China property market and Evergrande

China Evergrande is facing a liquidity crunch issue. It is having difficulties in paying its onshore bond interest as well as US dollar offshore bond interest. As investors are still fresh with the pain that incurred during US subprime mortgage that bring down Lehman Brothers and caused a global financial crisis, market are speculating whether China Evergrande saga will trigger the China version of property crisis and impacting the global financial market stability. Will China Evergrande case is just a tip of an iceberg? Only time will tell.

Back to 2 decades ago, after China restructured many of its state owned enterprise and bad loans, China at that point of time also just enter the world trade organisation WTO. China was having a booming economy where foreign investment boom, factory being setup across China, and infrastructure boom. The income of Chinese people rose at unprecedented pace. This created huge demand for housing. China Evergrande established in 1996 and just in time to ride the decades boom in property market.

With 1.4bil population and starting from young demographic, the growth in China economy drive the property market for 2 decades without major setback. Property prices rose multiple folds in general over just under a recent decade. When the trend go on for so long, people thought that it is still the property that give the best and sure return over all the asset classes. Furthermore, with China strict capital control, there are not many investment options but property and stock market. Stock market has been volatile and not the cup of tea for most Chinese people.

In China, all land belong to the government. When property demand was strong, sales of land was very active. Soon, land sales became a major revenue for state government. In earlier years, GDP was the single most important KPI set by central government for state government. Hence, state government tend to spend big on fiscal spending like building roads, railways, airport that some news article may say many projects don't really make economic of sense. To cover the extra spending, the state government always can sell land.

 Now turn to property developer. In China, you need to put in 40% down payment to buy a house. Part of the money collected by property developers need to put in escrow fund for construction. In order to achieve exponential growth, China property developers utilise significant amount of the downpayment (>50%) to fund the next land purchase and launch the next project as soon as they can. When the property market is hot, a property project normally can be sold out in a very short time. Then the property developer can use this new project deposit to fund more land purchase and launch more new project to collect more deposit and this cycle goes on. This ultra fast pace of expansion can go on because the construction progress which normally takes 3-5 years is so much longer than the land purchase and project launch cycle which in total takes only within 6-12 months.

No doubt, the booming property contributed significantly to China GDP from construction activity, the job created, the demand and supply for building material. Without this, China GDP growth would be much slower. 

But at the same time, property prices has become one of the most unaffordable in the world in terms of price to income ratio. Since 2015 or earlier, China government turn to reducing the wealth gap by trying to control property prices by capping price increase, tightening borrowing criteria in property developer or buyer end, etc. But every time there is slowdown in China economy, Chinese government would always relax some property tightening measure, worry about either cannot meet GDP growth KPI, or worry about state government highly geared situation with their overly dependent on land sales revenue.

Although China government over the years tighten the funding to property developer by clamping down shadow financing, china domestic lending channel, the China property developer found ways to get funding through HK offshore bond or equity raising, engaging in off balance sheet property development activity by joining force in associate and joint venture to make their balance sheet look strong to entice investor. With property demand so strong, strong deposit booking, active land sales, property developer is willing to pay high interest of even up to 10% to get offshore funding to complete the construction or some even to fund further land purchase. International investor are so happy to subscribe with the US yield of merely 1.5% and thought that there is an implicit guarantee that China won't let property bubble pop and devastating its people and economy. The risk looks ring fenced.

In 2020/2021, China government KPI evolved from GDP growth to common prosperity. Besides regulating the overgrown internet giant, public resources issue such as housing again become government's pressing issues to solve the growing inequality problem in China. China set a stricter criteria for funding. With COVID 19 in the background, China property growth slowdown to single digit growth in sales, compared to 20-30% growth in the past few years. Suddenly for the overly expanded property developer where their land sales growth had far outpace the construction growth, their party came to an end.

Now, the reality kicks in that China Evergrande need to deliver all the properties. Likely no more new project and new deposit money, no more offshore funding channel. In order to survive, China government will have to engineer as the last resort to bridge it over in shorter term and China Evergrande will have to sell its projects to other property developer or whatever valuable asset to self fund the construction. Now the question come back to whether China Evergrande is just a tip of an iceberg? If many more trouble developers start to surface, are there enough property developers with stronger balance sheet to takeover those troubled developer's projects? 

The China banks lending as a whole to property developer is less than 10% or may be 5-7%. Most of the China debt is domestic debt. On the banking side, I would like to think that China can stomach the current crisis.  Luckily, Chinese people household debt is at around 60%, and they still have high saving rate. Compare to US subprime mortgage which the root cause is the house buyer default and spread through the over leverage financial system, China property bubble seems to be contend within the property developer which is much smaller in scale compare to the whole housing market. As long as China can maintain the property price without significant drop, the crisis will likely limit to financial market only, but not too much on the real economy.

Many bond holders, equity holders will lose money. There may be impact on other financial market as well where those investor who lose money will need to sell other profitable securities to cover the loss. In the real china economy, hopefully not much people will lose job. It may impact some buying sentiment and thus economy may experience some slowdown. If most Chinese people don't lose money, China economy will remain intact. The key is the Chinese government need to ensure that all the property sold to the people will be completed and there is not panic selling of property in China.

 

 

Professional investor VS retail investor

As an analyst, or portfolio manager, my daily job is to attend company management meeting (now in COVID 19 era conference call), analyse company, write report, make recommendation to investment team, and invest within the framework set by my company and the fund mandate. There are tons of emails sent by broker everyday on corporate news update and research reports.

All these seems to give professional fund manager an edge over retail investor not in the fund management industry. But things start to change in recent years. Various internet/broker platforms for retail investor are gaining popularity. Due to huge number of retail investors and followers in those platforms, the platforms are able to attract talent from investment industry to give talk/seminar regularly, distribute broker research reports, and organise meeting with company management directly. The information flow in those retail internet platform is not second to professional investment industry. So what more advantage does the investment professional has?

In this internet era, information become abundance. Hence, in order to be successful in investing, having only first hand information is not enough. We need to realised that each of us only has 24 hours a day, and the world has millions of businesses and business decisions are being made all the time. There will always be people know something faster than us and react faster than us in the stock market. In short, we won't win by having first hand information. 

We only can win by developing insight. Connecting dots from various information and put it together. Everybody will interpret information differently. We see things differently. Just like in school, we learn the same thing but end up someone else always get No.1 in the class. But we don't have to be No.1 in the stock market. The market is big enough for every prepared investor to make money. 

Resume writing after Aug 2014

It had been such a long time since my last post in Aug 2014. I was finally offered a job in an asset management company in the capital city of Malaysia Kuala Lumpur. This was like a dream come true since I quit my engineering job in 2011 trying to shift career field into investment. The transition was not smooth. After i quit my engineering job, I ended up working for a Hong Kong valuation company and was tasked to work alone from my house to help them explore Malaysia market. I was struggling in those 3 years of doing business development work. I am introvert by nature, and with no business connection in Malaysia corporate world. After several times of failed interview from a few asset management companies, i nearly give up as all the asset management companies i knew already rejected me or no reply. Luckily this company called Pheim Asset Management opened the door for me into the investment industry. 

 Pheim Asset Management was a boutique independent asset management company. The boss Dr Tan Chong Koay is a very unique person as he likes to invest in undervalue stock. He is willing to hire people who is very interested in investment and very desperately wanting to switch career field, like me. This normally don't happen in other asset management company as the normal practise in the industry is they tend to hire people with experience within industry or with relevant educational background. 

 I started work in February 2015. I was already 32/33 year old. A similar age person as mine would have been worked for close to 10 years in this industry. I need to work hard to catch up. So..... I stop writing blog regularly..... And then i found facebook page which i can write just a few sentence when i have some thought (save a lot of time). 

 It is quite amazing that my writing actually never stop. But just become shorter and quote base. Now i want to resume writing blog base format again. This is to resume writing practise, to record down what i see, learn, think, feel regularly in a more complete manner. So i can track my path and may be someday i can compile it into books in later part of my career or stage of life.