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Setting a price for property developer?

Over the weekend, Mideo Real Estate announced a spin-off for its property developer business (PD&S) as a private enterprise; minority shareholders can receive HKD 5.9 per share in cash for each share of HK.3990.

The listed co traded at HKD 3.75 per share last Friday. So the cash payout is 57% more than the share price. The remaining listed co will focus on property management etc.

Is this applicable to many other developers and thus putting a floor?

I doubt it.

3990 is relatively small and controlling shareholder has over 80%. The max cash payout needed is ~1.6bn HKD, or $205mn – this is a small amount and can bed easily handled

Midea Group (a major electrical appliance manufacturer in China) itself is strong and cash-generating, with 33.7 billion rmb profit in 2023. The founder, He Xiangjian, has ~29.6% ownership of Midea Group.

Midea Group is paying over 20bn rmb in cash dividend in 2023. He Xiangjian can get ~6bn rmb, more than enough for the 1.6bn HKD payment calculated in above.

Even there is a price, that’s around 0.33x p/b.

And when 3990 stock was trading at HKD 3.75 per share, it’s at around 0.2x p/b,

What if 四大名著 are four major game types?

Just a random thought..

西游记: this is easy – RPG game with many bosses battles. The essence of the book is a group of 4 ppl going the West with many monsters on the road.

三国演义: this is easy – SLG strategy game (turn-based), or RTS game. The book is about a period of Chinese ancient history when three kingdoms fight each other.

水浒传: this can be gacha game like Genshin Impact. The book has 108 characters, each has unique backgrounds and skills.

红楼梦: this one is hard. What makes this book unique is its detailed depiction of lifestyle during Qing Dynasty. Maybe it’s metaverse game, or story-based romance game.

These 4 famous books each has its own appeal to a wide range of audience, which can reflect certain underlying demands. And these books’ popularity is proven over time.

Game developers need to constantly think about what “needs” they are catering to. Any thing that is popular for a long time must have served some pain points well.

 

 

Search’s problem in China

Search is a two side product.

You need to provide that “10 blue links” to serve consumers. Hopefully consumers can find what they need (have the answer) as fast as they can (no need to go to the next 10 search results).

You also need to serve the advertisers to market or grow their business.

Baidu seems to be challenged in both ways.

Sometimes, the most up-to-date information (with details) is found in Xiaohongshu and Douyin, where users upload tons of posts and videos. User-generated content can carry much more info than official news, as official news is well controlled by gov in China. There are basically not news other than official news.

For business owners, Baidu doesn’t offer much growth. Merchants shall spend more on e-commerce sites directly (which was mainly search-driven before recommendation rose). Douyin and Xiaohongshu may help “create the desire to buy” that search can’t. Some services can be banned from making advertisement (like after-school education). For some other businesses (toB etc.) – Moutai (liquor) is a more efficient sales spending. More importantly, search results are mostly webpages; but webpages are less useful in China vs. the US – a Weibo Account and a WeChat Public Account is more useful.

This actually leads to another interesting thing – I feel independent websites are dying in China. They are not important at all. Maybe China is preferring mobile over PC due to real name, and mobile phone number is the easiest way to fulfill that requirements, but websites don’t necessarily need a mobile phone number. This topic should be explored more.

China housing inventory – more than 2 years

If you look at US new home inventory, it shall take about 9 month to clear, as of Apr 2024 (see previous post).

What’s the number in China?

[The following numbers apply to 100 cities in China; source: https://mp.weixin.qq.com/s/BKnnF9QJTkYnAb1u0ip3Sw]

More than 2 years – 26.5 month to clear as of Apr 2024.

For lower tier cities (green line), the month to clear can be more than 30 months, or 2.5 years.

What’s would be the normalized rate of demand?

[Note the difference between 100 cities the the entire country]

Assuming future China has 7 million couples per year and new home demand is ~1/3 of that, it would be ~2.3mn new home demand.

Assuming new home is ~85 sqm, (2 x 42 sqm per person), it’s roughly 200mn sqm per year.

If every couple buys a new home, it would be ~600mn sqm.

There are other demand such as replacements. But just look at the US, which records less than 700k new home sales per year currently. China has 4x the population, so eventually new demand might come to 2.8mn, which translates to 280mn sqm if average is 100 mn per home.

This assumes new homes can sustain long enough.

There might be other renovation demand that can be recorded as new home sales, but real new demand could be lower than people think.

As of Apr 2024, reported inventory of new homes for 100 cities stood at ~500mn sqm.

In 2023, new home supply for 100 cities is ~291.1 mn sqm while sqm sold is ~316.5 mn.

In gov’s report, 2023 new residential sold was 948 mn sqm in 2023. So these 100 cities accounts for ~1/3 of total demand.

 

First yoy drop in US new home sales after 12 month of growth

US Apr new home sales (seasonally adjusted) dropped 7.7% yoy, reported last month.

The drop was long overdue, as interest rate (thus mortgage rate) has been high for quite some time.

The yoy strength from Apr 2023 – Mar 2024 was due to

A) the base effect

As most of 2022 was pretty weak after the war in Ukraine broke out. Fed also started the rate hiking cycle in Mar 2022.

B) the amazing AI-driven tech rally

Nasdaq rose over 60% from end of Sep 2022 to end of Mar 2024.

It reached all-time-high so even if you invested at the peak of 2021, you will still make money.

I bet many people enjoyed the wealth effect from stocks.

The base for the next 6 month (May 2023 – Oct 2023) looks pretty high, so yoy comparison should look weak, which is good if Fed is looking for “weak data”.

Meanwhile, inventory (new home for sale) has reached ATH since Feb 2024.

Previous high was 466k, seen in Oct 2022.

Time to clear the inventory is climbing in recent months. Now (Apr 2024) it’s 9.1 month vs. an average of 9.8 month between Jun 2022 to Oct 2022.

The median price for new homes sold is quite stable since Fed increased interest rate.

 

 

 

Living space in China vs. developed countries

According to the China Population Census Yearbook 2020, China has 462 million households, with average area of 111 sqm per household and 41.76 sqm per person. Average room per household is 3.2 and average room per person is 1.2.

Average space per capital of 41.76 sqm is not a small number. 

To compare, I asked ChatGPT for other countries’ numbers – 40-45 is quite the average. Only US, Canada and Australia are meaningfully above that number.

Just to double check in case ChatGPT is wrong, I looked up for German’s average living space, which was 46 sqm per person in 2018.

This number hasn’t changed much in the last decade or so. It was ~42 sqm per person in 2006 already, after decades of improvements (from 19 sqm per person in 1960).

Some further cross -check

Take a look at average home size in Europe, 100 sqm is already quite good.

Source: https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8073340/pdf/ijerph-18-04278.pdf

Average room per person is 1.6 among EU countries.

 

High wage jobs are bad?

In US, we typically hear about gov officials touting x number of high paying jobs are created.

We don’t hear that in China. Internet and finance jobs are considered high wages, but both sectors faced pressure to cut costs thus a decline in wages.

The first rationale seems to be centered around income inequality, which makes sense. Instability is one of the most feared elements in China. If u can’t increase income for all, you decrease income for some.

The second rationale is that many don’t deserve the that high income – they didn’t earn it. It is partially true, especially if someone gets a job by connection or background, or the firm is not providing much value for customers. Sometimes, the latter part is due to the restrictions – there aren’t much room to innovate if there are too many boundaries. Also, there aren’t much incentives to deliver better services if they can’t earn more. People look around and say oh others do poorly and earn similar so why should I do better. This is partially a result of the first rationale.

Thirdly, consumers don’t deserve high quality products / services and they don’t pay for them. Buyers determine the market; if most accept the subpar quality, then what else should the firm do? This is not a standalone issue; this is tied to the second one. The cycle reinforces itself – low-quality products/services tailored to an “accommodating”taste that is trained by mediocre offerings overtime.

Foreclosure during GFC

2008

A total of 861,664 families lost their homes to foreclosure last year, according to RealtyTrac.

A total of 3,157,806 foreclosure filings—default notices, auction sale notices and bank repossessions—were reported on 2,330,483 U.S. properties during the year, an 81 percent increase in total properties from 2007 and a 225 percent increase in total properties from 2006. The report also shows that 1.84 percent of all U.S. housing units (one in 54) received at least one foreclosure filing during the year, up from 1.03 percent in 2007.

2009

RealtyTrac, the online marketer of foreclosed homes, reported that one in 45 households — or 2,824,674 properties nationwide — were in default last year. That’s 21% more than in 2008, and more than double 2007’s total.

2010

RealtyTrac, a leading online marketplace for foreclosure properties, released its Year-End 2010 U.S. Foreclosure Market Report, which shows a total of 3,825,637 foreclosure filings—default notices, scheduled auctions and bank repossessions—were reported on a record 2,871,891 U.S. properties in 2010, an increase of nearly 2% from 2009 and an increase of 23% from 2008.

And a 14-year graph

https://www.attomdata.com/news/most-recent/2018-year-end-foreclosure-market-report/