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Finding Life Amid the Housing Ruins


Serving China’s Real Estate Market



The American housing market is ailing badly, and many European countries such as Ireland, the United Kingdom and Spain are suffering perhaps even more from their respective housing bubbles. Long periods of low interest rates and innovative loan products invented by various banks led to an explosion in real estate prices. The crash that followed caused investors in these products as well as homeowners to be disillusioned.

Fortunately for investors looking for housing-related stocks that aren’t affected so much by these trends, companies in Asia are still building homes and growing swiftly. Unlike the United States or most of Europe, there’s plenty of unmet housing demand in countries such as China.
   
An alternative to investing in pure play homebuilders is E-House, which provides services for the Chinese housing market. E-House is a leading real estate services company. It offers primary and secondary agency services as well as real estate consulting and information services. Although the market is still quite fragmented, E-House is considered China’s largest real estate agent with a market share of 2 percent.
   
E-House’s advantage over traditional builders is that it doesn’t have to carry a large land bank on its balance sheet. As we’ve seen in the United States, many homebuilders have had to take impairments on their land banks. E-House’s business model can be considered “asset-light,” as it doesn’t have to invest in buying land and constructing actual houses; it simply collects a fee as a real estate agent. In 2009 analysts expect 61 percent of its revenues to derive from primary agency services, with 33 percent from consultancy and information services and 6 percent from secondary agency services.
   
When investing in distant markets such as Asia, you might be comforted to see significant insider ownership. The founder of E-House, Xin Zhou, controls 32 percent of the company and is the chairman. Other insiders control an additional 11 percent of the stock, which trades as an American Depositary Receipt on the New York Stock Exchange under the symbol EJ. (Companies are mentioned in this article only for educational purposes. No investment recommendation is intended. Those interested in studying this stock should note that only four years of financial data are available through BetterInvesting’s S&P Stock Data Service, though the company’s 2007 annual report includes figures going back to 2003.)
   
Management is also keen to create shareholder value, as was evident when it authorized a large share buyback in 2008. The buyback was instituted after the stock’s price dropped to $4 from $30. The company currently has another buyback authorization for $20 million.
   
Risks with E-House include a meltdown of the real estate market in China and restrictive policies by the government that might prohibit E-House from charging fees for its services. E-House’s balance sheet is quite strong, with a net cash position of $190 million, or $2.30 per share. The company’s market is around $750 million.

E-House’s stock currently doesn’t pay a dividend, as the company prefers to reinvest its cash in the business. At a recent price of $9.50, the stock traded at a price-earnings ratio of 14 and at 1.5 times book value.
   
Considering its appealing long-term growth prospects and strong balance sheet, the company’s current valuation seems interesting. This assumes, of course, that in the long term the demand for housing-related services in China will go up.

Defining E-House’s Services

Primary Real Estate Agency Services: This is E-House’s core business. Once it is contracted by a developer, the company creates a marketing and sales plan for the project. E-House typically receives a fixed or progressive percentage of the total sales. The company has a proprietary sales monitoring system that allows potential buyers to view inventories of unsold units in real time.

Secondary Real Estate Brokerage Services: This encompasses the company’s listing and brokerage services, including offering advisory services on the choice of properties, accompanying potential buyers on visits to houses, drafting purchase contracts and negotiating the price. It currently focuses on three metropolitan areas: Shanghai, Wuhan and Hangzhou. E-House also provides these services in Hong Kong and Macau.

Real Estate Consulting and Information Services: The company generally divides the consulting business into land acquisition consulting and real estate development consulting. The services usually are offered for a fixed, negotiated fee.

E-House also has a database of information about real estate that it sells access to on a subscription basis.


Nic Van Broekhoven is a portfolio manager at Value Square Asset Management. He co-manages the Value Square Equity World Fund, which holds no position in E-House.




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