China’s home builders have seen some sharp swings in their stock prices as authorities rein in overheating pockets of the market and a trade war with the U.S. clouds sentiment.
The volatility doesn’t worry senior Shanghai-based hedge fund manager Zhou Liang. He’s hanging on to his real estate shares and placing faith in the industry’s long-term fundamentals.
After declining 11.5% in May -- its worst monthly performance since October -- an index that tracks mainland Chinese developers listed in Hong Kong is staging a recovery, up 5.3% in June. Brokerages including Morgan Stanley have the property sector should outperform as Beijing looks to adjust curbs to support housing amid U.S.-China trade tensions.
Hundreds of millions of Chinese are still expected to move from rural areas into larger cities over the coming decades and per capita urban living space in Asia’s biggest economy remains low, according to Zhou, the founder of , which oversees around 6 billion yuan ($873 million).
“Chinese property stocks are undervalued,” said Zhou, who has worked in the securities and asset management industry for more than two decades.
Zhou pointed out that many current city dwellers are barred from buying homes under property-cooling rules because they don’t have local residential permits. Once they obtain the permits, or local governments ease purchase curbs, they’ll start buying, spurring demand.
Real estate companies listed in Shanghai, Shenzhen and Hong Kong are trading at their lowest valuations in five to 10 years, with bigger developers boasting a 2019 price-to-earnings ratio of just five to eight times, Zhou said. He thinks investors are “overly concerned about property demand.”
Shares of leading domestic developers make up part of Shanghai Minority’s core portfolios, Zhou said, declining to elaborate but saying he doesn’t like companies that are too indebted.
Zhou has used leverage and stock-index futures to enhance the returns of some of his funds. Some of them are among the best performing in China’s private fund industry on a one- to three-year basis, Bloomberg-compiled data show. , one of Shanghai Minority’s flagship products, generated annualized returns of almost 20% over the past three years, versus 10% for the CSI 300 Index, the benchmark tracking the Shanghai and Shenzhen stock markets.
Zhou’s bullish views are echoed by Fu Gang, a fund manager at Shanghai River East Asset Management Advisory Ltd.
The valuations of some industry leaders have fallen to attractive levels and those larger players should gain market share via consolidation as smaller, more indebted rivals struggle, Fu said. That means bargain-hunting opportunities have now emerged.