Stronger Chinese developers advised to snap up cheaper and weaker peers

Mainland property players advised to take the chance to acquire smaller rivals that are undervalued and struggling in the market downturn

PUBLISHED : Wednesday, 20 August, 2014, 5:27am
UPDATED : Wednesday, 20 August, 2014, 6:44pm

Mainland developers listed in Hong Kong have been given a rare chance to grow their market share by acquiring weaker rivals rather than organic expansion, taking advantage of the sector's low price-earnings ratios amid an industry downturn, deal advisers said.

"Property shares are seriously undervalued 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," Henry Cai, the 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 could easily cost billions of yuan in major cities such as Beijing and Shanghai, as supply in core areas was scarce.

Local governments were also reluctant to cut prices despite the market downturn.

On the other hand, most developers are trading at price-earnings ratios of five to six, down from double digits during the industry's heyday a few years ago.

Cai said a fall equivalent to 10 per cent of the share price of internet giant Tencent Holdings would 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, China Vanke, has a Hong Kong market capitalisation of HK$21 billion, while Tencent's is more than HK$1.2 trillion, with a price-earnings ratio of 60.

More than half a year into a market correction, most acquisitions in the property market are still strong developers buying specific land parcels or projects from privately held small players on the brink of bankruptcy.

Analysts expect industry consolidation will speed up in the next 12 months, with more equity transactions such as Sunac China Holdings' HK$6 billion purchase of a 24 per cent stake in Greentown China Holdings 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.

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," said Harvey Coe, EY's Hong Kong-based real estate advisory leader.

He declined to provide details.

Other developers, including Nanjing-based Landsea Green Properties, have said they are seeking opportunities to take over regional players which have land reserves in prime locations that they bought 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.