September 2016 Housing Price Data for Yuzhou Properties’ Markets

China Index Academy (a research unit of Soufun) released its monthly report of new home prices in 100 top Chinese markets (LINK).  On a national basis average selling prices rose 2.8% for the month and 16.6% from one year ago.

china-100-city-home-price-index-100116

In September more cities including Nanjing, Hangzhou, Zhengzhou, Kunshan, Jinan, Beijing and Tianjin introduced new measures to restrain markets.  But like Black Friday doorbusters, these restrictions sometimes lead to panic buying sentiment as seen at one development in Hangzhou:

For some perspective on the China property market see: Mid-Year Letter from Ronnie Chan of Hang Lung Group.  And for comments on the current strategies of some small and mid-sized developers see: Benchmarking Xinyuan Real Estate after its rally

Data for Yuzhou’s markets are in the table below:

yuzhou-markets-101516

Yuzhou wisely managed its development strategy in recent years

  • It did not overexpand in the 2H13-1H14 boom and was able to acquire land in 2015 in key markets (Xiamen Hefei Shanghai Nanjing) that have been very strong in 2016.
  • Expansion in focus from Fujian Province (83% of sales in 2013 vs 47% in 1H16) to strong cities in the Yangtze River Delta (14% of sales in 2013 vs  50% in 1H16)
  • Timely corporate financing.  IPO in 2009 at HK$2.70.  Secondary offering of shares in May 2015 at HK$2.20.  Insider buying in July 2015 at prices of HK$1.57-HK$1.93.
  • The secondary offering left the company well positioned to acquire new land later last year in markets that have been extremely strong in 2016.  Contract sales in the first 9 months of 2016 are up 116% from the same period in 2015.

The Yangtze River Delta cities have strong and diverse economies with rising wages and rising populations.  Recent policy tightening in Shanghai Nanjing and Hefei is likely to cool transaction volumes but is unlikely to (and is not intended to) reduce prices.  The experience in Hong Kong from 2005-2015 was that only a major increase in land supply can cause a price correction.  So far Chinese cities have not followed this policy and instead are experimenting with further restrictions on land supply.  Land acquired by Yuzhou in 2015 and early 2016 prior to the new restrictions is likely to provide several years of very profitable sales.

The West Strait region is Fujian Province where Yuzhou was founded and has been the leading developer in Xiamen for many years.  Xiamen has been one of China’s best markets because the city center is an island with abundant parkland.  It’s a nice place to live and space for development is limited so island residences command premium prices.  The regional economy contains many links with Taiwanese businesses,  but the export orientation has cooled cities like Fuzhou Quanzhou and Zhangzhou due to the slowdown in world markets.  With its long history in the region Yuzhou has a large low-cost landbank.  For example, the average cost of 1mm sqm of potential development in Quanzhou is just 374 RMB/sqm so the holding cost of this land during a weak market is minimal and is not any burden on the company balance sheet.

US investors familiar with Xinyuan Real Estate should note several differences when studying Yuzhou:

  • Yuzhou recognizes revenues upon delivery of properties rather than using the percentage-of-completion accounting used by Xinyuan.  Yuzhou does not disclose estimates of revenues and revenues and margins by project.  Exceptionally strong contract sales in 2016 will lead to strong revenue and earnings in 2017-2018 when current proejects are completed.
  • Yuzhou releases earnings semi-annually like all Hong-Kong listed companies.  The mid-year 2016 report included a lengthy Chairman’s letter describing all aspects of the company’s business (see pages 6-25)
  • Yuzhou releases unaudited contract sales on a monthly basis like many other Chinese developers listed in Hong Kong (September report issued on October 12)
  • Yuzhou releases a helpful monthly investor newsletter (archive link)
  • As a member of the Hang Seng Composite Small Cap Index, Yuzhou shares should be eligible for purchase by mainland Chinese residents through the Hong Kong – Shenzhen Connect program beginning in November (see Small-Mid Cap China Property Stocks to Benefit from Shenzhen-Hong Kong Connect)

 

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