Chinese property stocks, at 55 per cent discount to assets, are a valuation trap for funds fleeing tech regulatory storm

Property stocks in Hong Kong and mainland China trade near record-low average book value per share, no appetite for re-rating yet

Deep discount shows the market is already trying to price the risk of policy curbs, according to Wealthy Securities

Reading Time:2 minutes

Which way to go? Investors are discounting property stocks too amid concerns about industry curbs to contain runaway home prices. Photo: Bloomberg

Published: 7:30am, 30 Aug 2021

Investors fleeing China’s regulatory crackdown into the safety of old-fashioned property stocks may be falling into a valuation trap instead. Their near-record low assets are still susceptible to further decline under China’s various industry curbs.

Property developers fetched about 45 cents on the dollar on average in book value of their underlying assets, near a historic low of 43 per cent last month, according to Bloomberg data. The 55 per cent discount, or about twice the 10-year average, may be warranted as China tightens measures to ensure home affordability under its latest “common prosperity” drive.

On the ground, authorities have imposed measures to curb price increases, including raising mortgage rates, cooling land auctions and banning financing through private equity funds. At the corporate level, regulators have slapped the “three red lines” of leverage thresholds to stem systemic risk in the financial system.

“The government’s tone remains very hawkish and signals that they won’t allow the property sector to hijack the overall economy,” said Raymond Cheng, head of Hong Kong and China research at CGS-CIMB Securities. “The policy headwinds have caused great concern among investors about the developers’ operations and valuations.”

An index tracking 33 developers listed in Hong Kong and mainland China has dropped 19 per cent this year, with only eight of them posting gains, bogged down by the liquidity crunch at China Evergrande and defaults by China Fortune Land. Developers are the biggest culprits for the US$12 billion equivalent of onshore debt distress this year.

China Evergrande, the worst of the 33 members, has slumped 71 per cent as billionaire founder Hui Ka-yan faces his sternest test yet to prevent a collapse in investor confidence by putting up some of its biggest assets on the market for cash.

Select Voice

Choose your listening speed

Get through articles 2x faster

1.25x

250 WPM

Slow

Average

Fast

00:0000:00

1.25x