Lombardi: Stock Market Commentary & Forecasts, Financial & Economic Analysis Since 1986

Why the Money May Be with China’s Real Estate

Wednesday, February 6th, 2013
By for Profit Confidential

Money May Be with China’s Real EstateChina is beginning to show renewed growth. (Read “China Showing Promise as Chinese Stocks Pick Up Steam.”). The country is driving stimulus spending and easy monetary policy to get its economy back on track and drive consumers to spend.

And while there was talk of an asset bubble in China’s housing market, I’d say that the short-term risk is high, but there’s also excellent long-term growth potential in the housing market.

The conditions bode well for the country’s housing market, considering that there are over 300 million middle-class consumers in China, and as a group, they are hungry for a lifestyle like we have in the West. Real estate investments are a key goal for the Chinese.

Standard & Poor’s analysts believe the housing market in China is stabilizing, with buyers returning while home prices are under control. (Source: Badkar, M., “S&P: China’s Housing Market Is Finally Looking Up,” Business Insider August 13, 2012, last accessed February 5, 2013.)

Moreover, in an ironic twist, at a time when California’s housing market is struggling, the state’s California Public Employees’ Retirement System (CalPers), a pension fund, invested about $530 million in two new China real estate funds managed by ARA Asset Management, which is positive longer-term.

To play China’s housing market, you can take the more conservative approach and buy the Guggenheim China Real Estate (NYSEArca/TAO) exchange-traded fund (ETF) with a year-to-date return of 58.8% as of December 30, 2012. The fund holds mainly large value–oriented Chinese real state stocks.

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TAO Guggenheim China Real Estate ETF stock market chart

Chart courtesy of www.StockCharts.com

For a speculative and potentially higher return opportunity, an emerging small-cap Chinese housing market company that I like longer-term is Xinyuan Real Estate Co., Ltd. (NYSE/XIN). Xinyuan has a current share price of $3.74 and a market cap of $271 million.

Xinyuan is approaching its 52-week high of $3.95, set on April 3, 2012, and it has outperformed the S&P 500 over the past 52 weeks, gaining 57.9% versus the S&P 500’s 12.6% gain.

XIN Xinyuan Real Estate co. stock market chart

Chart courtesy of www.StockCharts.com

Xinyuan buys land and develops large-scale, high-quality residential real estate projects that are targeted toward the growing middle class in China’s Tier 2 cities. The company looks for cities that are large and growing, with developed urban areas and a strong housing market.

Targeted cities have above-average gross domestic product (GDP) growth and population growth. These targeted cities currently comprise strategically selected Tier 2 cities, including Hefei, Jinan, Kunshan, Suzhou, Zhengzhou, Chengdu, and Xuzhou. The combined population of these cities is over 34.5 million people, according to Xinyuan.

Projects include multi-layer apartment buildings, sub-high-rise apartment buildings, high-rise apartment buildings, retail outlets, leisure and health facilities, and educational institutions.

Xinyuan also acquired a development site in New York City for $54.2 million via its U.S. development unit, XIN Development Group International, perhaps to expand its exposure.

Annual sales grew sequentially each year for the past nine years. Sales grew from $12.8 million in 2002 to $688 million in 2011. Xinyuan has been profitable in seven of the last 10 years, including increases in the last three years.

So, while housing may still be relatively cheap in Florida, there are also unique opportunities in China’s real estate market that can make you money.

Please be advised that any stock mentioned is meant only for illustrative purposes and should not be construed as a recommendation.

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George Leong - Financial Planner, ConsultantGeorge Leong, B. Comm. is a Senior Editor at Lombardi Financial, and has been involved in analyzing the stock markets for two decades where he employs both fundamental and technical analysis. His overall market timing and trading knowledge is extensive in the areas of small-cap research and option trading. George is the editor of several of Lombardi’s popular financial newsletters, including The China Letter, Special Situations, and Obscene Profits, among others. He has written technical and fundamental columns for numerous stock market news web sites, and he is the author of Quick Wealth Options Strategy and Mastering 7 Proven Options Strategies. Prior to starting with Lombardi Financial, George was employed as a financial analyst with Globe Information Services. Add George Leong to your Google+ circles

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