What the Best Benchmark in China Is Telling Us

“Ahead of the Street” Column, by Mitchell Clark, B. Comm.

Third-quarter earnings are still pouring in and the numbers from a lot of smaller companies are just now hitting the wires.

I always like to follow a number of companies to use as benchmarks. I use these benchmark companies to help develop a view on the economy and the stock market and to see if there are any new trends developing. Smaller companies can be just as valuable, if not more so, than large-cap enterprises in terms of developing a view on things.

One smaller company in China that is a great benchmark business to follow is E-House (China) Holdings Ltd. (NYSE/EJ). I wrote about this company back in May. It doesn’t really matter what the stock is doing; what’s important is how the company is performing operationally. This company operates in the real estate business in China and if it’s doing well, China is doing well.

E-House is one of the largest real estate services firms in that country and the business was founded in 2000. The company sells primary and secondary real estate agency services and operates in more than 50 of China’s biggest cities. Currently, E-House is selling residential and commercial real estate properties in all major regions of China. You couldn’t find a better benchmark company to follow if you tried.

The company’s latest numbers recently beat consensus estimates as third-quarter revenues grew a substantial 119% to 86.2 million dollars. For the first nine months of 2009, the company’s revenues grew 58% to 182.4 million dollars. E-House’s total gross floor area (GFA) of new properties sold grew to 3.3 million square meters in the third quarter, representing a huge increase of 235%. Most tellingly, the total value of new properties sold was $4.3 billion in the most recent quarter, up a whopping 314% from about $1.0 billion in the same quarter last year.

The latest quarter brought earnings of about 34.9 million dollars, which was an increase of 220% over the comparable quarter. Fourth-quarter revenues are currently estimated to be between 103 million and 106 million dollars, representing a substantial gain of about 165% over last year.

E-House is a great company to follow even if you aren’t interested in the stock. What this company reports is incredibly valuable to an analyst or investor. Right now, E-House is saying that business is booming — and so are property values. In my view, it’s one of the best signals yet that China is actually growing at a faster rate than we think it is.

I wrote before that the real estate market is like the stock market’s opposite. The business cycle in real estate takes a lot longer to unfold. In the U.S., the stock market is climbing, while real estate is struggling to recover. Eventually, however, the health of the real estate market is required to maintain the health of the equity market. E-House is saying that the real estate market is booming once again in China. All the more reason to have some dollars allocated to that part of the world.