China Property:Site visit:Zhuhai market cools down amid stable ASP post strict tightening-170717

Zhuhai market cools off post strict HPR policy

    We recently visited five projects in Zhuhai by COLI (The Seaside), Poly China(Poly Times), Logan (Heart of The Aviation City), AVIC International (AVICGarden), and local developer Shuxiangmendi. The property market in Zhuhaihas cooled down post the strict HPR (5-year social security proof now required)introduced in early April, with a significant decline in sales volume (investmentdemand has almost vanished). However, given the low inventory, propertyprices have remained stable in the past few months. Credit has started totighten since May with 30% down-payment ratio for first-home and 0-15%premium to PBoC rate (vs. 10-15% discount before).

    Significant sales volume decline; investment demand vanished

    According to local sales, the number of visitors has declined significantly (GFAsold fell 74% yoy in 1H17, but still almost doubled on 1H15level per Soufundata, Fig. 1) after tightening of the HPR from 1-year social security proof to 5years, and the deposits of some potential buyers have even been forfeited dueto sudden “disqualification”. In particular, investment demand has almostvanished (vs. >30% in 2016), and visitors now are mainly those planning tomove their Hukou to Zhuhai. Local sales expect sales volume to stay low in2H17given the slow population growth, unless there is any HPR relaxation.

    ASP remains stable due to low inventory

    However, property prices in Zhuhai have remained stable in the past fewmonths despite the huge volume decline. Local sales teams believe prices willstay flattish in 2H17given the low inventory level (~5months), limited futuresupply, and high land price (Fig. 2-4). Also, they expect the development of theGD-HK-Macao Big Bay Area to further boost Zhuhai’s economy, and hence,attract more population inflow to support the property market.

    Credit continues to tighten with higher mortgage rate

    Similar to other high-T2cities, the down-payment ratio was tightened to 40-50% for second-home buyers in April (it remained at 30% for first homes), andmortgage loan rate has increased to 0-15% premium to benchmark since May(vs. 10-15% discount last year). Also, the mortgage approval period haslengthened to 1-2months with limited quota (some transactions with ASPhigher than city average have to wait for a few months).

    Recommendation and risks

    Zhuhai’s situation is in-line with our expectation that sales volumes in T1/T2cities might stay low for the full-year due to strict policy tightening. We expectproperty sales to slow further in 2H due to high base, and developers withover-concentration could see sales slow down. Unlike the first half, we expectincreasing divergence among developers’ sales growth due to differentstrategies and execution. We suggest investors accumulate quality names withstrong execution (strong sales ahead even with market slowdown), includingVanke, Longfor, CIFI, Logan and Future Land. We use NAV for existingprojects in our stock valuations. The sector is trading at 7.8x 12m forward P/Eand 31% discount to NAV. Risks include further credit/policy tightening.