(Yicai Global) July 18 -- Amid falling share prices in China since the turn of the year, the average price-to-earnings ratio among real estate stocks has fallen to a three-year low of 11x prompting several firms in the sector to take measures such as share repurchasing over the past month.
The sharp decline of real estate stock prices is not completely the result of market trends. In terms of the fundamentals, China’s real estate industry is going through a rough time, with the prospects for profitability overshadowed by various negative factors such as deleveraging, industry regulations, and the tightening of the shantytown renovation policies.
The real estate sector index closed at 3799.35 on July 13, with the average P/E ratio falling to its lowest level since 2015 at 10.52x, data from Shenwan Hongyuan shows.
The fall affected some of the industry’s biggest companies such as Vanke and Poly Group. Vanke’s [SHE:000002] A-share price fell from a high of CNY42.24 (USD6.31) in January to a low of CNY22.52 in early July, and its market capitalization has shrunk by nearly CNY200 billion (USD29.9 billion) overall.
Collective Repurchasing Efforts
Property developer China Jinmao [HK:00817] announced plans on July 16 to repurchase some 1 million of its shares for HKD3.9 million (USD500,000). China Jinmao has carried out several large-scale share buybacks since June 26.
Major player 5I5J Holding Group [SHE:000560] also carried out its own repurchasing of stock on July 16, buying 300,000 shares through concentrated bidding, or 0.01 percent of total shares, for CNY1.8 million including transaction fees.
Other property developers including Logan Property, Evergrande, Country Garden, Shimao Property, China Aoyuan Property Group have performed similar share repurchase schemes, while controlling shareholders at Yuzhou Properties, Longfor, and Ronshine upped their stakes in an effort to stabilize market confidence.
Risk of Pledged Share Forced Close-Out
The measures taken by real estate enterprises are not only to stabilize investor sentiment but more importantly, to avoid the risk of forced close-out of previously pledged shares due to falling stock prices.
China’s listed realtors including China Vanke, Tahoe Group, Yango Group, CFLD International, Sichuan Languang Development have used equity pledges to gain financing in the past. Some property companies have to choose equity pledges as the capital market financing is generally restricted, said Xincheng Holding Group Senior Vice-President Ouyang Jie.
For the controlling shareholders of listed real estate companies that have pledged the companies’ shares to obtain financing, the stock price decline may cause them to lose control of the firms.
However, Zhu Yiming, a researcher at China Real Estate Information, believes that the current overall valuation of the real estate industry is already relatively low, and there is no room for the stock price to continue to fall as sharply in the future. Therefore, listed property companies are unlikely to encounter a large-scale equity pledge crisis.
Increased Risk Aversion
It is hard to deny that moves by some property enterprises to rapidly build up assets over the past year have been inseparable from the strategy of shareholders and executives to increase leverage. However, as deleverage and regulations become more severe, tensions in financing channel increase and the reaction of the capital market continues to be pessimistic, while only a handful of firms giving a positive outlook of the market.
What is even more bleak is that in order to achieve high turnover, individual property enterprises have frequently engaged in dangerous activities on their projects leading to construction accidents, which has worsened public opinion of the industry.
Hence, when some real estate companies known for their high leverage explicitly propose to reduce leverage or ask for faster withdrawal of funds, the market interprets this phenomenon as an increase in industry risk aversion.
“In the first half of this year, the company deliberately reduced land acquisition to reduce existing inventories,” an executive from a property company in South China told Yicai Global. “The company no longer emphasizes profit margins of some projects as it did in the past but tries to reduce inventory, with the overall goal of reducing capital outflows and increasing capital inflows.”
Given that some market participants believe that it is unlikely that the valuation of the property sector will be lower than multiples of 10, and property sales have still maintained high growth this year, real estate stocks are still worthy of allocation after the market panic but the mainstream opinion is that investors should be cautious.
Zhang Hongwei, director of the research department of Tospur Real Estate Consulting indicated a bearish outlook of the real estate industry in the second half of the year. Both the domestic and international macroeconomic environment as well as the industry policy background will affect profit margins at developers, and the profit margin will affect the stock price.
Editor: William Clegg