20170803-招商证券_香港_-Expect_strong_but_in-line_interim_results._Prefer_mid-caps_on_better_risk-reward_13页_1mb_1mb

China Property Sector Summary

Core Content

The China property sector is expected to deliver strong but in-line interim results in 2017, driven by robust property sales and recovery in gross profit (GP) margins. The report highlights that while the sector is performing well in the first half of 2017, there are growing concerns about market sentiment and new policy measures that may negatively impact the second half of the year.

Main Points

• Interim Results Expectations:

  • Property developers are expected to report a +23% YoY increase in core profits for 1H17.
  • Sales growth for the first half of 2017 is +49% / +75% YoY in FY16 / 1H17, respectively.
  • GP margins have recovered from 28.4% in 1H16 to 29.6% in 17E.

• Market Sentiment and Policy Measures:

  • Residential GFA sales growth has softened from +17% YoY in 1Q17 to +11% YoY in 2Q17.
  • Further weakening is expected in 3Q/4Q17 with sales growth projected at -7% / -12% YoY.
  • New policy measures are likely to intensify competition for land and reduce developers' profitability.

• Valuation and Investment Strategy:

  • Large-cap stocks are currently trading at 8.8x forward P/E, which is 10% higher than the 2015 market peak and 4% higher than A-listed peers.
  • Mid-cap stocks are more attractive due to 28% P/E discount compared to large-caps, 23% / 5% P/E discount compared to previous tightening cycles, and 29% P/E discount compared to A-listed mid-cap peers.
  • Mid-caps are also expected to have faster sales growth (e.g., +31% YoY for 2017E) due to easier bases and market share gains.

• Top Picks:

  • Yuzhou (1628 HK) is highlighted as the top pick with a +12% potential upside.
  • Aoyuan (3883 HK) is also recommended with a +13% potential upside.
  • Both companies have revised sales targets and improved earnings forecasts.

Key Information

• Yuzhou (1628 HK):

  • Interim results expected on 22 August 2017.
  • Contracted sales in 6M17 reached RMB21.5bn, or 72% of its sales target.
  • Target price revised to HK$4.99, implying 12% upside.
  • Revised 17-19E EPS are 98% / 107% / 100% of consensus EPS.
  • Sales growth for 2017E is +45%, outperforming other mid-caps and large-caps.

• Aoyuan (3883 HK):

  • Interim results expected on 16 August 2017.
  • Contracted sales in 6M17 reached RMB16.5bn, or 51% of the original sales target.
  • Revised 17E sales target to RMB37.6bn.
  • Target price revised to HK$3.71, implying 13% upside.
  • Revised 17-19E EPS are 106% / 116% / 108% of consensus EPS.

• Longfor (960 HK):

  • Expected core profit growth of +25% YoY for 1H17.
  • Contracted sales in 6M17 reached RMB92.6bn, or 84% of the sales target.
  • Sales growth for 2017E is +34% YoY.
  • Target price and rating are under review.

• China Overseas Land (688 HK):

  • Expected core profit growth of +8% YoY for 1H17.
  • Sales growth for 2017E is +34% YoY.
  • Target price and rating are under review.

Investment Recommendations

• The report recommends quality mid-caps over large-caps due to better risk-reward ratios.
• The sector is currently overvalued, especially large-caps.
• The interim results may be the last positive catalyst for the sector, with more headwinds expected in 2H17.

Summary Table

Conclusion

The China property sector is expected to report strong interim results, but investors should be cautious about the second half of the year due to weakening market sentiment and new policy measures. Mid-cap developers like Yuzhou and Aoyuan are preferred for their better risk-reward profiles and faster sales growth.