A real estate slowdown that has idled construction cranes and deflated home prices across China has been spreading angst among the manufacturers surveyed every month for the closely watched China Purchasing Managers Index (PMI).
But investors with an appetite for risk can buy on all that angst and shrug off the manufacturers’ shaky confidence in the Chinese economy, as most recently reflected by official government and a bank’s unofficial China PMI data for October.
What investors can consider buying are shares in big-name Chinese housing developers.
Prices for two Hong Kong Stock Exchange-listed companies — China Vanke Co., Ltd. (HKG:2202) and Evergrande Real Estate Group Limited (EGRNF, HKG:3333) — have been falling this year, with Vanke down 16% since mid-July and Evergrande down 22% since April. But both appear ready to rebound on stimulus hopes.
Expectations are running high that the government — which in China includes state-owned banks that write mortgages and finance developers — will do more to stimulate the real estate sector. Analysts have cited these expectations over the past week on grounds that the government will likely continue and perhaps accelerate its “mini-stimulus” efforts, such as easing mortgage rules, that began last spring. Property stocks have picked up in past years after government real estate stimulus efforts kick in.
The official China PMI released Saturday by the China Federation of Logistics & Purchasing was 50.8 in October, down from 51.1 the month before. Separate China PMI data crunched by HSBC and financial services provider Markit, released Monday, showed a slight gain to 50.4 last month compared to 50.2 in September.
Both surveys pointed to threadbare expansion for the manufacturers whose factories churn out export and domestic products, including steel and other building materials for the urban housing developments at the heart of Chinese real estate. Analysts cited a weeklong national holiday in early October, this year’s cooling down for the real estate market and a slight decline in export orders as factors weighing on the minds of manufacturers surveyed.
Analysts Predict an Intervention
China logistics federation analyst Zhang Liqun cited “downward pressure on economic growth” but said the effect of recent government stimulus measures, including help for the real estate sector, “are starting to show, although they have not yet been reflected in the China PMI.”
Lian Ping, chief economist at the Bank of Communications, also predicted more government intervention will be coming to keep economic growth on track. The government target is 7.5% GDP growth for 2014.
Backing these predictions was an Everbright Securities report Monday that cited recent stimulus-related decisions by the State Council, China’s cabinet, ordering government agencies to “promote consumer spending” in six economic sectors, the biggest of which is housing. The report did not say how policymakers plan to pump up home buying. But in addition to making mortgages easier to obtain, the government is already financing low-income housing construction and encouraging rural Chinese to move to cities.
In a recent analysis recommending Vanke stock, Anxin Securities predicted monetary easing by the central bank would “gradually” boost property sales, so that “real estate stocks are expected to continue to rise” led by leading companies such as Vanke, which have substantial land reserves ready for new building projects. Anxin expects the company’s 2014 earnings per share to jump to between HK$1.74 and HK$2.27 a share, up from HK$0.56 last year.
Nevertheless, there’s no guarantee that government stimulus will indeed revive the property sector and push Vanke and Evergrande’s stock values higher. A Moody’s report on Evergrande cited a 32% increase in sales contracts signed for the January-September period from the same months 2013.
“But debt financing has also increased,” said Moody’s, bringing “higher financial risk.”
As of this writing, Eric Johnson did not hold a position in any of the aforementioned securities.