Chinese Real Estate and the Tardy Gumshoe

by Travis Johnson, Stock Gumshoe | September 6, 2007 4:16 am

I think we’ve probably all heard the big arguments about investing in China[1], but this particular teaser brings two specific points to mind: first, that the savings rate is huge in China; and second, that the Chinese have essentially nowhere to invest except in property or in the domestic stock market.

And we’ve all seen what has happened to the Chinese A shares over the last year or two, eh? Massive gains of 100%+ per year. So what does that mean for real estate[2]?

Home ownership and private property is still a pretty new concept in communist China, so I don’t know how much of a future this kind of business has … or, if it does have a future, how long it will take to arrive. But there are plenty of million-dollar apartments in Beijing, so there’s at least a market of some kind.

But I’m getting ahead of myself. What we have at hand today is a teaser for Tim Fields[3]’ 123 Advisor[4] over at Trinity Investment Research. The service is mostly about finding the right IPOs, so we might assume that this particular company being teased is a recent IPO.

And we’d be right.

Here’s what we’re told in our little email teaser:

“This Chinese small cap provides real estate agency services, real estate brokerage services, and real estate consulting and information services in the People’s Republic of China.”

They offer brokerage, listing, sales, and agency services for residential property.

Sales are growing pretty quick, from $38.6 million in 2005 to 55.9 million in 2006. Fields is optimistic for the future, too, “projecting that this company’s 2007 earnings look very appetizing, with revenue exceeding $66 million.”

And Mr. Fields also predicts that this stock will move from its current price in the “mid-teens” up to $20 in the short term.

So what are we dealing with here? A few moments on “liquefy” in the Thinkolator, with a few ice cubes and a dram of scotch thrown in for good measure, tells us that this must be …

E-House China Holdings (EJ)

And oops, I took a couple days too long to write up this post for you … sorry! Something quite delightful happened to these shares over the past week, and we’re over $20 already.

It’s looking like they won’t have too much trouble getting the $66 million+ in revenues in 2007, since their last earnings release puts the first half of the year at $40 million.

Then again, maybe the shares will fall right back down again — Chinese shares have had a very nice run in the last couple days, especially those that don’t yet have a listing on the mainland … Hong Kong shares, in particular, have had a bit of a boom as everyone gets excited about the fact that more and more Chinese investors are being given the freedom to invest outside of Shanghai and Shenzen.

I don’t know enough about this firm to tell you whether or not they’re a flash in the pan … they are quite large, market-cap wise, at a billion dollars, and they are doing business in a few Chinese cities and in Macau[5] and Hong Kong.

What strikes me about many companies like this — and I can’t say that this is the case with EJ — is that US investors often take a leap of faith on these firms largely because they seem to have the market sewed up.

And why does it seem that they have the market sewed up?

Because they’re the first Chinese residential real estate company to get a high profile US listing.

I have no idea whether there are other big Chinese real estate brokers — but I would bet that there probably are, and that information about them is hard to find for US investors. Another company that is feeling the backside of this is Home Inns — they’re the “only” Chinese hotel company listed in the US, so they must be the king of the Chinese hotel business, right?

Well, it turns out that there are tons of competitors, growing at comparable speed, and that competition among these hotels is keeping profits down. Not surprising, I guess, because even in markets with big demand there has been a traditional understanding that the Chinese are terrifically price sensitive consumers.

So, some rambling from me … but really, I’m just rambling to cover up the fact that I don’t know much about EJ, or about the real estate brokerage business in China, and I’m not that likely to learn enough about it to wow you in the next few minutes. I’d just remind folks to remember that competition doesn’t just mean competitors that are publicly traded in the US.

One thing is for certain, If I were interested in this company I’d do plenty more research, and buy in small lots — so far, in just under a month as a public company, we’ve already seen this one open spike in initial trading to 18, fall back to near its IPO price at 12, then shoot back up over 20. I’m a little dizzy, and while Tim Fields thinks this will rocket with Bernanke’s rate cut I can’t find a compelling argument for most any of this share’s moves so far.

They are profitable, they are expensive, they are Chinese … maybe that’s enough.

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