Hollow But Lucrative Race for World’s Tallest Building in China

TAIPEI, Taiwan (TheStreet) -- High towers planned for inland China's major hub city would stand above every other building in the world, but a project one province to the south may get there first -- unless it's beat out by some other Chinese developer.

In a county that wants to remind the world of its economic power and where the facade means face, 71% of the world's super-tall office towers will rise in China during the next five years despite questions about demand, real estate services firm CBRE China says.

More than half of Asia's five-year supply of buildings over 300-meters (984 feet) high would be in China's second-tier cities, which are outpacing China's economic growth of about 7%, it adds. That's 132 new towers.

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"What happens in the major cities influences second- and third-tier cities, so while we haven't seen something on the scale of the others, there is desire," says Scott Kronick, an author, 20-year Beijing dweller and Asia-Pacific CEO at Ogilvy Public Relations.

Whether anyone wants to buy an office in the clouds and smog of urban China is the developer's problem. But if all these projects go forward anyway -- and a lot of them will -- they will inevitably bring income to the construction industry, from basic materials to elevators.

That trend means tall times ahead for the Singaporean and Hong Kong property developers who have invested in China for 15 years, leaving Western peers behind.

But a Western company such as Honeywell (HON), which has already invested $1 billion in China, might suddenly win a bid for 100 floors' worth of security systems.

Imagine the height of an elevator for the likes of Otis Elevator Co., a subsidiary of United Technologies Corp. (UTX). Otis has already built interior transportation for some of the world's highest towers.

Chinese authorities are leaning on developers to build stuff that doesn't add to its notorious air-pollution problem.

Those who take the call seriously might add orders to China-based, Nasdaq-traded Suntech Power Holdings (STPFQ), the world's largest solar-panel maker.

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Attention has turned to the Phoenix Towers in Wuhan, a transport nexus and industrial center as the buildings' proponents gave plans to the city last month. Two towers in the mixed-use commercial compound would soar to one kilometer (0.62 mile), compared with 2,717 feet for Dubai's Burj Kalifa, the world's top tower today.

Then in Changsha, the capital of Hunan Province south of Wuhan, conglomerate Broad Sustainable Building still plans to build its 2,750-foot-tall Sky City tower. It broke ground last year, though with little if any progress since then, Chinese media say.

Broad estimates the project will cost $626 million and take just nine months. Both goalposts are ominously low because the company would use prefabricated building techniques, the media say.

"Super-tall" office buildings are also set to sprout in the second-tier cities of Chongqing, Shenyang and Tianjin, CBRE says. It warns of the risk of oversupply, but for local officials in Asia, the image of a sky-high city is worth dozens of empty floors.

"There is a perception that a high density of tall buildings is synonymous with being a successful financial hub," the July 7 report says.

That means go ahead and build. Some towers will prosper on occupancy by financial and other service businesses if economic reforms steer China toward more reliance on consumption.

Reforms, however, may take longer than expected, says Qinwei Wang, China economist with Capital Economics in London.

"This means that net returns of some high buildings will perhaps be disappointed, especially for those supported by the state-owned firms with decisions largely based on benefiting local officials' career rather than reasonable evaluations of economic and social returns," Wang says.

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At the time of publication, the author had no position in any of the stocks mentioned.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

TheStreet Ratings team rates HONEYWELL INTERNATIONAL INC as a Buy with a ratings score of A+. TheStreet Ratings Team has this to say about their recommendation:

"We rate HONEYWELL INTERNATIONAL INC (HON) a BUY. This is based on the convergence of positive investment measures, which should help this stock outperform the majority of stocks that we rate. The company's strengths can be seen in multiple areas, such as its revenue growth, largely solid financial position with reasonable debt levels by most measures, good cash flow from operations, increase in stock price during the past year and growth in earnings per share. We feel these strengths outweigh the fact that the company has had somewhat disappointing return on equity."

Highlights from the analysis by TheStreet Ratings Team goes as follows:

  • HON's revenue growth has slightly outpaced the industry average of 0.8%. Since the same quarter one year prior, revenues slightly increased by 5.8%. This growth in revenue appears to have trickled down to the company's bottom line, improving the earnings per share.
  • The current debt-to-equity ratio, 0.49, is low and is below the industry average, implying that there has been successful management of debt levels. Along with the favorable debt-to-equity ratio, the company maintains an adequate quick ratio of 1.04, which illustrates the ability to avoid short-term cash problems.
  • The stock has risen over the past year as investors have generally rewarded the company for its earnings growth and other positive factors like the ones we have cited in this report. Looking ahead, unless broad bear market conditions prevail, we still see more upside potential for this stock, despite the fact that it has already risen over the past year.
  • HONEYWELL INTERNATIONAL INC has improved earnings per share by 7.8% in the most recent quarter compared to the same quarter a year ago. The company has demonstrated a pattern of positive earnings per share growth over the past two years. We feel that this trend should continue. During the past fiscal year, HONEYWELL INTERNATIONAL INC increased its bottom line by earning $4.92 versus $3.70 in the prior year. This year, the market expects an improvement in earnings ($5.55 versus $4.92).
  • Net operating cash flow has slightly increased to $1,341.00 million or 6.76% when compared to the same quarter last year. The firm also exceeded the industry average cash flow growth rate of -24.85%.

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