I wonder how the investment merits of these chinese SOEs would stack up against the smallish net-net HK developers such as Tai Cheung (8.3% yield, net cash) and Miramar (6% yield, net cash), also similarly trading at deep discounts to their book. Perhaps they are an apple-orange comparisons, but with limited resource, i do wonder which offer more bang for the buck. Any strong view here?
I personally don’t dabble in net net small developers because they’re too small for my personal tastes I personally only like investing in large blue chip developers with a long track record of having solid credit since the real estate business can be quite volatile.
The reason why I covered only the State owned developers in China is because the stake has an active role to play in these companies hence the chances of them going bankrupt are basically zero. Plus these companies are very conservatively run and aren’t prone to the whims of private entrepreneurs who will undertake any investment no matter how risky to maximise their chance of profits.
You can have the smaller developers as part of your net net basket no problem but I’d personally sleep better at night holding the large state owned developers.
The only thing to be careful about when digging into China RE plays is companies often have off-balance sheet liabilities that are several times the size of the on-balance sheet liabilities reported in the public financial documents. Therefore, it is also important to look at how the bonds are trading to get a sense of the level of distress each developer is facing.
I don’t really care much about the off balance sheet liabilities with the State owned developers because of two reasons:-
- The State owned developers can make these creditors wait for years before they finally pay up because well they are owned by the literal State and whether it’s the U.S., Europe, China or even Burundi good luck winning litigation against the State for payment of their dues it never works out
- The State owned developers are very conservatively run as evident by China Overseas’s A grade rating and have long track records of excellent execution and operation.
With the real estate industry industry in China shifting to almost a complete state owned and operated model I expect that to continue.
Great write up. I find a lot of compelling investments in China at the moment. What is keeping me from going big is the Taiwan political risk. I fear we could end up in a similar situation that we faced with Russia where your funds are frozen or seized. Don’t want to sound like a conspiracy theorists but these risks are real and happened to a lot of western investors in Russia. What are your thoughts on this risk?
I’m not from the West so the risk is obviously zero for me. But for Western investors, yes your government will continue making investing in China difficult. Look into whether you can open an account with an Asian brokerage in a neutral country like Singapore, POEMS offers remote opening for EU citizens and I think tiger might have it too. For US citizens, it’s a lot harder.
Don’t invest in ADRs first and foremost and there’s no real workaround there, those can easily go to zero. Invest only in HK and A shares and preferably not from an American brokerage.
There’s no set metric per se and anyone saying this is lying to you. Prices have contracted between 40-45%. The high ratio that you cited was for cities like Shanghai and Shenzhen previously where residential projects have to compete neck and neck with both industrial and commercial development since land is that much more valuable. For these cities when you compare prices to equivalent cities like New York, London, Hong Kong etc the prices in China are about the same or slightly cheaper. The real bubble was in rural and tier 3-5 city housing prices and these prices have contracted significantly. The market is now recovering but I believe that rural markets will take more time to it’s best to buy companies like COLI, CR Land, Joy City etc which are state owned and develop only in Tier 1 and Tier 2 cities.
When you average all the markets then yes. But this is an average figure so rural markets and some ghost towns have obviously done worse while urban markets like Shanghai or Shenzhen haven’t had that much of a contraction in prices relatively speaking of-course.
Very good read - I already bought First Service and Automated System from your net net articles and some exposure to Chinese real estate looks fantastic at this price point as well :)
Thank you so much for your kind words. That’s precisely why I covered this sector as well. I hope part 2 can provide you with more value. Both First Service and Automated Systems are so undervalued it’s crazy
I wonder how the investment merits of these chinese SOEs would stack up against the smallish net-net HK developers such as Tai Cheung (8.3% yield, net cash) and Miramar (6% yield, net cash), also similarly trading at deep discounts to their book. Perhaps they are an apple-orange comparisons, but with limited resource, i do wonder which offer more bang for the buck. Any strong view here?
Thanks for the write-up. A great read.
I personally don’t dabble in net net small developers because they’re too small for my personal tastes I personally only like investing in large blue chip developers with a long track record of having solid credit since the real estate business can be quite volatile.
The reason why I covered only the State owned developers in China is because the stake has an active role to play in these companies hence the chances of them going bankrupt are basically zero. Plus these companies are very conservatively run and aren’t prone to the whims of private entrepreneurs who will undertake any investment no matter how risky to maximise their chance of profits.
You can have the smaller developers as part of your net net basket no problem but I’d personally sleep better at night holding the large state owned developers.
Provides much needed historical context. Great read as usual. Excited for Part 2, thanks!
Thank you for your kind words Andreas
Very nice read.
Thank so much Chris, it means a lot to me. I hope I can make part 2 even better
The only thing to be careful about when digging into China RE plays is companies often have off-balance sheet liabilities that are several times the size of the on-balance sheet liabilities reported in the public financial documents. Therefore, it is also important to look at how the bonds are trading to get a sense of the level of distress each developer is facing.
I don’t really care much about the off balance sheet liabilities with the State owned developers because of two reasons:-
- The State owned developers can make these creditors wait for years before they finally pay up because well they are owned by the literal State and whether it’s the U.S., Europe, China or even Burundi good luck winning litigation against the State for payment of their dues it never works out
- The State owned developers are very conservatively run as evident by China Overseas’s A grade rating and have long track records of excellent execution and operation.
With the real estate industry industry in China shifting to almost a complete state owned and operated model I expect that to continue.
Thanks for yet another interesting article. Do you have any analysis of the listed China Overseas subsidiaries with their own listings, 2669 and 81?
That’s coming in the next part haha. Give me a few days this took me almost an entire day to write
Great write up. I find a lot of compelling investments in China at the moment. What is keeping me from going big is the Taiwan political risk. I fear we could end up in a similar situation that we faced with Russia where your funds are frozen or seized. Don’t want to sound like a conspiracy theorists but these risks are real and happened to a lot of western investors in Russia. What are your thoughts on this risk?
I’m not from the West so the risk is obviously zero for me. But for Western investors, yes your government will continue making investing in China difficult. Look into whether you can open an account with an Asian brokerage in a neutral country like Singapore, POEMS offers remote opening for EU citizens and I think tiger might have it too. For US citizens, it’s a lot harder.
Don’t invest in ADRs first and foremost and there’s no real workaround there, those can easily go to zero. Invest only in HK and A shares and preferably not from an American brokerage.
Sorry if I missed it, but what has the affordability ratio come down to? It was around 17X before the recent decline
There’s no set metric per se and anyone saying this is lying to you. Prices have contracted between 40-45%. The high ratio that you cited was for cities like Shanghai and Shenzhen previously where residential projects have to compete neck and neck with both industrial and commercial development since land is that much more valuable. For these cities when you compare prices to equivalent cities like New York, London, Hong Kong etc the prices in China are about the same or slightly cheaper. The real bubble was in rural and tier 3-5 city housing prices and these prices have contracted significantly. The market is now recovering but I believe that rural markets will take more time to it’s best to buy companies like COLI, CR Land, Joy City etc which are state owned and develop only in Tier 1 and Tier 2 cities.
Prices have contracted 40%-45% nationwide?
When you average all the markets then yes. But this is an average figure so rural markets and some ghost towns have obviously done worse while urban markets like Shanghai or Shenzhen haven’t had that much of a contraction in prices relatively speaking of-course.
Excellent analysis and an enjoyable read, appreciate your hard work.
Hi Jackson thank you so much
Hui Ka Yan is Xu Jiayin in Cantonese
Oh fair enough
Very good read - I already bought First Service and Automated System from your net net articles and some exposure to Chinese real estate looks fantastic at this price point as well :)
Thank you so much for your kind words. That’s precisely why I covered this sector as well. I hope part 2 can provide you with more value. Both First Service and Automated Systems are so undervalued it’s crazy