Abaci's Common Sense Investing

In my previous posts, I've left out one very important factor from the calculation, i.e. the tax effect and especially that of the Land Appreciation Tax. Currently SOHO is providing 2-3% on sales as provision for LAT, said to be common practice in BJ, and auditors have no particular complain about it, so neither should I. But I figure if anyone buying SOHO is not buying simply assets or business but Pan, he should have confidence Pan will find a way out if tax becomes a problem, just as he has confidence Pan will find good land at good prices and erect magnificent buildings on it.

But my money isn't with SOHO or Pan. I did subscribe to the IPO but I don't hold any now. I don't have anything against SOHO or Pan strongly but just that I'm a cautious person and prefer a safer bet. In this case my preference is with Shui On Land (272), a company with a similar business, cheaper valuation, but more importantly better execution in my view.

SOL is also in the city redevelopment business and its owner Vincent Lo is also well connected in Shanghai. SOL also has good city center projects in Shanghai because of Lo and the 'Xintiandi' project is a success. Well the architecture for sure has a lower 'WOW' factor than that of SOHO, but 'Xintiandi' nonetheless has become a brand that can be leveraged.

But don't mistake 'wow' for margin, for SOL has an even higher gross margin of 70% (vs. 50% of SOHO). I don't believe this margin will sustain because land prices have gone up a lot, but SOL does have the advantage of having secured most of its land supply some time ago, for city redevelopment is by definition a long term project.

What I like better about SOL is that it has successfully reached out to other cities with the 'Xintiandi' brand, in at least Xihu, Wuhan, and Chongqing. In technical terms I'd say its business model of city redevelopment is proven scalable, thus lessening the need for connections to get good land. Bear in mind in redevelopment the land is usually prime. Not to mention this also means having a much larger landbank of 10 times the size. Earnings sustainability is therefore lesser a concern.

Another area which I think SOL did better was in the management of retail and commercial tranche of its projects, whereas SOHO has sold off everything and will only start keeping some in future projects. The rental from shops and offices provides continuous cashflow which helps smooth out the volatility of the residential market. Plus investment properties will also rise in value, slowly but steadily. This means less aggressive use of funds but is more comforting for a conservative investor looking for the long run.

SOL is where my money is at.

DISCLOSURE: I hold 272 and no 410 at time of writing.