Hong Kong-listed Midea Real Estate Holding is a company that is principally engaged in property development and sales, property management services, and the investment and operation of commercial properties in China.
Guided by its policy of intensive development in focused areas and strategy upgrade, Midea has a gross floor area (GFA) of over 38.7 million sq m (416.6 million sq ft), comprising 332 property development projects spanning across five key major economic regions in China, according to its latest financial report.
Linked to the Midea Group, one of the leading electrical appliance makers of China, Midea Real Estate is investment-worthy primarily due to its cheap trading price, coupled with an attractive yield at current trading prices. Despite having decent business and financial fundaments, the year-to-date and one-year total investment returns for the company are –31.1% and –16.8% respectively as the company’s share price recovers.
Although it was a challenging year for China’s real estate industry last year, it is expected to recover due to the receding effects of Covid-19 and the general economic recovery. Business-wise, Midea Real Estate is adapting well to these challenges, as it managed to deleverage successfully and managed to reduce its weighted average financing costs for the year. The company also continued to optimise its land reserves structure and enhance its ability to resist cyclical risks by focusing on first and second-tier cities and regions such as the Greater Bay Area and Yangtze River Delta. Further, Midea Real Estate’s ability to leverage on technology has strongly benefitted the business through initiatives such as in areas of smart living and housing construction technology sectors.
The company’s business strategy moving forward is to focus on city development and improve its ability to create mid-to-high-end improved housing and products as the company remains positive and optimistic about the trend of housing upgrade and iteration. This segment ideally would improve profitability as it commands higher margins due to its nature of being a value-added service and product. Midea Real Estate will also focus on the vertical sectors, such as promoting cross-industry projects. Most importantly, the company has stressed the importance of credit and the balance sheet as it adheres to increasing the safety buffers, deleveraging, and stabilising the business fundamentals of the company to avoid risks and worst-case scenario events from occurring.
Midea Real Estate’s balance sheet is decent, with good liquidity represent by a current ratio of 1.3x. Solvency ratios are also acceptable as the company’s net debt ratio is also 53.2%. The company’s total liabilities to total assets ratio is 0.8, implying that the company’s total asset value can drop to a maximum of 20% of its current value before shareholders receive less than what they paid for, in the event that the company is wound up.
See also: More upside for Indian equities despite rich valuations
In terms of valuation, Midea Real Estate trades at a big discount compared to peers. Relative to domestic and regional peers, the company trades at a significant 54% discount for its forward P/E; 43% discount for its forward EV/Ebitda; and 59% discount respectively for its forward P/B, indicating that it is an attractive pick-up.
The chart shows the historical dividend yield for the company. At current prices, a dividend yield of 8.3% is significantly more attractive than China’s risk-free rate of 2.8%.
There are eight “buy” calls and no “hold” or “sell” call for Midea Real Estate, with a target price of HK$11.24 ($1.91), roughly 15% above its current trading price of HK$10.02. Based on our in-house valuations, we think the company is worth 10% above its current trading price including dividend returns.
Disclaimer: This company is for information purposes only and does not constitute a recommendation or solicitation or expression of views to influence readers to buy or sell stocks, including the stocks mentioned herein. This stock does not take into account the investor’s financial situation, investment objectives, investment horizon, risk profile, risk tolerance and preferences. Any personal investments should be done at the investor’s own discretion and/ or after consulting licensed investment professionals, at their own risk.
