China Overseas Land Is A Hold Considering Operating Data Read-Throughs

seekingalpha07-13

China Overseas Land's sales performance for 2024 year-to-date was better than that for the industry using the top 100 real estate developers as a proxy.But CAOVF's slower pace of land acquisition in ...

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PATCHARIN SAENLAKON Elevator Pitch China Overseas Land & Investment Limited (OTCPK:CAOVF) (OTCPK:CAOVY) [688:HK] stock is awarded a Hold investment rating. In my July 16, 2021 initiation article, I highlighted my \"Neutral\" view of China Overseas Land, a leading \"property developer in Mainland China\", taking into account both \"increasing land prices\" and the company's \"low net gearing.\" My current write-up evaluates China Overseas Land's latest operating data. The company's sales performance in 2024 year-to-date and June 2024 was superior to that for the broader market. But CAOVF's conservative stance relating to land acquisition suggests that it is premature to think that China's residential property sector is out of the doldrums. Therefore, my decision is to rate China Overseas Land as a Hold. The company's shares are traded on both the OTC market and the Stock Exchange of Hong Kong. China Overseas Land's Hong Kong shares and Over-The-Counter shares boasted mean daily trading values of $45 million and $30,000 (source: S&P Capital IQ), respectively for the last three months. Readers can engage the services of US brokers like Interactive Brokers or Hong Kong brokerages such as Boom Securities to deal in the company's comparatively more liquid Hong Kong-listed shares. CAOVF Outperformed The Industry In Terms Of Property Sales Growth China Overseas Land revealed the company's key operating metrics for June 2024 and the first half of the current year with an announcement issued in the first week of July. The bright spot for CAOVF was its property sales figures. Property sales for the company grew by +41% YoY to RMB46.7 billion in June this year as per its July 5, 2024 announcement. In contrast, the combined new residential real estate sales for the top 100 Mainland Chinese property developers decreased by -17% YoY in the previous month. However, China Overseas Land's year-to-date property sales growth has yet to return to positive territory. As indicated in the company's July announcement, CAOVF's property sales contracted by -18% YoY in the first half of 2024. Nevertheless, China Overseas Land's 1H 2024 sales growth performance was still much better than the broader market. As a comparison, the top 100 Mainland Chinese property businesses as a whole witnessed a relatively wider -42% YoY drop in property sales for the first six months of the year. In my opinion, CAOVF's relative outperformance with respect to sales growth is likely attributable to the company's status as a State-Owned Enterprise or SOE and its focus on higher-tier Chinese cities. I previously mentioned in my July 2021 initiation piece that \"state-owned enterprise China State Construction Engineering Corporation\" is China Overseas Land's biggest shareholder. China State Construction Engineering Corporation has a 56.1% equity interest in CAOVF as per the company's annual report. State-owned property developers like China Overseas Land are likely to have taken market share from their privately-owned real estate peers, as Chinese home buyers will have greater confidence in SOEs' ability to stay solvent and complete their pre-sold residential property developments. On the other hand, there is little assurance that the Chinese government will step in to \"rescue\" troubled property companies which are privately owned and unaffiliated with the state. According to its investor presentation, 92% of China Overseas Land's land bank available for development into properties for sale, which it refers to as \"saleable resources\", is situated in \"first-tier and major second-tier (Chinese) cities.\" A June 25, 2024 commentary piece published on China-focused media platform Think China highlighted that \"the problem of excess housing stock is the most severe\" in China's \"third-tier and fourth-tier cities.\" As such, CAOVF's sales performance has been better than the market as a whole, due to its limited exposure to over-supplied lower-tier cities in the country. But Company's Conservative Stance On Land Acquisition Is Telling CAOVF disclosed in the company's July 5 announcement that the \"aggregate attributable GFA (Gross Floor Area) of the lands acquired by the Group was approximately 1,148,298.04 square meters\" or sq m for 1H 2024. Last year, China Overseas Land purchased land that was equivalent to an attributable GFA of 7,062,592.22 sq m as highlighted in its investor presentation. In other words, CAOVF's 2024 year-to-date land acquisition only represented about 16% of what the company bought in full-year 2023. It will be fair to say that China Overseas Land has taken a very cautious approach towards the addition of land bank this year. It is telling that CAOVF's stance on land acquisition is so conservative. This suggests that a sustained recovery in property sales for China Overseas Land and the broader Chinese residential real estate market might take more time to materialize. This might help to explain why China Overseas Land has been very disciplined in terms of land acquisitions in this year thus far. Firstly, China Overseas Land is basically \"a good company in a bad industry.\" As mentioned in the preceding section, China Overseas Land's 1H 2024 property sales growth is still negative, even though the company's sales contraction is narrower than the broader market. In other words, CAOVF has been gaining market share (\"good company\"), but the market is still shrinking (\"bad industry\"). Therefore, China Overseas Land's near-term operating and financial performance could remain weak in absolute terms as seen with the -18% YoY property sales decline for the first half. Secondly, the Mainland Chinese property sector might underperform in Q3 2024 based on third-party research. According to Chinese research firm CMB International's July 11, 2024 report, there are expectations of \"slightly widened property sales decline in Jul-Aug\" based on an analysis of \"property search interest.\" Therefore, China Overseas Land's strong +41% YoY property sales growth for June 2024 might not be sustained in the coming months. Thirdly, the prevailing view is that China is less likely to introduce significant policies to boost the Chinese economy and the real estate market anytime soon. The Financial Times published an article on July 11, 2024 cited Chinese Premier Li Qiang's comments at \"a recent World Economic Forum event\" that the country's \"economy was like a patient recovering from a serious illness\" which doesn't support the usage of \"strong medicine.\" It is reasonable to infer from Li Qiang's remarks that China will roll out supportive policies for the country's economy and property market in a progressive manner. This implies that the probability of a sharp rebound in new home sales driven by aggressive policies for the Chinese market in the near term is low. Closing Thoughts A Hold rating for China Overseas Land is fair, as there are both favorable and unfavorable takeaways from the company's latest operating data disclosures. The company's property sales outperformance on a relative basis is a key positive, but its slow pace of land bank acquisition has negative read-throughs. With regards to valuations, China Overseas Land's current consensus next twelve months' normalized P/E multiple of 5.8 times is pretty close (within 10%) of its five-year and 10-year mean P/E ratios of 5.3 times and 6.2 times (source: S&P Capital IQ), respectively. A P/E metric at a similar level as its historical averages seems to be fair for \"a good company in a bad industry\" like CAOVF.  Editor's Note: This article discusses one or more securities that do not trade on a major U.S. exchange. 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