More on real estate

Source: Vietstock.vn, chart by Vietecon.com

Before I get further into real estate, I just wanted to mention a milestone. Vietnam is going to start allowing international flights again! Yay! A charter flight with 250 Japanese businessmen will be making the trip shortly, according to the South China Morning Post. Interesting stat there: more than 800,000 Japanese visited Vietnam in 2018, or about 5% of all visitors (kind of surprised its not more).

Now, back to real estate. I wanted to look at VinHomes (VHM) a little bit more, because of how crazy the statistics are on the company. Look at the chart above. Revenue was just VND11tr in 2016 but jumped to VND52tr by 2019. Same for net profit: VND1.6tr going to VND22tr.

This flows into the balance sheet, with assets rising 5.3x in the three years and equity growing even faster at 6.8x. Of course, the big increase in equity is because of the IPO in May 2018. And as part of that, there was some demergering and acquisition of subsidiaries. That meant some sales, for which VNM only recognized the income, were fully consolidated in the income.

Source: Company data, chart by Vietecon.com

This makes looking at their numbers quite confusing, but I did find figures that show just the property sales and gross profits. And it is crazy how high VHM’s gross profits are for their property sales. It probably helps that they have low land costs, but even still. Gross margin of +60% is crazy. Even at the 2018 low of 33%, this is quite a good margin.

Of course, gross profit doesn’t take into the time value of money. What I mean is that the company buys the land, then a year or two later (if they are lucky) starts building, then after some initial infrastructure investment is done, it starts selling units. Even so, it might have its initial cash locked up for many years, and construction costs for a year or two (again, if they are lucky). Deposits are partially offset against this, but not entirely, and so if you present-value all of the cashflows in and out, the value is going to be less than the gross profit.

Having said all of that, it is still an extremely high gross margin even compared to other emerging market developers. Good for them. Speaks to their brand and their ability to buy cheap land.

Now, though the company is probably going to face lower sales due to COVID. However, because it has pre-sold a lot of units, it still has lots of revenue to recognize, to the total of VND79.6tr as of 1Q2020. That’s almost five quarters of revenue at a 2019 run rate.

Plus, it still has lots of land, to the tune of 153m sqm as of 1Q2020. VHM says that all of this could be sold for $44bn (VND1,012tr) through 2025. That is massive, and actually almost doesn’t seem possible. The company had bookings of almost VND100tr in 2019, so it would have to more than double that in 2020 and keep at that level until 2025 to exhaust the land bank. I doubt the market could absorb all of that. Remember that total GDP is just $250bn, so VHM would make up something like 3% of GDP a year.

How does the GDV (gross development value) compare to market cap? Well, the stock is trading at about 0.25x GDV. But of course, GDV is a revenue figure, not a net income figure. Net margin has been as high as 33%, but let’s assume a more reasonable 25% (between 2019’s high and the 2018 low of 19%). That would mean that the stock is trading at around 1.0x future net income. But that doesn’t include VND6.3tr in investment properties plus some revenues/profits from its contracting business.

Ultimately, I find that property stocks trade on a mix of forward-looking sentiment around sales plus a land bank. If the land bank is rapidly depleted, investors pay attention. That’s not the case here, so I expect they will look more closely at trends in sales, partially because the land bank is basically inexhaustible in the near term. Looking at the stock price through that lens, it was trading at around VND85k pre-COVID, then we saw it fall to a low of VND53k before partially rebounding to VND77k. And Monday it fell again, as sentiment starts to turn negative on the rest of the world recovering and the knock-on effect in Vietnam.

I assume we will continue to see lots of volatility in VHM and the rest of the Vietnamese market until the rest of the world starts to get COVID under control.

VietEcon

More on real estate

VietEcon