China HGS Real Estate Has Yet to Be Fully Valued

Jan. 6.10 | About: CHINA HGS (CAHS-OLD)

China HGS Real Estate (OTC:CAHS-OLD) is a Shaanxi-based company that specializes in property development in China's second-tier and third-tier cities. The company's assets include multi-layer, sub-high-rise, and high-rise apartment buildings.

It is ranked the #1 property developer in Hanzhong City, one of the ten largest cities in Shaanxi province (capital: Xi'an), with a population of approximately 4 million. Hanzhong lies in the southwestern part of the province, bordering Sichuan. Hanzhong's historic claim to fame is that Liu Bang used to be the King of Hanzhong, who later founded the Han Dynasty.

CAHS recently reported its FY2009 results (year end in September), with revenues increasing to $28.5m, up 65.0% from $17.2m, and net income of $11.1m, up 83.7% from $6.0m the year before. Gross margins was 47.0% compared to 46.9%.


Current Price: $2.46
52-Week Range: $0.02-$2.50
EPS: (2009) $0.28 (2010) $0.33*
P/E: (2009) 8.8x (2010) 7.5x
PEG: 0.43*

* Based on C.O.P. estimates

This is clearly an emerging stock that is yet to be fully valued. 10x 2010 earnings is an entirely reasonable short-term target, which would bring the price up to $3.30. In the long run, I would like to see the growth sustained; for even though bottom line improvement for last FY was well over 80%, based on the company's own guidance, I'm expecting a growth rate of no more than 20% this FY. Having said that, real estate earnings are usually very patchy, and are entirely affected by when their projects are launched.


I'm going to wait and see. The company has reportedly experienced excellent sales at its Yangzhou Pearl Garden project. So let's see how that translates into growth for Q1 2010. Additionally, trading volume needs to pick up for this to be a viable trade.

My Position: None.