Still Betting on China

10/22/2008 12:01 am EST


John Christy

Founding Editor, Forbes International Investment Report

John H. Christy III, editor of Forbes International Investment Report, sees opportunity in Chinese real estate even amid a battered market.

As corporate names go, E-House China Holdings (NYSE: EJ) is about as bad as they come, invoking painful memories of the dotcom and real estate bubbles, as well as this year’s plunge in Chinese shares.

But in reality, E-House is just a real estate agency. It’s not a homebuilder or a property developer, just a middle man. And with a network of 3,000 real estate agents in more than 30 cities across China, it is the dominant agency in one of the world’s biggest and fastest-growing economies.

About 40% of E-House’s business is concentrated in Shanghai, Jiangsu province, and Zhejiang province. In 2007, E-House handled transactions involving $9.5 billion worth of property. Eighty-three percent of its revenues are from primary real estate agency services, 10% from secondary real estate brokerage, and the balance from consulting and other real estate-related services.

E-House also owns the largest and most comprehensive nationwide database on Chinese real estate. It is just beginning to monetize this valuable data through subscription fees and consulting services. In February, E-House and Sina (Nasdaq: SINA) teamed up to create China’s leading real estate portal on the Internet, drawing upon E-House’s proprietary data.

While E-House is still very small, its growth in recent years has been simply phenomenal. Last year, revenue was $121 million versus just $13.8 million in 2003. Net income in 2007 was $41.7 million. Five years ago it was less than $5 million.

Despite a devastating earthquake in Sichuan province in May and a generally weak Chinese real estate market, E-House delivered 90% revenue and net income growth in the first six months of 2008. And its net profit margin was a healthy 26%.

In the short run, there remain plenty of risks. China’s real estate market is beginning to show signs of serious stress, with prices in some cities falling nearly 50%. At current levels, however, a lot of bad news appears to be priced into EJ shares. Analysts expect the company to earn $1.09 in 2009, a price-to-earnings multiple of just [five] times. But E-House also has $2.70 of net cash per share on the balance sheet. Strip that out, and you’re paying less than seven times earnings for a rapidly growing, debt-free business. E-House also recently announced a $20 million share buyback program.

A victim of bad timing, the company went public on the New York Stock Exchange in August 2007, just as the worst of the global credit crunch began to unfold. At a recent $5, EJ is 70% off its IPO price of $18 and more than 80% off its October high of $36.

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