Home Run

Chinese Developers' Fat of the Land

Forget earnings, it's more about acreage amassed.
Photographer: Axel Schmidt/Getty Images
At Closing, March 19th
28.35 HKD
At Closing, March 19th
25.30 HKD

There's a new valuation methodology in town for Chinese developers: Buy ones with the biggest land banks.

While state-backed China Overseas Land & Investment Ltd. and China Resources Land Ltd. have long been hailed as blue chip, it's competitors such as China Evergrande Group, Country Garden Holdings Co. and Sunac China Holdings Ltd. that have shined this year. Combined, the trio have a market value north of $170 billion. Evergrande started the year at $23 billion.

Investment banks are racing to revise their estimates. Citigroup Inc.'s Oscar Choi, the top-ranked analyst by Institutional Investor, raised his sector price target by 13 percent this week, saying he sees industry consolidation. Choi predicts that in three years, China's top 10 developers will double their share of the market to 40 percent. By 2019, Evergrande, Country Garden and Sunac will be the top three revenue generators, overtaking China Overseas Land.

Bigger the Better

China's top 10 developers are expected to double their market share to 40 percent by 2020

Source: Citi Research

Consolidation is a polite way to talk about the nub of the issue here. The real secret sauce behind those firms' meteoric rise is land. A Gadfly analysis of 18 Hong Kong-listed Chinese developers shows that expanding land banks account for 80 percent of the rise in share prices, a closer correlation than with earnings growth.

Promised Land

Developers that have quickly amassed land are being rewarded by stock investors. Sleepy state-backed firms aren't feeling the love

Source: Bloomberg Intelligence

While home prices in China are rising at a slower pace, the cost of residential land keeps spiraling.

Land of Plenty

Residential land prices in China have soared even as home price growth slows

Source: Bloomberg Intelligence

Evergrande, Country Garden and Sunac were smart. By hoarding sites, they can not only support future growth but also benefit from price appreciation. The three now own roughly half of the total territory controlled by the 18 developers. By comparison, the reserves held by China Overseas Land and China Resources Land haven't moved much, and their share-price gains have lagged.

There are reasons to believe residential land prices will remain elevated. With local governments in China able to access the municipal bond market for funds, they're less likely to sell off large swathes of territory.


China's land-to-residential sale ratio has held below one times for 30 months

Source: CLSA

Ironically, it's now the state-backed property companies most vulnerable to attacks from short sellers. China Resources Land still trades at 9.9 times forward earnings, in line with Evergrande, even though its profit tumbled in the first half.

How the lay of the land has changed.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

    To contact the author of this story:
    Shuli Ren in Hong Kong at sren38@bloomberg.net

    To contact the editor responsible for this story:
    Katrina Nicholas at knicholas2@bloomberg.net

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