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The American Dream: Now Made In China

Posted: Sep 24, 2007 13:41 PM by Matthew McCall

Tickers in this Article: EJ

One of the effects of a booming emerging market is wealth creation for the citizens of the country. Certainly, the rich get richer, however the less fortunate also have an opportunity to move up in the world.

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When the lower class begins to accumulate savings, one of the first large purchases is typically a home. It is not only the American dream to own your own home, but also the Chinese dream. At least, E-House (China) Holdings (NYSE:EJ) hopes it is. (For deeper analysis, check out Re-evaluating Emerging Markets.)

The company, which was established in 2000, is based in Shanghai, China and in early August began trading on the New York Stock Exchange. Over the last three years, the company has grown to become largest real estate agency and consulting services company in China. E-House serves its clients in 20 cities throughout the country with a network of over 2,500 real estate professionals.

Movin' On Up
A major trend in Chinese real estate has been urbanization. Simply put, families that can generate enough savings to move out of the rural areas and into the cities are doing so. According to CEIC Data Company, from 2001 to 2005 the sales revenue from primary properties grew by 38% and the number of properties sold climbed 25%.

What makes EJ attractive to investors is its focus on the urban areas as well as new properties. According to its recent numbers, the company derives revenue not only from real estate sales, but also consulting. When builders look for insight into new buildings they can turn to EJ for expertise. In 2006, 45% of its revenue came from the three regions that are very populous and considered urban living. The trend appears to be focused on the cities where EJ can thrive.

First Earnings Test in the U.S.
When EJ reported second quarter earnings on August 22, 2007, the company's CEO had this to say, "'We are very pleased to have posted strong growth for our second quarter and first half of 2007." I would have to agree with him after looking at the numbers. Total revenue for the quarter was $24 million, up 147% from $9.7 million in the same quarter in 2006. Net income for the quarter jumped 242% to $6.4 million from $1.9 million last year. For the first half of 2007, net income came in at $10.8 million, much higher than the $0.5 million in 2006.

Looking ahead, the company expects revenue for the upcoming quarter to be in the $24 million to $26 million range. This represents an increase of over 200% from the same numbers last year.

Growth Potential and Risks
During the second quarter of 2007 the GDP in China rose a jaw-dropping 11.9%. Combine that number with the 1.3 billion people that live in China and it suggests the real estate professionals will be busy as Chinese citizens search for homes in the city.

On the flip side, the bears will argue that the Chinese market cannot continue to grow at such a rapid pace and the probability for a market crash is high. If the Chinese stock market were to experience a short-term setback it should not have a lasting effect on the housing market. However, if a long-term market crash were to occur, it will be an issue for all real estate companies. (For more insight, see our tutorial on the Greatest Market Crashes.)

Finally, there is the issue of competition - EJ may be the Chinese leader in real estate transactions, but what about American competition heading into the country. As more U.S.-based real estate firms make their way into China, it could put pressure on EJ and other local companies.

Getting Your Real Estate Fix
When it comes down to the final analysis of EJ, the question you must ask yourself is do you believe in the long-term China story and if so, do you want to play it through real estate? I personally back the Chinese growth story, but at the same time realize the potential risks. With high reward, comes high risk. And with very few real estate stocks in the U.S. catching my eye, why not go halfway around the globe to get our real estate fix?

For related reading, see The Emergence Of Global Real Estate.

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By Matthew McCall

Matthew McCall is the president of Penn Financial Group, LLC, a registered investment advisor. He also publishes two newsletters, The ETF Bulletin and The PFG Letter as well as other educational material. As a registered investment advisor, he manages clients' investments based on their specific goals and objectives.

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