For years, mainland property stocks have been avoided or underweighted by institutional investors, who believe China’s home market bubble is about to burst.
Most stocks in the sector have slumped below their net asset value, and the price to book ratio of some smaller players have even dropped to 0.2 or 0.3 times.
The depressed valuations reflect market concerns about exorbitant housing prices in first-tier cities such as Shenzhen, Beijing and Shanghai and a serious inventory glut in lower-tier cities.
But the much feared meltdown has so far not materialized, thanks to the government’s deliberate management of the property market.
Chinese authorities have adopted divergent approaches in managing the property market.
It has imposed various restrictions to address the overheating situation in first-tier cities while relaxing the household registration system in lower-tier cities to drive housing demand.
This has led to an interesting dichotomy.
Numerous developers have reported strong sales growth in recent years.
For example, Vanke’s (002202.HK, 000002.CN) sales revenue jumped to 262.7 billion yuan (US$39.5 billion) last year, more than doubling from 121.5 billion yuan in 2011.
And Evergrande’s (03333.HK) sales revenue also soared to 201.3 billion yuan from 80.4 billion yuan during the period.
But while awash with cash, these big developers saw their stocks remaining depressed.
That could be part of the reason for Evergrande’s recent purchase of Vanke shares.
Evergrande has so far bought 552 million shares or 5 percent of Vanke, spending around 10 billion yuan.
It could have cost Evergrande less were it not for the leakage of its moves when it has built its stake to about 4 percent. The leakage pushed up Vanke’s shares dramatically.
Evergrande’s purchase also reignited market interest in mainland property counters, boosting the market value of the sector by several hundred billion yuan within a few days.
In about a week, Evergrande and Vanke shares have soared 15.5 percent and 23.9 percent respectively. Other mainland property stocks also posted sharp gains.
On paper, the market value gain of Evergrande stocks and the Vanke shares it bought has already reached around 10 billion yuan.
The stock purchase is also viewed as a signal for bargain hunting in the China property sector by peers, who are themselves insiders and are supposed to know the true underlying value of property counters.
This article appeared in the Hong Kong Economic Journal on Aug. 11
Translation by Julie Zhu with additional reporting
[Chinese version 中文版]
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