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What’s so Scary about China Housing & Land Development?

|Includes: China Housing & Land Development, Inc. (CHLN)

China Housing & Land Development, Inc. (Nasdaq:CHLN) develops residential and commercial properties in Xi’an, China. In August, the Company gave analysts an unpleasant surprise when it announced a net loss of $10 million, or $0.32 per diluted share, for the second quarter of 2009. Over the following weeks, the price per share slid nearly 50% as investors ran for the exits. But what exactly are they running from?

Upon a closer look, the Company attributed the loss to a $13.1 million non-cash charge on the revaluation of derivatives and warrants. But for this revaluation, the Company actually earned a solid $0.10 per diluted share. Further, when comparing the second quarter of 2009 to the second quarter of 2008, the Company actually enjoyed a hearty 71.1% growth in revenue and monstrous 261.9% increase in gross profit.

Perhaps investors are afraid of a real estate bubble in Beijing, Shanghai, and Shenzhen. But what does that have to do with the price of dirt in Xi’an? Simply put, Xi’an did not experience the heavy speculative buying that artificially drove up prices in Beijing, Shanghai, and Shenzhen (as well as many American cities). As a result, Xi’an has some of the most affordable real estate prices among major Chinese cities -- home prices in Xi’an sit at only half of those in cities such as Beijing, Shanghai, and Shenzhen.

Are there ominous signs for the future of Xi’an itself? Not hardly. As part of China’s Great Western Development Strategy (i.e., ‘Go West’ policy), the national government is investing heavily to develop the infrastructure in western regions and encouraging businesses and individuals to migrate to Xi’an and other western cities. What’s more, the Xi’an GDP is growing faster than China’s GDP as a whole, and the city’s residents are enjoying double digit annual appreciation in disposable income.   

Maybe investors are worried that a development company will not be able to find funds to operate in light of the global credit crunch. However, the Company has secured a US$147 million line of credit with China Construction Bank. With only US$42 million in bank loans currently outstanding, as well as cash flow available from pre-sales of projects under construction, the Company should have no problem taking advantage of the tremendous potential present in the Xi’an market.

In summary, what’s so scary about a company with exceptionally strong growth in an excellent position to capitalize on a promising market?

Disclosure: Long CHLN