In an era when every investor seems to be buying stocks with high returns-on-capital at even higher prices (what is known in the biz as “quality”), it sometimes seems like there’s nothing left which offers attractive fundamentals at a bargain price.
But what if Alphaville told you that there’s a magical place where your deepest investment desires could be fulfilled? A place on earth like no other. A place that a young Warren Buffett could only have dreamt of.
As it turns out, such a place does exist. It’s called mainland China’s real estate sector.
From a UBS note published on Thursday:
To surmise, the often mundane business practice of building space for people to inhabit has, in China:
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The highest estimated compound growth rates in earnings per share in the next 3 years
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The highest forward return-on-equity
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The lowest forward price-to-earnings in China
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Joint highest forward dividend yield
If anything, these return-on-equity figures look too small. Flicking through a few of the mammoth real estate businesses on S&P Capital IQ, we note Alphaville favourite $ 149bn Evergrande had a ROE last year of 24.2 per cent. For $ 72bn China Vanke, the figure was 23.3 per cent.
A projected decline in ROE might just be a function of diminishing leverage as these businesses shed their debt loads through compound growth — the wonks at UBS have Evergrande, as one example, reducing its enterprise value to ebitda to 3.7 by 2021, from 5.8 last year.
We’re not sure we’ve ever seen metrics of this quality. It almost seems too good to be true.
Related Links:
Evergrande’s puzzling debt raise — FT Alphaville
A hint about the future of leverage in China — FT Alphaville
Evergrande: debt behemoth — FT Alphaville
China’s property developers binge on record dollar debt — FT
Evergrande: China’s biggest property developer faces debt crunch — FT
China developers face $ 55bn of maturing onshore debt in 2019 — FT
