 Good day, fellow investors. Is the Chinese real estate market in a bubble? Because that's a narrative I've been hearing for already almost a decade. Bubble bubble bubble bubble bubble but nothing is popping there. There is no crash. There is nothing. The Chinese stock market is a real estate market is growing. Prices are slowly increasing. Whatever the government does buildings are being sold. People buy everything. So what's the narrative? Ghost cities, overexpansion, overbuilding, extreme prices and what's the reality? Sold, profits, dividends, cash flows. Let's balance those out and see what is the real thing and whether we should invest in such an environment. The topics for today we will give an overview of the Chinese real estate sector, discuss the sustainability of the Chinese real estate sector, discuss the many cheap price earnings ratio average is 5.7 investing opportunities in the sector, go through the main factors to look at before investing. With real estates it's easy. Location, location, location, demographics, unemployment, jobs, factories, opening, demand, supply and then you know what's going on and how will will continue. Let's start. It's important to note that the Chinese premier Li Kei Jiang said China aims to pursue stable and healthy development of the property market in 2018, protecting the interests of first-time buyers and upgraders while taming speculation. So don't expect speculation but let's see if the business is healthy. This is very important. Urban and rural population of China from 2006 to 2016. The urban population went from 582 million to 792 million so 210 million people went to live into the cities. The current urbanization level is at 59.4% and it is expected to reach 70% by 2030 or 1 billion which means that another 210 million people will go to live to the cities. Thus in the next 12 years another 210 million people, we have just seen the past 210 million people go to live to the cities so more people will go. So the trend is continuing for another decade and we must keep in mind that when it comes to construction in China, China is adding 350 million people that will live in cities. That's like building a complete United States of America from scratch in 20 years. That's the Chinese building environment and that's something we have to keep in mind. Therefore the tailwind is there, the demographics are there, the migration is there, developed countries have 90% of people living in urbanized areas 70 to 90% still much more growth for China. Even the small villages, rural areas will become perhaps cities and there will be buildings. So still a lot to go for China but let's look at the current situation in the market and the demand supply. Every time there is oversupply, every time there is speculation the Chinese government intervenes in the market to cool off price increases. Something the US government didn't do in 2005. So you see these cycles built up of inventory and they peak at some levels. They have peaked in 2015 when the upward cycle was left running a little bit more. If you look at the real estate prices you can see that the most volatile prices are in tier 1 cities, tier 2 a little bit less volatile and tier 3 or 4 even less volatile. What's very important here is that Chinese real estate prices have declined in 2009, 2012 and 2014 and nothing happened to the economy. If real estate prices would decline so much in the Netherlands or in the US the economy would be in deep, shit. Further when looking at inventory levels as the government intervened the inventory levels have been declining but in tier 1 inventory levels are very very low, tier 2 also declining, tier 3 and tier 4 are still a bit high but declining. So declining inventory ratios tell us that supply is really tight plus on top of it the government wants to tame speculation and it implemented the following regulations. So increased down payments to 30% for first buyers and up to and above 50% for second home purchases. Restricted second home purchases, limited shadow banking, funding, controlled land supply made remarks about the bubble and how the government will control the risks. Something other governments in the world never do. All the above let inventory levels to four year lows prices cooling off and less speculation but the demand is still there. Let's take a look at the risks. What most people are worried about is a contraction in the Chinese real estate market, more on demand and purchasing power. Not so much on price fluctuation but if people stop buying, if people stop, if construction companies stop constructing and the real estate market makes approximately when you include appliances services 20% of the Chinese GDP so it would be a big hit for China. However there are still 210 and then later another 200 million people coming into those cities and if China allows immigration to cater for the elderly population there will be another 50-100 million people coming to China in the future. So we'll see how that evolves over time but let's see about the risks. Household debt is still relatively low in China because the Chinese are big big savers. Long-term trend of prices is stable even if there is fluctuations from the speculations. The big issue with Chinese real estate is affordability. A look at the house price to income ratio would tell you it's really a crazy crazy market but even in India it's even crazier in Cambodia. However those are averages. The average price per square meter in Q3 2017 was RMB $46,000 or $6,000-$7,000 that's double the GDP per capita. However those are as I said averages. In some cities prices are RMB 10K while in others are much much higher. What's important to note is that the average income in China has also been increasing fast. It was at RMB 30K in 2008 and now it is at RMB 74K. That's a huge increase. Imagine that your salary doubles in 10 years. Another risk that investors perceive is the very low rental yields. Rental yields in China are from 1.45% to 3% which is below I don't know London or New York. Perhaps not the luxury things. Secondly a drop in Chinese real estate prices but more as I said already in demand would hit the economy as 20% is related to GDP. But that is the case in any other economy in the world. Perhaps maybe Russia. In Russia everything would be fine. In the other parts of the world any economy would be hit if the real market real estate market drops and there is less demand. So to conclude a lot of people still moving migrating into cities a lot of things to build infrastructure a lot of demand a lot of growth coming. China is transitioning to more service oriented economy which means that it will add on top of the infrastructure building economy manufacturing which is again a positive. There will be ups and downs but the long-term trend is very positive. So let's see whether there are options to invest in such an environment. The key factors to keep in mind are of course I repeat location location location the residential housing market is almost always driven by the local economy and therefore one must analyze the local wins in order to estimate the outcomes. China is big and extremely differentiated. Leverage smaller developers are particularly leveraged while larger developers are often leveraged in US dollars which is a risk if you build in China. Risk and rewards some are fairly priced at P ratios of three some are not. Let's see the Chinese real estate developer list. This is something I got from Koneko Research. Please check that out if you want to see more about the Chinese real estate market. The average price earnings ratio is just 5.7 and it should be even lower now as most stocks continue with their decline with stable revenues and growing profits. As you can see here this was from somewhere in September price earnings ratios I think there is one at 11, one at 16 and the rest is all below 10. There is also companies with high dividend yields 5.7% is the average price earnings ratio so a huge list here to analyze for those who are interested. Profitability gross profit margins between 20 and 40% so very very profitable price-to-book ratios between 0.6 so undervalued and a bit of those are also overvalued. Some are very leveraged up to 10 times ratio but some have very low leverage ratio and so it's again looking into each individual player. On top of the above cheapness stock prices have gone down despite real estate prices actually going up and these prices a lot of the companies are big companies in Hong Kong that are trading and those trade as the market trades so those stocks went down as people are selling Chinese stocks so it might be an opportunity to find some real undervalued cheap gems in a negative sentiment environment but you have to really check each stock there to see what is what understand the local markets local Chinese cities which is a lot of work but you can see how much work goes just into analyzing this sector so a lot more work goes into analyzing individual stocks but that's how we investors do it. There seems to be more available funding for property developers in China as domestic funds seek better returns due to the clampdown on shadow banking. So what's going on smaller developers are getting in trouble those who have USD denominating debt are also getting in trouble because the regulatory environment might prohibit dollar denominated debt like this they're contemplating it from what I have found the reading Bloomberg articles so that's a big big risk for those companies which might make it difficult to repay the debt and that's something also to watch again when analyzing all individual lenders or borrowers sorry. So another thing is in the long term everything is growing building there might be ups and downs those who can survive the ups and downs and are already cheap might be really nice dividend payers in the future however at some point this has to stop they cannot grow revenues 50 60 70 percent or 30 percent per year forever so that's something to keep in mind and discount in the price. For example country garden holdings forecast price revenue increase growth of 50 percent over this year okay they are doing some acquisition but still 50 percent is huge so what I'll be doing I'll be digging deep into I don't know I have three four target stocks that I want to check most are in Hong Kong there is even one in the New York traded on the New York Stock Exchange so I'll do a deep report on that to see whether it is a buy or not however it's highly leveraged with a 10% dividend or eight something so we'll see how that fits the risk reward portfolio. Thank you for watching looking forward to the comments and I'll see you in the next video tomorrow when we'll discuss Facebook and some new additional insights to add when you cover a stock on the earnings model see ya