MOSTLY CHINA

[frenchee]

A Rare Chinese Bargain: Property Shares
Emerging Markets

http://online.barrons.com/article_print/SB120372679749987135.html

INFLATION IS RAGING ALL over china, except, it seems, in the property sector. Even as China posted its worst inflation figures in 11 years last week, real-estate shares continued to fall: Property stocks on the Mainland are now nearly 50% off their highs, far more than Chinese shares on the whole. Any official or investor interested in China will be watching closely.

The real-estate sector accounts for just 1.6% of the Shanghai Bourse and just under 7% of the Shenzhen exchange, but makes up nearly 11% of the Mainland's economy. The Chinese are devoted real-estate investors, and recent returns on the Mainland were generally good -- home prices rose by 30% to 60% in 2007, according to the magazine Finance Asia.

Then the government, fearful of inflation, raised borrowing costs and restricted lending, making it tough for developers to buy land and finance new construction.

"Until October, many [property] stocks were seen not as asset plays, but as continuous machines of recurring income," says Shu Yin Lee, director of Grand River Properties in Shanghai, and an adviser to Dalton Greater China Fund. "Take away the gains in property and stocks, and that affects consumption and the wealth effect. It's a big deal for stability. That gets in the way of the 'Great Harmony' that [President] Hu Jintao is trying to promote."

Hong Kong-focused developers generally have fared better than those on the Mainland, because the special administrative region, whose currency is pegged to the U.S. dollar, was forced to ease credit in tandem with the Federal Reserve. That may now reverse: Late last week, an HSBC Holdings official suggested that local banks may cease following the U.S. central bank in cutting rates, owing to Hong Kong's own inflationary pressures.


Mixed Showing: Asian markets didn't move in lockstep last week. India fell, Taiwan rose.
Meanwhile, Mainland developers are posting mixed sales results, but they're looking cheap. Guangzhou R&F Properties (ticker: 2777.HK) reported last month that contract sales were up 23% from the level a year earlier, although 5% below December's total. Sales for China Vanke (0000002.CH) in January were down 70% from December; Vanke has already cut prices in major cities to move inventory. Worst hit is the south, target of much speculation, thanks to its proximity to Hong Kong.

The fundamentals still look strong for developers, given robust economic growth, currency appreciation and, not least, the huge demographic shifts caused by urbanization. "This is the largest economic movement the planet has seen in such a short period of time," says Charles Aster, who heads the China and real estate practices at law firm Kane, Russell, Coleman & Logan.

And the government is easing access to other forms of capital raising. Shut out from banks, developers are gradually being allowed to raise money on the stock market. The government, for example, will allow property companies to resume the sale of A shares. One big beneficiary, according to Citibank, is Guangzhou R&F, as a stock sale will bolster its finances. Citi thinks the shares are worth HK$36.28, versus last week's price of HK$22.95. Meanwhile, Beijing is also permitting new domestic stock fund launches for the first time in six months -- a new source of demand for real-estate shares.

"This all creates opportunity," says Lee of Grand River, who likes stocks trading at big discounts to their net asset value. Tian An China Investments (28.HK), for instance, now trades at HK$7, compared to its NAV of HK$15 and the HK$9 a share price Goldman Sachs paid to invest in it last November. Lee also likes Tomson Group (258.HK), whose shares changed hands last week at HK$2.38, versus a NAV of HK$10.

OTHER VALUES HAVE emerged. China Overseas Land (688.HK), according to CLSA Asia-Pacific Markets, trades at 16.5 times expected 2008 earnings and at a 17% discount to its NAV.

Christopher Wood, strategist at CLSA and author of its Greed & Fear newsletter, thinks this year will see "consolidation" in Chinese equities and property shares. But it will "ultimately prove a great buying opportunity. If Greed & Fear is going to pick one area to bottom fish now it would be the national brand-name property developers with strong balance sheets, who have been able to take advantage of the financial squeeze on the smaller developers to increase their landbanks."

Last week, Wood doubled his exposure in his model portfolio to China Overseas Land and removed Hang Lung Properties, "which is more of a play on Hong Kong and China commercial property."