Three China Real Estate Bargains

  • China real estate developers have fallen far from their 52-week highs (LINK).
  • Home prices in some major cities closely monitored by the government have begun rising and suggest an informal relaxation of housing market restrictions (LINK).
  • Looser fiscal and monetary policy is boosting domestic consumption to offset the economic and psychological impact of US trade tensions.
  • Guangzhou R&F, China SCE Property, and Yuzhou Properties are an attractive way to profit from a potential sector rebound.

Guangzhou R&F (HKEX:2777) was founded in Guangzhou in 1994 and has provided a total shareholder return of 1086% since listing on the HKEX in 2005.  It has grown to national scale with operations spread over 68 cities.  Links to Company website, 1H Results announcement, and 2018 Interim Report.  Some analysts are cautious about R&F due to its high debt/equity ratio, however the total balance sheet leverage is slightly below peer average and is supported by a large portfolio of investment property including 88 hotels, 70 of which were acquired last year in a bargain purchase from Wanda.

R&F snapshout

Yuzhou Properties (HKEX:1628) was founded in Fujian Province in 1994 and has grown to national scale covering 26 cities in China’s most attractive markets (Beijing/Tianjin, Yangtze River Delta. Taiwan Strait, and Pearl River Delta).  Overseas Chinese Town (HKEX:3366), a Shenzhen-based SOE recently acquired a 10% stake in Yuzhou through a share placement at HK$3.96/share (16% above the current price).  This transaction brought Yuzhou a strategic partner well-connected in the Pearl River Delta and provided new equity at a reasonable price when a weak market may enable bargain acquisitions.  Links to company website, 1H results announcement, 1H results presentation, 1H results webcast, and 2018 Interim Report.  Note that the company’s 2018 launch schedule is heavily weighted to the second half and last month the Chairman strongly reaffirmed the full year contract sales target of 60Bn RMB.

Yuzhou snapshot

China SCE Property (HKEX:1966) was founded in Fujian Province in 1987 and has grown to national scale covering 30 cities in China’s most attractive markets (Beijing/Tianjin, Yangtze River Delta. Taiwan Strait, and Chongqing). Links to company website, 1H results announcement, and 2018 Interim Report.

SCE Snapshot

Topics covered below:

  • Profitability and Valuation
  • Leverage
  • Insider Buying
  • Investment Considerations

Profitability and Valuation

Despite strong business performance the share prices of R&F Yuzhou and SCE have fallen in 2018 and trade below peer average P/E and P/B multiples.

Profitability

Above average gross margins reflect well-managed land acquisitions and good control of operating expenses.  Note that CRIC contract sales include joint ventures.

Book Value Returns

Above average long-term returns demonstrate strong operating performance through real estate market cycles.

Price to Book

R&F Yuzhou and SCE are currently trading at below peer average Price/Book ratios despite superior long-term book value returns.

Leverage

Leverage

Tighter credit conditions have pressured Chinese real estate developers this year, but R&F Yuzhou, and SCE have maintained access to financing, albeit at higher rates than a year ago.  Successful bond issuance depends on both market demand and also CSRC approval (even for offshore financing).  R&F was able to issue new USD notes last week with a 8.875% coupon (LINK) and in April at 7.0% (LINK).  Yuzhou issued USD notes in July with a 7.9% coupon (LINK).  SCE issued USD notes in April with a 7.45% coupon (LINK).

R&F has been able to grow without issuing any new shares since 2006 leading to an exceptional long-term total shareholder return.  Yuzhou has supported its very rapid growth without excessive leverage by raising equity when market conditions were favorable (HK$4.93/share in 2017 and OCT’s strategic investment at HK$3.96/share in August 2018).  SCE also took advantage of the strong 2017 market to raise equity at HK$3.64/share.

Insider Buying

A controlling interest in each company is still held by its founder and each has signalled confidence through recent open market share purchases.

R&F Co-Chairmen Dr Li Sze Lim and Mr. Zhang Li together hold 34% of the company’s shares.  Dr. Li recently purchased additional shares at prices from HK$14.16-14.30

2777 Chart

 

Yuzhou Chairman Lam owns 56% of the company and has purchased shares several times in recent months at prices from HK$3.30 up to HK$5.30

1628 Chart

China SCE Chairman Wong owns 52% of the company and has purchased shares several times in recent months at prices from HK$3.55 up to HK$3.59.

1966 Chart

Investment Considerations

R&F Yuzhou and SCE receive extensive analyst coverage and their shares trade very actively in Hong Kong.  Each is eligible for purchase by mainland investors through the Hong Kong Stock Connect programs.   R&F and Yuzhou are included in the MSCI China index.  Near-term price movements in these three stocks will be substantially driven by broad market trends.

The companies pay generous dividends, but the amounts will vary depending on earnings so it would be risky to consider them as “income” investments.  Dividends transfer value rather than create value, but the payments are a positive governance signal that demonstrate managements are delivering value to shareholders.

Investors need to keep in mind that these companies provide financial reporting in RMB, but shares are traded in HKD.

Disclosures:

At the time of publication the author is a shareholder of Guangzhou R&F, Yuzhou Properties, and Xinyuan Real Estate.  The author does not make any recommendation regarding any investment in any company mentioned here.  Investors should check all of the key facts cited here from regulatory filings and other public sources prior to making their own investment decisions.

The author’s disclosures and opinion that the three featured stocks are “attractive” are as of 9/25/18.  Holdings and opinions could change at any time.  The author is unlikely to provide ongoing public commentary about these stocks.  Investors are cautioned against investing in any of these stocks if they are unable to continually monitor company and sector developments.

 

 

 

 

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out /  Change )

Google+ photo

You are commenting using your Google+ account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s