China Property Sector:Policy headwinds bring challenges and opportunities

Cooling measures are strictly executed.

    The Oct. primary residential sales volume generally dropped but varied among cities, e.g. Suzhou -59% MoM and Nanjing -39% MoM vs Guangzhou +11% MoM. We noted that 1) this round of cooling measures were strictly implemented and reduced loopholes esp. in buyers’ qualification, 2) high-priced product presales approval were put on hold; and 3) bank mortgages were still affluent for qualified buyers.

    Sales divergence among cities.

    We believe that 4Q16E property sales in overheated cities could plummet 26% QoQ and 27% YoY but other cities could be less affected, since the government upheld credit easing on mortgages. The property price in most overheated cities could remain stable (10M16: E-house home price index +14.8% YoY) in the next few months since there will be limited new supply.

    Short-term overhang.Await buying opportunity.

    We believe the policy overhang will persist one-to-two quarters and affect market sentiment, due to negative news on sales volume decline, developers’ withdrawal of new land purchases and stricter control on developers’ fund raising. However, we expect quality developers will be able to maintain 10% contracted sales growth in 2017E and take this opportunity to replenish cheap land sites and perform M&As. The sector is trading at 38% discount to its 1-year forward NAV, close to 0.8SD below 7- year mean. Buying opportunity could emerge towards the end of 1Q17E when more signs on the mortgage/household loan trend will appear and the policy headwinds are priced in. Greentown (3900 HK) is our preferred play (85% earnings rebound in FY16E and deep NAV discount at 65%).