Reliable data from China may often prove elusive to investors, but one thing they can count on is urbanization. Despite decades of alternating policies regarding land use, the Chinese government has an ultimate goal of moving 250 million more rural dwellers into urban areas, with a resulting 70% of the population living in cities and towns by 2025.
Many companies stand to benefit from a larger urban population in China, from retailers and restaurants to property managers and utilities. We decided to search for Chinese companies traded on US exchanges that present positive investment opportunities based on the Chinese government's emphasis on urbanization.
First we screened our universe for stocks that appear undervalued - looking for companies that demonstrate high ratios of levered free cash flow/enterprise value, above 10%, an indication that they are undervalued relative to their cash flows.
Levered free cash flow is the free cash flow after deducting interest payments on outstanding debt. Enterprise value is the sum of the firm's value from all ownership sources: market cap, outstanding debt, and preferred shares.
Among our results, two companies stood out as potential beneficiaries of greater urbanization in China: China HGS Real Estate Inc. (HGSH) and Huaneng Power International Inc. (HNP). We decided to look closer at their recent performance and earnings, as well as search for other news that may affect their future growth.
For an interactive version of this chart, click on the image below. Average analyst ratings sourced from Zacks Investment Research.
Do you think these companies will benefit from urban expansion? Use the list below as a starting point for your own analysis.
1. China HGS Real Estate Inc. : Engages in the real estate development in the People's Republic of China.
- Market cap at $392.84M, most recent closing price at $8.72
- Earnings per share: 0.32
- EPS this year: -73.80%
- EPS over the next 5 years: N/A
- Performance over the last quarter: 25.11%
- Performance year-to-date: 197.61%
- Levered free cash flow at $44.77M vs. enterprise value at $405.20M (implies a LFCF/EV ratio at 11.05%).
- Return since 5/20/2013: -16.40%; compared to E-House (China) Holdings Ltd. (EJ) (-5.05%), China Housing and Land Development, Inc. (CHLN) (-8.00%) and Xinyuan Real Estate Co., Ltd. (XIN) (-4.43%).
Murphy Analytics has examined HGSH and sees some potential for growth over the long term. They note that the urbanization rate in China was estimated at 43% in 2005, 51% in 2011, and is predicted to reach 65% by 2030 (compared with the government target of 70% by 2025). An increase of 14% means that over the next 15 - 20 years, 190M more people will move to Chinese cities (government targets suggest 900M people total will live in cities by 2025). With so many people requiring some form of urban housing, HGSH may be well placed to take advantage of this growth despite fluctuating real estate prices.
HGSH earnings for the second quarter of fiscal year 2013 (ended March 31, 2013) featured a jump in revenue over 500%. Total revenues for this period were $19.4M, an increase of 573.4%, compared to $2.9 million in the same quarter of 2012. And the total gross floor area sold during this quarter was 41,474 square meters, 7 times greater than the 4,938 square meters sold in the same period last year.
2. Huaneng Power International Inc. : Engages in the generation and sale of electric power to the regional or provincial grid companies in the People's Republic of China.
- Market cap at $12.9B, most recent closing price at $36.71
- Earnings per share: 2.56
- EPS this year: 365.50%
- EPS over the next 5 years: 15.20%
- Performance over the last quarter: -6.54%
- Performance year-to-date: -1.18%
- Levered free cash flow at $4.23B vs. enterprise value at $30.05B (implies a LFCF/EV ratio at 14.08%).
- Return since 5/20/2013: -21.51%; compared to China Hydroelectric Corp. (CHC) (-18.38%) and Korea Electric Power Corp. (KEP) (-11.97%).
Last month, HNP stock saw significant declines thanks to fears surrounding a potential slowdown in the Chinese economy. HNP is the country's largest electricity supplier, and may be affected by proposed reductions in imports as it relies on overseas markets for 29% of its coal. However, if urban expansion continues in China, the company may see a significant boost as urban populations typically use more electricity than their rural counterparts.
The company's earnings report for the most recent quarter included a decrease in consolidated operating revenue but an increase in consolidated net profit attributable to the shareholders of 177.77%. HNP attributed this jump to the falling costs of fuel compared to the same period last year.
*LFCF data sourced from Yahoo! Finance, accounting data sourced from Google Finance, all other data sourced from Finviz.