Evergrande Real Estate, China’s second-largest property developer by sales, stunned analysts this summer with its first-half results. In a period of artificially restricted demand, the company doubled its sales volume year-on-year to RMB42.32 billion (US$6.71 billion), while its underlying profit rose 147.9% annually to RMB4.81 billion.
The secret to Evergrande’s success was its diversification: All told, the Guangzhou-based developer has a presence in 101 cities, including the new economic centers of the country’s west, like Chongqing, Wuhan and Hefei.
Restrictions on property purchases and mortgages have succeeded at reining in price growth in first-tier cities, especially Shanghai and Beijing. However, property markets in less regulated lower-tier cities have actually heated up, as investors stymied in the first-tier cities snap up houses in smaller urban centers.
This trend has not escaped the notice of regulators, who have recently begun discussing plans to extend restrictions to smaller cities.
Any such move, when it occurs, would present a risk to Evergrande’s business. That’s one reason why investors are jumping ship on the company’s stock, reducing its value by nearly 40% between mid-July and mid-September.
That decline is unwarranted, and presents a buying opportunity. Even if regulations are extended, Evergrande will remain better-positioned than its competitors, many of whom own much of their property in the vicinity of their headquarters. The company has plenty of projects – 62 in all – ready for launch in the second half, mostly in the fourth quarter.
Evergrande’s continued expansion has pushed up its net debt ratio from 53% at the end of 2010 to 73% within the last six months, but its cash also expanded 44%, helping to secure its financial position. In addition, management has promised to slow expansion and start selling, after Evergreen added 49 million square meters to its land bank in the first half. It now has a land bank of 135 million square meters with 181 projects – meaning that its stock is trading at a hefty discount to its net asset value.