Numerous Chinese property counters have rallied two or three times so far this year. Such amazing jump is rare.
We can probably explain the whopping gains with the unique cashflow and profit realization pattern of developers as well as the influx of mainland capital.
All property developers have similar business model. They buy a land plot in the first place, and then build houses on the land, and sell or lease them. It takes at least two years to plan and build these houses, which means developers have to wait at least two years after the sunk costs. They have to pay off the land cost quickly. Therefore, rapid expansion has created a huge gap between their cost and revenue.
In the meantime, revenue from all property projects can only be recognized when flats have been officially delivered to buyers, according to current accounting rules. That means developers have to record all pre-payment revenue from homebuyers as liability before homes are delivered to customers. Generally speaking, they need to wait at least 12 to 18 months to finish all the work.
As such, financials like debt level and revenue cannot timely reflect the huge property boom seen last year.
Meanwhile, there has been misconception that property developers in general suffer this year after the government imposed strong curbs to prevent a housing bubble since late last year.
Data indeed supports such view. The nation’s total housing sales revenue slumped 31 percent in August from the year before, for example.
But the truth is, the nation’s housing industry has seen increased level of concentration in recent years. And small and medium-sized developers have been forced out of the land auction market. Many of them have been acquired by bigger rivals. At the same time, big developers are gaining market share.
Home prices continue to hold firm, with new-home prices in the top 70 cities rising for the 22nd straight month year on year in July.
Most of these Hong Kong-listed developers are leading players in China. They are biggest the winners of the industry shake-up and booming prices.
Inflow of money from across the border is also a game changer.
Foreign institutional investors have so far dominated the Hong Kong market.
They tend to use stringent investment criteria and put a lot of weight on booked results. Some may not be allowed to buy certain stocks if the company has excessively high debt ratio. As a result, many of them have stayed away from mainland Chinese developers.
The Hong Kong-mainland stock connect program changed all that.
Not a few seasoned mainland investors, who regarded property as huge bargains, became heavy buyers of these counters, suddenly lifting them out of multi-year doldrums.
These mainland investors are said to have banded together to form an internet group in order to do profound research themselves, particularly on collecting monthly sales figures from all over China, which is a key market-moving factor.
Their understanding of the property market could rival, or even surpass, that of the analysts of major investment banks.
Armed with such information edge, they have made big bets on the sector and hence the rocketing share prices.
This article appeared in the Hong Kong Economic Journal on Sept. 14
Translation by Julie Zhu
[Chinese version 中文版]
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