Stronger mainland developers advised to snap up cheap weaker peers
Hong Kong-listed mainland developers have been given a rare chance to grow their market share by acquiring weaker peers rather than organic expansion, taking advantage of the sector’s low price-to-equity (P/E) ratios amid an industry downturn, deal advisers said.
“Property shares are seriously undervalued currently and I think good developers, especially those listed firms with strong financing support, now have the best opportunity to acquire others through the capital market,” said Henry Cai, executive chairman of Deutsche Bank’s Asia-Pacific corporate finance section, told a recent property forum.
“Listed firms should take over others before they are blown down. It’s cheaper to acquire their equity stakes than directly buying their land reserves, and it’s also cheaper than land parcels from auctions held by the government.”
A piece of land would easily cost billions of yuan in major mainland cities such as Beijing and Shanghai, as supply in core areas was scarce, and local governments were reluctant to cut prices despite the market downturn.
On the other hand, most listed developers were trading at P/E ratios of between five and six, down from double digits during the industry’s heyday a few years ago.
Cai said a fall equivalent to a 10 per cent drop in the share price of mainland internet giant Tencent would will be enough to wipe out four developers.
The biggest Hong Kong-listed mainland developer by market capitalisation, China Overseas Land & Investment, is worth about HK$186 billion. The mainland’s biggest developer by sales, Hong Kong-listed China Vanke, has a market cap of HK$21 billion, while Tencent’s is more than HK$1.2 trillion, with current P/E ratio of 60.
More than half a year into a market correction, most acquisitions in the property industry are still strong developers buying specific land parcels or ongoing projects from privately-held small players on the brink of bankruptcy.
Analysts expect that industry consolidation will speed up in the next 12 months, with more equity transactions like Sunac’s HK$6 billion purchase of a 24 per cent stake in Greentown in May likely to emerge.
The acquisition was based on Greentown’s net asset value, priced at a 13 per cent discount but above many equity analysts’ expectations. Both firms are listed in Hong Kong. Sunac’s share price has risen 82 per cent and Greentown’s 4.4 per cent since the deal was announced, while the Hang Seng Properties Index has gained 11 per cent.
“We are working on a number of deals now,” Harvey Coe, EY’s Hong Kong-based real estate advisory leader said, while declining to provide details.
A few mainland developers, including Nanjing-based Landsea, have said they are seeking opportunities to take over regional players who have land reserves in prime locations that they bought a cheaply a few years ago.
Coe warned that buyers would have to weigh the risks and returns of taking over unlisted developers because information disclosure was insufficient and they would have to take on their liabilities too.
“They will need to spend some time understanding [target firms’] financial background and book all possible costs,” he said.