China Overseas Land & Investment: Stock of the Week

After the news of developer Country Garden’s financial crisis, our top pick in the China property sector, China Overseas Land & Investment (00688) – also called COLI – dropped 7%. Our analyst Jeff Zhang thinks the sell-off is overdone.

We think that state-owned developers like COLI fared better than their privately owned peers in home sales, thanks to landbank replenishment in higher-tier cities, strong operating efficiency, and their robust funding status.

For COLI, over 80% of its land bank and projects are in tier-1 or 2 cities.

Given its state ownership background, refinancing from onshore creditors, such as the SOE banks, would be much easier than it would be for privately-owned Evergrande or Country Garden.

Moreover, because of a yuan depreciation in recent months, COLI is retiring its offshore credit facilities and refinancing onshore. This would reasonably lower future interest liabilities on Renminbi due to the interest rate difference.

Zhang’s base case remains that home sales should only be able to find the bottom toward year-end. With a better sale sentiment, state-owned developers like COLI with ample liquidity and strong land and project profiles will benefit from it the most.

According to Morningstar’s latest estimates, COLI is trading below the historical average, having a potential upside of 100%. 

 China Overseas Land & Investment Stock Bulls Say

• Chinese residential housing demand should rebound gradually, with positive homebuying sentiment coupled with policy tailwinds supporting COLI’s sales growth.
• COLI's brand premium and project delivery efficiency should allow it to maintain robust top-line growth amid a cooling property market.
• In a liquidity constrained environment, COLI can leverage its healthy balance sheet and adequate funding to ramp up landbank consistently.

 China Overseas Land & Investment Stock Bears Say

• A structural economic slowdown with a declining Chinese population would limit COLI’s long-run sales prospects.
• COLI sees narrowing competitive advantage in operational efficiency, as peers adopt similar models aimed at quick asset turnover and recurring revenue.
• The firm’s commercial property portfolio growth may be tempered by competitors launching higher-end projects at a faster pace in the same area.