The highest this Singapore property dividend stock traded was S$4.12. That was 15 years ago.
Today, shares are stuck in the bargain bin.
At S$2.3 billion market cap, Yanlord Group (SGX: Z25) is a highly focused China property developer. It was founded in 1993 and was subsequently listed on the Singapore Exchange in 2006.
What’s would I look at for a good Singapore dividend play?
- Stable price movement (not too violent)
- Consistent dividends
Property developers probably wouldn’t fit in both criteria.
In fact, it’s one of the worst possible times to be a China developer right now, over the last three months, its contracted sales recorded a 24% growth to CNY16 billion.
Last year, revenues jumped 45% to CNY34.8 billion. And its net profits grew 10% to CNY4 billion. It has pumped out many new projects and produced massive free cash flow. That grew its cash position by 25% to CNY21 billion.
This was despite China’s debt clampdown that started last year.
Actually, Yanlord focuses on one niche — the high end luxury Chinese residential market. And it has big projects across some of China’s biggest cities, including Shanghai, Hangzhou, Zhuhai, Tianjin and Nanjing.
These are also China’s fastest growing regions.
Honestly, I’m not a big fan of property developers for dividends
And that’s because property developers are highly risky. They typically borrow a lot first to pay for construction costs — hire workers, buy raw materials and equipment — and bid for expensive land.
What’s more, property projects need about three to five years their projects complete. Sometimes, even longer.
But that’s not the worst part.
Government regulations control property prices. And developers can be forced to sell their units at the tightest property regulations.
That’s why property developers are cyclical businesses.
At times, they make a lot of money.
At times, they struggle.
This makes their dividend payout volatile.
So what about this Singapore dividend stock?
Surprisingly, over the last five years, Yanlord has consistently paid dividends of 6.8 cents per share.
Actually, Yanlord started paying dividends since 2013 and have not missed out a payment then. Not too bad.
At today’s share price, that’s a 5.6% dividend yield.
Source: Yanlord Group Financial Information 2021
What’s even more surprising is Yanlord has a low payout ratio of 24%. In other words, for every dollar of profits, Yanlord pays out a conservative 24 cents per share.
Dividend payout ratio is earnings per share divided by dividends per share.
This means, Yanlord doesn’t have to struggle to maintain their dividends even when they struggle to sell their projects.
You see, what I like about Yanlord is they focus on the high-end luxury market. This results them in producing much higher gross profit margins.
Gross profit margins is revenues minus all the cost of goods and services, including construction costs, raw materials and land costs. It tells me how profitable their projects are.
Over the last 10 years, Yanlord produced an average 35% gross profit margins. That’s much higher than its China developer peers of 20-25%.
A higher gross profit margin allows Yanlord to reinvest their profits into more projects.
At the same time reward shareholders with dividends.
This is not something many (even Singapore) developers can achieve.
On the other hand, there’s still huge demand for properties. While urbanization in other “emerging countries” like Malaysia and Mexico is about 77-80%, China sits at 65% urbanization.
For a 1.4 billion people country, there’s plenty potential for the property market.
China expects to move at least another hundred over million people to bigger cities over the next few years.
Why this Singapore dividend stock is stuck in the bargain bin?
There are a couple of reasons…
Source: ShareInvestor Webpro
- First, Yanlord gets clumped together like any other S-chips. Afterall, it’s a China developer listed in Singapore. Years back, many investors got burnt by many of the S-chip companies brought to list here from China. People forgive, but never forget.
- Next, right now, with the whole China property debt getting clamped down, investors are scared. And that’s why investors hesitate to put their money in China property developers.
- Lastly, the market thinks that there’s a huge property bubble going on in China — with “ghost towns” and huge unsold property units unsold across China.
This all leads to thinking that China property stock is highly risky.
That’s also why Yanlord’s shares currently trade at a big discount from its net asset value (NAV), or book value.
If you ask me, I don’t think their shares will ever trade back up to its NAV. Even though it’s cheap, but it could remain cheap forever.
And that’s the bad news.
The good news — despite its highly cyclical business, I’m surprised to see shares stll trading steadily since it crashed during the global financial crisis.
That’s because Yanlord has a very health financial position.
Actually, Yanlord’s net gearing has been improving every year. And it has built up a huge cash position over the last five years (see below).
Source: Source: Yanlord Group Financial Information 2021
“I don’t need any borrowings.” Management said. “We are good”.
While many China developers have defaulted on their debt, Yanlord has consistently repaid their debt on time. And also passed the so-called strict three red line test.
Now here’s the sticky issue.
Even though Yanlord’s numbers look good, they inevitably still got hit by China’s property cooling measures and debt controls.
This results in Yanlord’s latest gross profit margins shrink to 25% gross margins, down from 36% over the year before.
Will Yanlord’s shares ever trade back to NAV?
What I’ll say is this is not your speculative, “buy low sell high” stock.
But it probably makes it a pretty good dividend payer.
The only way for Yanlord’s shares to appreciate is if its founder decides to privatize the company. Right now, Mr Zhong Sheng Jian, founder and CEO of Yanlord owns a 70% stake in Yanlord.
I won’t be surprised, at some point, if Mr. Zhong decides to take his company private. That could bring shares back to NAV.
Yanlord currently trades at a 0.3x P/B ratio. That’s darn cheap. And, in fact, cheaper than many other Hong Kong listed China developers:
- China Vanke — 0.7x P/B
- China Overseas Land & Investments — 0.6 P/B
- Country Garden — 0.5x P/B
Mr Zhong Sheng Jian is the founder and Chief Executive of Yanlord. Actually, he has moved to Singapore in 1988. He has worked with many big partners like Ping An Insurance. He also collaborated with our GLCs like Sembcorp, Surbana Jurong and other Singapore property developers. That adds a lot of credence to Yanlord.
And probably one of the more comforting fact I found about the founder.
Look: I don’t think the discount between the shares and NAV will ever close, unless its a privatization by Mr Zhong himself.
Are Yanlord’s dividends sustainable?
Disclosure — I don’t own Yanlord shares but it’s in my watchlist (You can check out exactly what I trade and own Diligence)
The thing is, so far Yanlord seems to have a strong control over its debt. It’s been paying down its debt, meeting interest payments on time.
And Yanlord doesn’t seems to be affected too heavily by China’s property debt clampdown.
At this current share price, it’s trading in the bargain bin, unlike the prices we saw during the global financial crisis. Yanlord shares won’t jumpt too violently, but it also won’t have the kind of massive capital gains.
What I like is Yanlord’s niche in its high-end luxury residential developments, its strong ability to recycle capital efficiently (just see its profit margins) and the way it manages its debt — it knows how to load up debt to expand its projects. And “deleverage” when there’s little projects.
Risks? Well, China can continue to tighten its debt controls for developers (remember developers need to finance their projects), Yanlord could be under stress.
Sometimes, investing can be simple.
Willie Keng, CFA
Founder, Dividend Titan