Investors are snapping up mainland property stocks, betting that government steps to cool house prices will not stymie demand from the 8.5 million people who flock to mainland cities each year.

Shares in the likes of Shanghai Forte Land Co Ltd and Guangzhou R&F Properties Co Ltd have jumped about 38 per cent so far this year, while Hopson Development Holdings Ltd has soared more than 70 per cent in the period.

Memories are fading of the negative mood surrounding Chinese developers just 12 months ago. Then, the mainland raised interest rates and moved against property speculation, muffling the residential market in Shanghai, where prices have since dropped 15 per cent.

Investors are now banking on companies that are pledging to look beyond Shanghai, a previously lucrative market which saw 20 to 30 per cent annual rises in property prices boosting developers' margins.

Merrill Lynch analyst Clifford Lam is keen on a new breed of developers those who roll out housing projects quickly rather than sit on cheap land until property prices soar.

"The up-and-coming companies concentrate on asset churn and they should be treated like manufacturers," Lam said.

"The margins are less but they're growing quickly. It's definitely going to be the more successful business model."

Companies such as Guangzhou R&F and Hopson Development Holdings Ltd are "volume players" that can make decent profits even if property prices do not rise much, he said.

Therefore, they are a better hedge against unpredictable government policy than a company such as Shanghai Forte, which had prospered by picking up cheap land in Shanghai, he said.

Good value but risky

Despite their surging stock prices, many mainland property companies still appear to be good value, given their growth prospects and because fast and high-volume sales produce high returns on equity.

Shanghai Forte and Hopson are trading at around 16 times forecast in the 2006 earnings, according to Reuters Estimates, about the same as Thailand's Land and Houses PCL and Hong Kong's Sun Hung Kai Properties. Guangzhou R&F is at 12 times.

But whereas Land and Houses expects 10 per cent revenue growth this year from selling Bangkok homes, Hopson is headed for an estimated 30 per cent growth in apartment sales in 2006 and 2007 from its projects in Beijing, Guangzhou, Tianjin and Shanghai.

Hopson is giving its investors a 31 per cent return on equity, while Sun Hung Kai manages about 12 per cent, partly because it owns several high-value buildings in Hong Kong.

All mainland property companies risk the possibility that the government might overegg policies aimed at keeping property prices in check and curbing what it sees as too much investment in construction.

Morgan Stanley analyst Kenny Tse said in a note this week that the government could choose to raise interest rates again, restrict mortgage lending or make it more difficult for developers to sell apartments before they are finished.

For Lam, the biggest risk to the mainland developers comes from heavyweight Hong Kong developers such as Sun Hung Kai Properties and Cheung Kong (Holdings), which are keen to diversify from a small home market hit last year by rising interest rates.

Cheung Kong and sister firm Hutchison Whampoa Ltd said last month they had formed a joint venture with a mainland developer to invest US$191 million in a residential project in the southern province of Guangdong.

Everyone, it seems, wants to house the mainland's new middle class workers, who are moving to sparkling new apartments to make way for the masses of peasants lured to cities by factory jobs.

A clampdown in bank loans for small-scale developers has left the field open to well-capitalized listed mainland firms and their foreign rivals.

"The demand side of the equation is totally fine for five years or so," Lam said.

"And macro policy has driven out smaller property developers in a lot of cities. You see some of these local companies going broke."

(HK Edition 03/18/2006 page3)