Asian Stock Focus: Value In China Real-Estate Plays
Friday January 14, 10:38 AM
By Laura Santini
HONG KONG (Dow Jones)--As developers and buyers of real estate prepare for a possible sharp decline in China's property values, some stock investors are reaching for their wallets. They plan to stash their cash in property shares and wait out the turbulence.
Real-estate investor Peter Churchouse is just such a long-term contrarian. The Hong Kong-based investor thinks China's property market is heading for a fall, but he's bullish on the shares now because he thinks their prices already reflect skittishness about the underlying market. If the shares are down in anticipation of a drop in property values, he reasons, they'll go up in advance of a rebound a few years hence.
The shares already trade at hefty discounts to net asset value (assets minus debt), an important stock valuation measure that real-estate analysts look at more closely than price-to-earnings multiples. Shares of New World China Land, for example, trade in Hong Kong at a whopping 75% discount to NAV.
John Saunders, a property analyst at CLSA Asia-Pacific Markets, cautions that New World China's discount could indicate investors aren't comfortable with the NAV figures. But other Chinese property companies also trade at enticing, albeit less steep, discounts. China Overseas Land & Investment trades 41% below NAV, while Beijing Capital Land and Shanghai Forte Land have discounts of 33% and 27%, respectively. One investor at a major U.S. bank suggests that if these shares doubled, then their NAV discounts would be in line with real-estate markets outside China.
Comparisons with the sector at large, which includes some 150 real-estate companies listed on Chinese exchanges, aren't available because most stock analysts cover only a smattering of Hong Kong-listed concerns.
Investment opportunity lies mainly in a handful of China-based companies listed in Hong Kong, known as H shares, including Beijing North Star and China Overseas Land, as well as Shanghai Forte Land and Beijing Capital Land. In addition to the H shares, Hong Kong-based companies that operate almost exclusively in China, such as New World China Land and Henderson China Holdings, might also merit watching.
But is China's property market really headed for a fall?
Some analysts, like Saunders, say China's burgeoning middle class will keep demand strong. One U.S. investor expects high growth will continue for at least another decade, if not two - even though raising capital has become harder, as the Chinese government has sought to cool the construction frenzy by making it harder for residential developers to secure bank loans.
"In terms of demand for new houses, China is going through what the U.S. did during the post-World War II baby boom," the investor says, arguing that stock prices are down because of overbuilding in certain markets, such as Shanghai, and because of a few examples of missteps and inexperience - management teams are young and still proving themselves. Nevertheless, he says, Chinese want new houses, and even properties built two years ago can now seem outdated if they don't sport the latest designs.
Though not contrarians in the matter, both men find the China-property play compelling, as the demand they see bolsters an optimistic view that share prices will rise.
On the other side of the demand argument, David Zhang, an analyst at Shanghai-based hedge fund Dynasty Asset Management, expects a decline in property values, probably in 2006. He and other investors note that rising property prices haven't translated into higher rents. Indeed, rents have fallen, reducing yields for developers. The reason, Zhang says, is that in residential property, prices are rising faster than personal income.
While present stock valuations might seem alluring, Zhang says, his fund intends to wait before adding more shares, in hopes prices will drop further amid a correction in the underlying market. "As a hedge fund," he says, "we see near-term risk and wait for the future."
Last year, Dynasty sold off its Shanghai Forte Land shares, even though Zhang says he likes the company's long-term prospects. The fund still holds a Henderson China position of about $10 million, or 5% of its $200 million portfolio.
China's real-estate sector is undergoing some changes that may help some companies weather a downturn if it occurs. One trend involves a shift away from Shanghai and Beijing, which has experienced a pre-2008 Olympics boom. China Overseas Land, for instance, recently didn't exercise an option it held to develop a mixed-use site near Shanghai's popular Xintiandi area. Instead, the company plowed 945 million yuan ($114.2 million) into an infrastructure project in Nanjing called Changjiang Second Bridge.
Companies with relatively strong balance sheets are exploring possible joint ventures with property concerns that have built up good land reserves but lack capital. Shanghai Forte Land, Saunders says, is doing just that, to diversify its land bank beyond Shanghai. The company's net debt-to-equity ratio is low by China real-estate standards, at about 49%. By comparison, Beijing Capital Land is shouldering a 62% ratio, while for China Vanke, a huge developer listed in Shenzhen, the figure is 61%.
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