China Property Sector:Don’t worry about bubbles and policies

A million-dollar question. The never-ending debate on property bubble has intensified after the Shenzhen/Shanghai-led (+53%/+15% YoY) surge in property prices last year, and such momentum has extended to some nearby 2nd/3rd-tier cities since 4Q15, e.g. Huizhou, Dongguan, Jiangsu, Hefei, etc (ASP +10%~14% over the past 6 months). Some local governments announced property market policies to tackle heating property markets, while some also imposed loosening measures. While we appreciate the need of cooling measures, such as the recently announced stricter downpayment and tighter differential mortgage policy to curb investment demand, we believe the market should not play it as a major risk, as these measures may only slow down the price surge rather than reverse the uptrend, given many of these cities have reached supply-demand balance, if not supply shortage, after 2 years of scaled-back new construction, in contrast with the oversupply back in the 2010-2011 tightening cycle, in our view.

    How’s the current physical market and latest policy effect? Nationwide new starts/sold retreated to only 0.9x (10-year average: 1.2x), with Beijing/Shanghai/Guangzhou low at 1.0x/0.8x/0.8x, the lowest since 2009. We expect such balanced supply-demand to remain in light of (1) peaking out land sales and (2) developers’ better control in construction pace following wider funding channels. For the latest tightening policies (please refer to Figure 3 for more details), more are on controlling investment demand by limiting downpayment and mortgage in key hot cities. Under excess liquidity, we expect these investment demand will simply spill over to other core 2nd-tier cities, offsetting the drop in volume at the cities being affected. We believe it would be more important for developers to maintain their discipline, and avoid bidding for thin-margin “Land King” when market sentiment is hot. Hence, we continue to prefer developers with established landbank in both 1st/2nd-tier cities, e.g. CR Land (1109 HK), China Jinmao (817 HK).

    Dance while the music still goes on. Having said that, the slower new starts may also cap the growth in sellable resources in the long term, which explains developers’ cautious 2016E contracted sales growth targets of only 0%-20% (2015E: 0%-40%), based on a flat sell-through rate. Nevertheless, take-up has been well-ahead of expectation YTD, leading to an average 59% YoY jump in developers’ 2M16 contracted sales, and we believe 2016E contracted sales may surprise on the upside, unless the government rolls out its administrative cooling measures (e.g. purchase restrictions) on a nationwide basis. In that case, we estimate the revenue growth would well offset the potential margin squeeze and investors should reconsider China Property as a growth sector, which should at least trade back to its historical valuation of 45% NAV discount, from currently 50% (6.6x 2016E P/E). We maintain our Outperform rating on the sector and expect March contracted sales figures (to be announced in early April) to be a near-term catalyst. Top pick: CR Land (1109 HK) in light of its 1st/2nd-tier city landbank and potential re-rating on its commercial portfolio.