China expert Paul Goodwin selects E-House Holdings (NYSE: EJ) -- the leading real-estate firm in China -- as his favorite idea for the coming year.
The editor of Cabot China & Emerging Markets Report explains," In 2008, housing values in China plunged, and E-House's stock s price plunged right along with them." Here, he explains why this year should see improving prospects.
"E-House is the leading real-estate firm in China, and that's becoming a bigger deal these days.
"The massive migration from China's farms and villages to the cities put huge pressure on housing stocks and E-House's role in providing agency and brokerage services to market new housing developments gave the company a huge boost in 2007.
"On the other hand, 2008 was a different story. A slowing Chinese economy and overvaluation caused by rampant speculation had the same effect in China as it did in the U.S. Housing values plunged, and EJ's price plunged right along with them.
"As with all corrections, this one has probably gone too far, and has left both Chinese housing and EJ attractively priced. After a drop from a high of 36 in late 2007, EJ corrected all the way to 4 in November 2008.
"At that point, an estimate-beating quarterly earnings report jump-started the stock again, pushing it into the high single digits.
"E-House has been consistently profitable from its inception. Its most-recent quarter produced an 18% gain in earnings on a 28% jump in revenues and a substantial 27.7% after-tax profit margin. Not bad for an industry caught in a downtrend.
"With over 3,000 real estate professionals in 25 cities, E-House is the leader in its field, and there are several factors that should help the company (and the stock) have a good year in 2009.
"First, the Chinese government has announced that its economic stimulus package will include support for sagging real estate prices.
"Second, where most past business was derived from the sales of new housing stock, the maturation of the Chinese housing market will create more opportunities in the secondary (re-sale) real estate market.
"Third, E-House has the largest database of housing stocks in China. It's the equivalent of the Multiple Listing Service in the U.S., except that E-House owns it outright, and will be able to charge other companies to use it.
"Overall, with a turnaround in the Chinese economy, a recovery in the Chinese real-estate market and the rest of these catalysts all behind it, EJ should have a great year."
