You know that things are going well in China when even a real estate IPO hits it out of the park. E-House
Then again, real estate is actually a growth industry in the booming Chinese economy. E-House's revenue rose 45% last year to hit $56 million. Things got even better during this year's first quarter, when E-House's top line more than quadrupled.
Like many of China's leading companies, E-House is also working on fat margins. It generated a profit of $18.1 million last year, or 32% of revenue. That may not be as thick as the juicy margins that companies like NetEase.com
E-House watches over a network of 2,500 real estate professionals in 20 cities. That's pretty similar to the manpower that ZipRealty has deployed closer to home. Obviously, home prices are higher in the United States, so ZipRealty generated $95 million in revenue last year despite the slowdown in the residential market.
ZipRealty commands a market cap of nearly $142 million. With more than half of that backed by its cash-rich balance sheet, it has an enterprise value of a paltry $50 million! How does E-House stack up? With 74.6 million shares outstanding after this morning's offering, E-House commands a $1.4 billion market cap.
The term "housing boom" isn't an obsolete joke overseas
E-House's valuation may seem rich. Real estate brokerages aren't getting a lot of Wall Street love here. Market leader Realogy lasted just six months as a public spinoff before running off to a suitor. Realogy called the cashing-out deal "an insurance policy" because it didn't see a turnaround until 2009 at the earliest.
China is different, though. There, you don't have a sea of rusting cranes lying dormant on abandoned coastal condo projects as condo flippers lick their wounds. According to Chinese research firm CEIC Data, primary property sales revenue grew at a compounded annual growth rate of nearly 38% from 2001 to 2005.
Homebuyers there weren't wooed with exotic "no money down" variable-rate mortgages, only to be forced to default as interest rates trickled higher and mortgages eclipsed home equity values. China's a designated driver to that kind of Lindsay Lohan binge. China requires homebuyers to initially put up 20% to 30% of a purchase as a down payment.
Living room to run
This is still a young market in China. E-House wasn't even around until seven years ago, and it has grown to become the top dog. Real estate as a sector is far more in demand there than it is here. How else could one explain that one of the stock market's richest P/E multiples of Chinese companies belongs to lodging chain Home Inns
Yes, Home Inns has carved out a niche in entry-level travel hotels, but that's the kind of specialty that would typically draw yawns domestically.
E-House is valued at a premium not because of where it is, but because of where it has the potential to be. When you have an economy that has grown at a better than 10% annual clip in recent years, a nation with 1.3 billion citizens that feels financially empowered is going to want to upgrade to a new home. The urbanization trend in major Chinese cities is moving locals out of the farmland outskirts, and E-House is there dangling the keys.
This is not enough to make the company a screaming buy, of course. The valuation is certainly rich, and even Home Inns took a hit when the multiples got out of whack. However, the equation is a no-brainer:
China + Residential Real Estate = Growth
It makes sense in the same way that banking on Ctrip.com
E-House is at the right place at the right time. You can't blame it for jangling those keys.
Ctrip is a Motley Fool Hidden Gems selection, and Baidu and NetEase are Rule Breakers recommendations. Those are just a couple of the Chinese growth stocks that have been unearthed by our newsletters, and you can dig in to more with a free 30-day trial to the service of your choice.
Longtime Fool contributor Rick Munarriz is a big fan of Chinese growth stocks, though he's not in the market for a new home there. He does not own shares in any of the companies in this story. He is also part of the Rule Breakers research team, seeking out tomorrow's ultimate growth stocks a day early. The Fool has a disclosure policy.