How do you expect a company’s shares to react when its chairman says his sector is in a bubble? Not by rising 7 per cent. Yet this is what happened to housing developer China Vanke yesterday. Welcome to the twisted logic of the Chinese property market.
One explanation is Vanke’s decision to move its shares from the Shenzhen stock exchange (B shares) to the Hong Kong exchange (H shares). But the move itself adds no value – foreigners can invest in B shares. A more rational explanation is Vanke’s plan to use its new perch to tap foreign debt markets. Deutsche Bank estimates Vanke may increase foreign debt from 10 per cent of gross debt to 25 per cent. The company’s cost of funding is 7.5 per cent, twice that of state owned peers. Still, interest expense was only a tenth of net income last year.
So where does the jump leave the valuation? True, the Chinese property market is looking wobbly: prices are softening and investors fear a slowdown. But that is already priced in. The MSCI China property sector index trades at just six times historic earnings. Vanke’s H share is pricier, on 7.8 times, but as a privately managed company it presents an attractive alternative to state-run peer China Overseas Land and Investment on 6.7 times.