.

Sun noted that construction activities have been picking up in the US and Middle East while pockets in Asia such as India and Indonesia could provide healthy prospects with the recent changes in their respective government.

However, one concern was the collection of payments. As of 30 September, Yongmao carried Rmb313.2 million in trade and other receivables.

Yongmao’s chief financial officer, Yap Soon Yang, divulged that the firm only extends credit terms to customers in China, Hong Kong and Singapore.

This is because Yongmao has physical offices in these countries, thus, it would easier to speak with their clients face-to-face.

For other overseas customers, Yongmao collects a down payment of up to 30 percent, depending on the complexity of the product sold, and requests for full payment of the item prior to shipment.

This enables Yongmao to mitigate the chance of a default. Since the company initial public offering in February 2008, the company has encountered only two defaults.

One occurred in the Middle East, where the client failed to obtain the approval for the usage of the tower crane.

The other happened in the US, during the subprime crisis. Since 2010, Yongmao has not faced any difficulties collecting payments.

Financial Implication

The slowdown in China’s property development market has been felt by Yongmao.

For the six months ended 30 September, revenue shrank 8.5 percent to Rmb449.1 million, largely due to a dip in revenue contribution from China.

For the six-month period, China brought in 53.5 percent of the top line, compared with 71.8 percent a year earlier.

The stark decline was compensated by growth in all other geographical markets.

By value, Asia (ex-China) posted the highest surge with a growth of Rmb32.6 million to Rmb139.6 million.

Despite the softer sales, the shift away from domestic clients towards international customers has benefited Yongmao’s margins.

As shared by Yap, the firm is able to extract higher profitability overseas due to better pricing power.

In 1H15, gross margin came in at 30.2 percent, up 5.2 percentage points from a year earlier and a 2.9 percentage point improvement since FY14.

As Yongmao reports its financial statements in Chinese Yuan, translation risk impacts its figures. With a growth in overseas contribution, this risk is set to increase.

Yap noted that the firm is in the process of convincing their clients to transact in Chinese Yuan, if the client resides in a country where offshore Chinese Yuan clearing services are available. This would reduce the potential currency risk exposure taken on by Yongmao.

So far, only six countries, including the United Kingdom, France and Singapore, are able to provide such services.

SI Research Takeaway

Looking ahead, Yongmao’s turnover will be a contest between the slowdown in China property segment versus the potential lift from infrastructure projects and overseas sales.

While it’s still in the early stages, better margins found outside of China could help to support Yongmao’s bottom line even if the top line faces headwinds.

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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