Chinese Real Estate Sector Analysis Part 2: Exploring the debacle and undervalued stocks in an absolutely despised sector

Fishing where no one wants to fish

Welcome to the second part of my Chinese Real Estate Sector Analysis. In the first part, I tried to provide much needed historical context along with a detailed analysis of both the current and prospective future state of the industry. To prevent the previous post from becoming as long as War and Peace, I only analyzed two of the most undervalued state owned developers that I think are good buys right now with the real estate industry recovering while the market—mostly driven by Western institutions right now— merely chases tech names while completely ignoring other fundamentally amazing companies that have a lot to gain from improving and growing Chinese macro. This post shall contain both stocks directly related to the sector and undervalued real estate proxy plays to provide a fair balanced list of companies spread across the real estate sector for you to analyze. For much needed historical, present, and future context of the sector as a whole, I would urge you to check out Part 1.

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China Overseas Property Holdings Limited (2669. HK) and China Resources Mixc Lifestyle Services Limited (1209. HK)

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I’ve covered the property management sector previously in my analysis of a smaller property manager as part of my undervalued and net net investments series. So I hear you asking “Dragon what the hell is a property manager”, well let me explain.Property managers provide essential cleaning, security, gardening, repair, and maintenance services to property developers and residents. Chinese housing communities are different from Western ones because most Chinese in urban areas live in large gated apartment complexes where the provision of these services is essential to the overall residential experience. Whether real estate prices rise or fall, pre- existing Chinese housing communities will still require property managers. The property management is very sticky because of the trust and reputation that they build with residents and property owners so it’s really difficult to replace a property manager. Unlike real estate developers, property managers have been unaffected by this crisis because they do not actually hold any real estate on their balance sheet. In addition to residential real estate, property managers are also required for commercial, retail, and industrial properties since these properties are held for investment by property developers— who like the name suggests have synergies in developing properties and obviously not in managing their cleaning, maintenance, budgets, compliance etc.

Since the market is irrational, as Warren Buffett probably best describes it— “a voting machine in the short run and a weighing machine in the long run”— the entire property management sector has been pulled down by the general negative sentiment in the real estate sector as a whole which has been mainly driven by bearish fundamentals of property developers. Property management is an asset light service driven business which can even do well in times of low levels of property construction activity since (a) they have the pricing power to raise their rates every year due to the stickiness of their business model and (b) the high quality managers will always take away share from the lower quality ones because of their superior prowess in operational execution. Hence the key to investing in this industry is to invest only in the high quality names which are preferably backed by a high quality developer since these shall always outperform and are available at exorbitantly cheap prices due to the current sentiment around the sector.

There are two very high quality names that I like in this space: China Overseas Property Holdings and China Resources Mixc Lifestyle Services.

China Overseas Property Holdings is the property management arm of blue chip Chinese SOE developer China Overseas Land & Investments. Their parent company has the highest credit rating of any mainland developer at A rating given by S&P Global and they have an extensive number of residential properties with some commercial properties as well. In H1 24, the company grew revenues by 9% and profits by 16% year over year while they have compounded revenues by 20% and profits by 21.,88%— this looks quite amazing and I think you would agree as well— well then you might now be asking, “ Dragon, why has the stock taken a hammering and why is it so cheap”, well this, my friend, is the inefficiencies of the market that we as pragmatic ands smart value investors are meant to take advantage of. While the world chases tech and pummels this amazing fundamentally sound and growing company despite it having no real property exposure on its balance sheet— we should be foaming at the mouth grabbing this opportunity with both hands. The valuations are perhaps one of the cheapest relative to growth out of all companies on this list; it trades at a low price to earnings of 10.19 times with a sweet 3.53% dividend yield.

China Resources Mixc Lifestyle is also a great company which is backed by China Resources Land, which is a SOE great developer as well, that develops the über popular Mixc series of shopping malls that are basically a tourist magnet in every city that they’re present in. CR Mixc maintains these malls. In H1 24, revenues grew by 17.1% and profits by 36% while it has compounded revenues by 22.1% and and profits by absolutely stupendously high figures. It trades at a PE ratio of 17x and pays a 2.83% dividend yield. At these valuations, if these companies grow at the same or higher rate as they’ve in the past then you have the potential to earn 15%+ CAGR from these stocks.

Both these companies are excellent fundamentally speaking and excellent ways to get exposure to the real estate sector without owning a developer; China Overseas Property is more mature and had slower growth in H1 24 but pays a higher dividend yield and trades significantly cheaper than CR Mixc while having grown revenues by about the same figure since 2019. CR Mixc manages a very high quality series of shopping malls along with other CR Land properties so the choice between either company as an investment is quite difficult and I’ll leave you to ponder over it.

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Haier Smart Home (6690.HK) and Midea Group (0300.HK)

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The home appliance industry serves as a real estate proxy because its growth is closely linked to real estate development, homeownership rates, and urbanization trends. When real estate markets expand—whether through new housing projects, rising home sales, or increased renovation activity—the demand for home appliances naturally follows. Buyers of new homes often invest in appliances like refrigerators, washing machines, air conditioners, and kitchen gadgets as essential household fittings. Similarly, landlords looking to furnish rental properties drive appliance sales, making this industry an indirect but significant beneficiary of real estate cycles. This sector has three broad tailwinds going for it:-

• Government subsidies in China driving a replacement super cycle as people can upgrade their old appliances at a very subsidized price

• A gradual recovery forming in the Chinese real estate sector after being pummeled for so many years which will drive new construction and as outlined above— new homes will need new appliances to be installed as residents move in and tenants look to rent their properties out.

• Higher global growth for Chinese appliance giants at the expense of their western rivals in both developed and developing markets. Whirlpool and Electrolux are unprofitable while Beko hardly makes any profits; Haier is heavily challenging Bosch in Europe

Chinese appliance giants— Haier and Midea— have become true global giants now. Haier is the largest refrigerator and laundry machine manufacturer in the world while Midea is the largest appliance manufacturer in the entire world. Haier has grown its European revenues by a CAGR of 20% heavily challenging industry incumbent Bosch while after its successful acquisition of GE Appliances its also top 3 in North America. Midea is also a global giant and as such both stand to gain immensely in the coming years from the tailwinds that I’ve outlined. The most significant one from the narrow viewpoint of the Chinese real estate sector is the potential upgrade super cycle that may form as a result of policy subsidies and market recovery in property. The valuations for these companies is very undemanding as well.

Haier only trades at a PE ratio of 11.68 times while it grew revenues and profits by 3% and 18.09% respectively in H1 24 and compounded revenues and profits by 5% and 17.78% respectively since 2019. Let’s be conservative, if Haier slows down its profit growth and grows profits at 12% for the next 5 years and trades at 12 times earnings then you can earn a dividend+stock compounded return of about 15% CAGR. Any appreciation in the real estate market driving new construction and property purchases along with the impact of the new subsidies is a free call option on top which can drive your returns to about 18-24% CAGR if you play around with the numbers. For example, if profits grow at 15% for the next five years and it trades at 15 times earnings then you can earn a dividend+stock return of 23.09% compounded per year.

Midea is a very similar company and is available at a PE ratio of 12.45 while it grew revenues and profits at 10.30% and 14.11% respectively in H1 24. It has also compounded revenues and profits by 7.70% and 9.24% respectively since 2019. Midea pays a higher dividend yield but has lower growth and is a significantly larger company so I would personally rather suggest Haier SmartHome but both companies are excellent when it comes to product quality, operational efficiency, and corporate governance.

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China Resources Land (1109.HK)

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China Resources Land is a large state owned real estate developer just like China Overseas Land & Investment and Joy City Properties— which I covered in the first part of this series. CR Land is a top-tier real estate developer under the state-owned China Resources Group and stands out as a resilient player in China’s property sector. The company’s diversified portfolio spans residential, commercial, and industrial real estate, anchored by prime assets in high-demand Tier 1 and Tier 2 cities like Beijing and Shenzhen. Their commercial portfolio is spearheaded by the Mixc brand of shopping malls which are tourist attractions in basically every single city that they are present in. This strategic focus on urban hubs, coupled with stable rental income from the Mixc series of shopping malls, provides a buffer against the downturn in residential real estate development—a segment of the company that has heavily struggled. CR Land also benefits from robust financial health, with lower leverage and preferential access to financing through its state-backed parent—a critical advantage amid ongoing liquidity crises in China’s property sector.

The large commercial exposure differentiates it from China Overseas Land & Investment which has a very small commercial exposure and puts CR Land more into Joy City’s category. There’s no gainsaying the fact that CR Land is an exceptionally well run company but the valuations simply don’t make sense when compared to the other developers that I’ve covered. China Overseas trades at a price to book ratio of 0.32 times while Joy City trades at a price to book of 0.08 times; China Overseas is the highest credit rated listed developer in the mainland real estate sector with an A grade rating from S&P. Global, while Joy City which has a large amount of commercial exposure is directly backed by COFCO— a large state owned conglomerate just like the China Resources Group. CR Land has the highest valuation of the bunch at 0.63x book despite it having the same gearing ratio as China Overseas and Joy City and a lower credit rating than China Overseas, which simply does not make sense to me as I have the option to buy two similar quality companies for magnitudes cheaper. In fact even HK listed Swire Properties (1972.HK) trades at a cheaper valuation than CR Land despite it having a similar quality commercial portfolio, minimal development exposure, and a much much lower gearing ratio. Hence I wouldn’t recommend CR Land as a good investment at these valuations.

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China Resources Gas Group (1193.HK), China Gas (0384.HK), and ENN Energy Holdings (2688.HK)

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Another excellent proxy to the real estate sector is the city gas distribution sector. The City Gas Distribution (CGD) sector refers to the network of infrastructure that supplies natural gas to end consumers in urban and semi-urban areas for domestic, commercial, industrial, and transportation purposes.

The City Gas Distribution (CGD) sector in China plays a crucial role in the country’s energy transition, supporting its efforts to reduce reliance on coal and shift toward cleaner fuels. As one of the largest consumers of natural gas globally, China has aggressively expanded its CGD infrastructure to meet the demands of households, industries, and the transport sector. The Chinese government has set ambitious targets to increase the share of natural gas in the national energy mix, aligning with its broader environmental and energy security goals. The CGD sector in China primarily supplies natural gas through two key segments: piped natural gas (PNG) and compressed natural gas (CNG). PNG is widely used in households, commercial establishments, and industries, replacing traditional coal and biomass for cooking and heating purposes. With increasing urbanization and government mandates to phase out coal-based heating, the adoption of PNG has surged, especially in major metropolitan areas like Beijing, Shanghai, and Guangzhou. Industrial users also rely on PNG as a cleaner alternative to coal and oil, benefiting from lower emissions and enhanced energy efficiency.

CNG, on the other hand, is widely utilized in the transport sector. China has the world’s largest fleet of natural gas-powered vehicles, including buses, taxis, and trucks. The government has encouraged the use of CNG and liquefied natural gas (LNG) in transportation as part of its strategy to reduce urban air pollution and dependence on imported crude oil. LNG-powered trucks have gained particular prominence in China’s logistics industry, given the country’s vast freight transportation network. The CGD sector in China is expected to continue expanding, supported by favorable government policies and increasing energy demand. The country aims to raise the share of natural gas in its total energy consumption to around 15% by 2030, up from approximately 8% in recent years.

The city gas distribution sector has faced headwinds in recent years due to the downturn in the real estate sector— due to which construction activity in both residential as well as commercial real estate has stalled— throttling the addition of new customers and connections for these companies. Even despite the downturn, these companies have more or less endured through relatively unharmed due to the stickiness of their business and their position as a monopoly in the areas which they operate in.

There are three large companies in this industry— CR Gas, China Gas and ENN. I personally like CR Gas the most out of all the companies that I’ve mentioned and I’ll outline the reasons for this. CR Gas has grown revenues by a CAGR of 13% since 2019 while profits have remained largely stagnant —due to market conditions— but even growing revenues by a CAGR of 13% despite net zero covid lockdowns and a decimated real estate sector is quite impressive. In H1 24, CR Gas grew revenues by 7.7% while they grew profits by 21.2%. CR gas has also made significant efforts to expand outside its core business into more related verticals through its “value added services” segment. Through this segment, CR gas upsells kitchen appliances like stoves and chimneys; insurance products; and maintenance services. How much this segment can contribute to overall revenues remains to be seen but I like management’s initiative in even undertaking this project. The average Chinese entrepreneur or CEO is a beast compared to their Western counterparts, I mean where else would you see a gas distribution company expanding to these verticals. Let’s be conservative and assume that CR gas can grow revenues by around 8% a year and trades at the same price to sales of multiple of 0.57 times that it trades at currently, then you can earn a stock+dividend compounded return of around 12%— not bad for a boring gas utility company. Any expansion in growth rate and/or dividends can be your call option on top, I’ve tried to be as conservative as possible.

China Gas has a higher dividend yield of around 7.5% but has gone through some wild swings in revenue while profits have been slashed by around 50% since 2019. It can be a good dividend play but I personally prefer the consistency of CR Gas better.

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Zhejiang Chint Electrics(601877. SH)

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Zhejiang Chint Electric Co., Ltd. is a leading Chinese manufacturer specializing in low-voltage electrical appliances, including circuit breakers and switches, and a pivotal player in renewable energy through its subsidiary, Chint Solar. Chint’s dominance in China’s low-voltage electrical sector, bolstered by its top market share, provides a sturdy consistent growth. The company leverages government support for domestic industrial champions and strategically aligns with China’s Belt and Road Initiative, securing contracts in emerging markets. Technologically, Chint stands out with over 1,000 patents and partnerships with global tech leaders to develop smart energy solutions. The company boasts a track record of robust financial performance. Over the past five years, Chint has delivered consistent double-digit revenue growth, driven by strong domestic demand and strategic international expansion into markets like Europe, Southeast Asia, and Africa. Notably, approximately 40% of its revenue now comes from overseas, diversifying its exposure beyond China’s borders.

Zhejiang Chint is well positioned to benefit from multiple growth drivers. China’s relentless infrastructure development and urbanization continue to fuel demand for reliable electrical components, a core segment of Chint’s business. Furthermore, the global shift toward renewable energy positions Chint Solar—a major producer of solar panels and developer of international solar projects—as a critical enabler of decarbonization efforts. The company is also capitalizing on China’s push for smart grid modernization, investing heavily in R&D for energy storage systems and IoT-enabled grid solutions. With the smart grid market projected to reach $30 billion by 2025, Chint’s technological edge in this space offers significant upside.

Chint has been battling through two significant headwinds: (a) lower construction activity due to a battered real estate sector means that there’s lesser demand for Chint’s low voltage and mid voltage electric products in the domestic markets and (b) the solar industry is heavily cyclical with there being a battle royale currently ongoing due to heavy overcapacity being built out. The solar industry looks to be slowly recovering but I won’t make any comments on it since I don’t have any expertise on the sector I’ll be mostly focusing on the low voltage electrical components. But a recovery in construction activity should hopefully boost solar as well

The low voltage electrical component segment has been taking a bit of a hammering as well due to low construction activity but as this recovers along with further infrastructure buildout in China this segment should continue to thrive. The company has grown sales by around a 15.09% CAGR since 2019 and it only trades at a PE of around 12 and price to sales of around 0.86. If revenue growth slows down to around 12% for the next five years and the price to sales multiple remains the same then we’re looking at about a 14% compounded stock+dividend return per year. This is my bear case assumption and any recovery in real estate activity and the solar industry is a free call option on top. The CEO was recently invited by President Xi to his recent symposium (make of that what you will), it makes me more bullish.

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JD. Com (9618.HK)

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I’ll keep this one short; I’ve already outlined my bullish view on home appliance stocks, if you don’t feel comfortable holding the actual producer of those appliances then consider owning JD. Com—the largest retailer of home appliances and other electronics. There’s no gainsaying the fact that China’s macro hasn’t exactly been the best in the last three years or so. The real estate issues have driven the entire economy into a deleveraging cycle and as such consumers have tightened their wallets and are less trigger happy when it comes to spending money particularly when it comes to things like electronics which is JD’s primary differentiator in China’s hyper-competitive e-commerce and retail market. Add to this, heightened competition from new emerging players like Pinduoduo and it becomes apparent that Chinese e-commerce has been an obscenely difficult market to navigate and survive in. Even so, JD hasn’t fared all that bad, their revenues have stagnated yes, but their profits have grown quite nicely doubling from 2022 to 2023 and management has been very prudent when it comes to delivering their outlined targets as well as cutting costs.

There are three clear catalysts for JD’s price appreciation:-

• Firstly, consumer spending has been recovering gradually throughout 2024 and the government has announced subsidies for electronics purchases on a large variety of items from air fryers to refrigerators to even mobile phones. JD is the largest electronics retailer in China and thus they stand to benefit immensely from this.

• Secondly, they have been investing heavily into last mile operations and have now even entered Meituan’s quick commerce segment whether they can compete here or not remains to be seen but I won’t necessarily count on this being a resounding success.

• Thirdly, the real estate market has been showing gradual signs of recovery and this combined with the subsidies can lead to a large scale upgradation cycle particularly in home appliances which JD shall benefit greatly from.

Richard Liu is an excellent manager and entrepreneur; Liu’s industriousness, low key humble personality, and innovative thinking has differentiated him and JD from competitors and even though he’s now stepped down as JD CEO, becoming the chairman like Jeff Bezos his influence is still paramount to the company’s operations and corporate culture. JD is still cheap compared to its technology and retail peers at only 11x times earnings and stands to gain from the improvement in both Chinese macro in general and Chinese real estate in particular. The company has also shown very high amounts of resilience even in the hyper competitive and challenging environment of the last few years.

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China Pacific Insurance (2601.HK)

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China Pacific Insurance is the second largest property insurer in China. This company has a large life insurance arms as well( being the third largest in China) but the property insurance arm has struggled due to a lack of new property purchases and construction as this market recovers, CPIC has significant upside ahead of them along with providing a high dividend yield. CPIC has an embedded value of 538 billion RMB and a return on equity of around 9.5% making its fair value 0.95x book. If it reaches this fair value in a very conservative assumed period of 5 years then you shall make a stock+dividend return of around 17%. This is assuming that the embedded value does not change at all— this isn’t rational as embedded value went up around 8% in H1 24 itself. So this is a heavily undervalued opportunity.

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Thank you so much for reading; your feedback on the first part and the substack in general has been overwhelmingly positive so I would like to thank each and everyone of you for being so supportive. Special thanks goes to Master Leong (China Daily Reads) and Reads for their kind words and recommendation. If you have any suggestions for the next post then I would love to hear them and I’ll try my best to deliver.