China HGS Real Estate?

In the past, we have noted the disconnect in prices between Xinyuan Real Estate (NYSE:XIN) and its peers traded in China and Hong Kong, as well as an apparent disconnect in the valuation of XIN compared to the other US-listed Chinese real estate developer, China Housing & Land Development, Inc (NASDAQ:CHLN).

Well, it turns out that this last comparison was not entirely correct.  There is actually a third US-listed Chinese real estate developer, that is so under the radar that we didn't even realize it existed.  But it exists, or it at least purports to.  It is China HGS Real Estate, Inc. (NASDAQ:HGSH), which appears to have gone public through a reverse merger.  No comment.  It's stock price hasn't performed that great, though.

Anyway, China HGS compares itself in its promotional materials to XIN and CHLN.   In fact, that's the only reason we ever discovered this company's existence, because a recent search for SEC documents on XIN uncovered China HGS's latest filing where they make this comparison.  Here's the relevant pages from the filing:

Was everyone else aware of this company's existence?  I hope not.  And I doubt it, since trading volume is so low in this name that it is virtually nonexistent.  What is even more intriguing is that China HGS commands a market cap of $32m, not that different from CHLN at $44m.  Actually, while the last sentence was being written the stock dropped a bit and its market cap is now $25m (not making this up, folks).

And its P/E ratio is a mere 1.28 now.   But, unlike XIN and CHLN, there is zero institutional ownership of China HGS.  Well, despite less than $20k in share worth owned by Spark LP, and 1,700 shares owned by CalPERS.  But, other than that, zilch. 

So what is the deal with China HGS?  Not being in China, we have no idea whether it's a legitimate company or not.  But the lack of any institutional ownership or coverage is certainly unusual, for a company with operations purportedly on the scale of CHLN. 

The company has recently started filing promotional materials, and yesterday had a press release.  The company advertises the fact that it has no long term debt, and that it is not dependent on bank debt for operations, land acquisitions, or cash flow.  Ok.  That sounds good theoretically.  But, and here's the big qualifier, the company states the following in its most recent 10-Q:

In order to fully implement our business plan, however, we may need to raise capital. Our expectation, therefore, is that we will seek to access the capital markets in both the U.S. and China to obtain the funds we require. At the present time, however, we do not have commitments of funds from any source.

At the current share price, this may not be possible.  It is difficult to see what the company's gameplan is at this point, and despite the seemingly good metrics, extreme caution is probably warranted before venturing into this name, as with all Chinese reverse mergers.

Nevertheless, if it is legitimate, theoretically once it got additional financing it could be poised to outperform along with other Chinese real estate firms that are currently beaten down.  But that's a big "if." 

Still, it's worth keeping an eye on, and certainly good to know about.  It will be interesting to see if it gets any boost when/if XIN's share price recovers more.  If anyone can add more color or info about this company, please let us know.

Disclosure: Long $XIN.  No position in $HGSH or $CHLN