Thursday, July 22, 2010

China’s real estate market has just start growing

In China, consumers buying residential properties are required to put down 30 percent before taking out a mortgage. For a second home, the down payment is 50 percent, irrespective of their net worth. Home purchase is predicated on affordability.

Today, there are some 360 million urban residents in China. In the next three decades, the figure is expected to grow to 970 million. What China is trying to achieve is unique in history – to create urban space to more than 610 million people, within a single generation.

In such an environment, periods of overheating will occasionally be accompanied by dramatic price increases. China’s urbanization rate is about 45 percent, whereas in Japan and other advanced countries it is more than 80 percent. As these nations reflect very different levels of economic development and different levels of individual prosperity, their real estate markets are different as well.

Despite its rapid pace of expansion, China’s real estate is still at a very preliminary stage. The marketplace is so colossal that there are no precedents, no simple models. Yet the prospects for a robust growth remain intact. The key will be not to allow that growth to become threatened by a property bubble – while providing affordable housing for the rapidly-expanding new middle-class.

A Chinese company that can profit from it is NYSE-listed Xinyuan Real Estate (XIN). The company is a developer of large scale, high quality residential real estate projects aimed at providing middle-income consumers with a comfortable and convenient community lifestyle. Xinyuan focuses on China's Tier II cities, characterized as larger, more developed urban areas with above average GDP and population growth rates. Xinyuan has expanded its network to cover a total population of over 44.7 million people in seven strategically selected Tier II cities, comprising Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Xuzhou and Chengdu.

The last analyst report dated from May 28, 2010 when the price was $ 3.19

Rodman &  Renshaw Initiation Outperform $7.00
Xinyuan shares are currently trading near a discounted liquidation value (50% of its book value and 78.5% of its cash value), which we believe has largely reflected the bear market sentiment and policy headwind. We believe there should be clear differentiation between Xinyuan, which operates mostly in higher growth and less speculation-driven Tier II cities, and those developers that focus more on speculator-concentrated Tier I cities. With a solid balance sheet, sufficient liquidity, plenty of projects in the pipeline to support its growth through 2012, combined with an experienced and disciplined management team, we believe the company justifies a much higher valuation. Our $7 price target is based on the shares trading at 8x our expected 2011 non-GAAP EPADS of $0.92 and 1x our estimated BVPADS of $6.95, representing a slight discount to Xinyuan's Chinese real estate developer peers currently listed on U.S. and Hong Kong exchanges.


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