Today we’ve got a quickie for you — this one’s form Robert Hsu for his China Strategy newsletter — the second most popular China-focused letter according to Stock Gumshoe readers (after the Cabot China letter).
Times are good again for China investors, thanks to a persistent belief that the stimulus in that country will turn things around quickly, and that emerging markets will again bring us out of the recession — of course, plenty of folks think differently, believe that China’s economic numbers are essentially invented out of whole cloth, and feel that China’s bound for another crash … it is, at least, a little scary after the huge recovery these stocks have shown in the past six months.
But Robert Hsu has a teaser pick for us again today — and to be fair, it’s not all that hard to sniff out (that’s why this is a quickie). But we might as well have a look, no?
Here’s what he says in his latest ad:
“This One Little Stock Could Change the Way You Live
“The reasons are simple:
* “This little-known real estate play is a fast-growing national property developer in China’s second-tier cities that have a population size between two million to 10 million.
* “Over the years, the company has successfully expanded its network to cover more than 34 million people in six Chinese cities — Chengdu, Hefei, Jinan, Kunshan, Suzhou and Zhengzhou. As a result, it was the number-one property developer in Zhengzhou from 2004 to 2006.
* “As you’ll read in China Strategy, the company mainly focuses on gearing its projects toward China’s growing middle-class by developing large-scale residential communities, mainly high-rise condominium buildings.
* “In addition, the company constructs other developments like retail outlets, leisure and health facilities, and schools.
* “As if that weren’t enough, the company also provides property management services and other real estate-related services to its customers.
“By catering to the needs of China’s wealthiest people, the company grew its revenues a surprising 15% in 2008—one of the toughest years for Chinese real estate developers on record.
“If the company could do that in the down year, where most investors lost their shirts, you can only imagine how much more profitable the company will be for investors as the China real estate market rebounds!”
So … as you might have guessed, this is Xinyuan Real Estate (XIN)
XIN is trading at about half the price of its IPO, which came close to catching the top back at the end of 2007. They are indeed primarily a builder of big middle-class condo buildings in those “second tier” cities (many of which would be mega-cities in most other countries). You can see their portfolio for each city on their homepage, which is actually very informative compared to many Chinese company sites.
And yes, the stock and the company have both seen performance problems in the past year or so — which means that you have to take the “fast-growing” part of the teaser with a little bit of a grain of salt. They are growing, and they did end up with revenue growth for calendar year 2008, but it’s not a steady ladder to the sky — earnings and sales did fall off quite a bit early this year, and the company hunkered down and focused on reducing costs and cutting debt.
XIN still carries a fair amount of debt, and has further writedowns coming on some projects that they probably started at the height of Chinese real estate fervor, but they have reduced the debt by a bit, they do seem to be managing sensibly and strategically (from what little I can tell from recent earnings releases — the latest one is here), and the shares trade at only about 1.25X book value. Of course, the big question there would be, “how are they valuing their real estate and unsold projects” — I don’t have an answer for that one.
And if you’re afraid of stocks that have already had huge runs, you’ll find Xinyuan Real Estate absolutely terrifying — they bottomed out dramatically in November, having all three of the toxic terms in their corporate description (“emerging markets,” “real estate,” and “debt”), so if you were brave and picked up shares back then you might have gotten them for close to $1.50 — six months later they got over $7 and have now dipped slightly back to about $6.50.
They seem to have a good system going — they do a lot of presales to customers to fund construction, they buy land at auction from the government so it’s immediately available, and they have a standardized design and construction timeline and process that they seem to try to adhere to pretty religiously. Of course, there could easily be some dips in earnings in the future, too, because the recent need to postpone land purchases means that there will be a hole in the sales timeline when the projects that would normally have started this Spring don’t appear as finished buildings (their time from land purchase to occupancy is typically a bit under two years).
So … whaddya think? I like the business model, I see no end of demand for middle class housing in China in the long term, and the company seems well positioned and well run — but I have a terrible time trying to put a fair price on these shares, given the uncertainty of earnings in the quarters to come after they’ve scaled back on starting new projects, and, in the short term, I have no idea what the level of speculative fervor vs. real residential demand is in the cities where they operate today.
I do have a soft spot for the old teaser target E-House China (EJ), though that’s more of a real estate brokerage and looks pretty expensive now, too, and for China Overseas Land (CAOVF on the pink sheets), but there’s also a good argument to be made that if you’re just looking for exposure to the long-term need for real estate in China you might be better off with a diversified basket of these stocks — one way to get that is through the Claymore China Real Estate ETF (TAO), which holds a lot of big Hong Kong and Macao developers (many of which have mainland properties and projects, too) in addition to other Chinese real estate firms. Surprisingly enough, unless my eyes are going bad on me, the ETF does not appear to include XIN at the moment, one of the few Hong Kong or US-listed stocks in the sector that’s not in the ETF holdings.
If you’ve got an opinion on Xinyuan, or on other Chinese real estate plays, feel free to let us know! And of course, we’re always looking for reviews of newsletters — if you’ve subscribed to any newsletters that focus on foreign stocks, click here to let us know what you thought (or to see the top listings).