20170512-招商证券_香港_-China_property_sector_2017_Souring_outlook_29页_1mb_1mb

China Property Sector Summary - May 2017

Core Content Overview

The China property sector in May 2017 is analyzed in terms of market dynamics, policy impacts, and investment outlook. The report highlights the weakening sales visibility, pricing power, and transaction volume, with a focus on the effects of tightening policies on different tiers of cities.

Main Points

• Sales and Pricing:

  • Sales visibility and pricing power of developers have weakened.
  • Transaction volume dropped sharply in April (-40%) and March (-30%) following austerity measures.
  • Home prices have shown more resilience, but developers' profits are not necessarily increasing due to sharp rises in land prices.

• Sector Valuation:

  • The sector is trading at 7.4x forward P/E, a 6-23% premium compared to mid-cycle tightening in 2011/13.
  • The overall rating for the China Property sector is UNDERWEIGHT, suggesting it is expected to underperform the market over the next 12 months.

• Policy Impact:

  • Policies such as "Home Purchase Restrictions" (HPR), stricter presale permit approvals, and increased down payments have significantly affected the market.
  • In Tier-1 cities, the policy restrictions on non-local residents and increased down payments have led to a decline in transaction volume.
  • In Tier-2 and Tier-3 cities, the effects are also evident with substantial drops in transaction volumes.

• Developer Actions:

  • Developers are turning bearish, with some revising down sales targets and cutting prices.
  • A mid-sized developer is reviewing its 2017 sales target.
  • A large developer cut prices from RMB33,000psm to RMB32,000psm.

• Market Trends:

  • Residential property transactions in Tier-1 cities dropped by 32% YoY in April 2017 and 20% YoY in March 2017.
  • In Tier-2 cities, the decline was more severe, with 40% and 35% YoY drops in April and March respectively.
  • Tier-3 cities also saw significant declines, with 44% and 26% YoY drops in April and March respectively.

Key Findings from Channel Checks

• Shanghai:
  • Difficult to obtain presale permits.
  • Sale of commercial properties suspended.
  • No discount on first-home mortgages.
  • "Count home count mortgage" policy (认房又认贷).

Volume Forecasts

• Quarterly Forecast:

  • Sales volume is expected to decline further in 2Q and 3Q 2017.
  • Nation-wide forecast shows a decline of 8.6% in 2Q and 11.8% in 3Q.

• Annual Forecast:

  • Nation-wide sales volume is forecasted to decline by 3.7% in 2017.
  • Tier-1 cities are expected to decline by 12.5%, Tier-2 by 6.6%, and Tier-3 by 2.0%.

Home Prices and Inventory

• Home prices are supported by low inventory levels in Tier-1, Tier-2, and Tier-3 cities.
• Despite stable prices, developers' profits are not necessarily higher due to rising land prices.

Developer Profitability

• Booked Gross Profit Margins (GPM):

  • COLI: 38.3% (FY12), 32.5% (FY13), 32.7% (FY14), 27.2% (FY15), 27.8% (FY16)
  • R&F: 40.8% (FY12), 39.2% (FY13), 35.5% (FY14), 32.1% (FY15), 28.3% (FY16)
  • Agile: 41.4% (FY12), 35.6% (FY13), 32.4% (FY14), 25.1% (FY15), 26.5% (FY16)
  • Shimao: 33.5% (FY12), 35.3% (FY13), 32.5% (FY14), 28.5% (FY15), 27.6% (FY16)
  • KWG: 36.5% (FY12), 36.2% (FY13), 35.5% (FY14), 36.1% (FY15), 34.6% (FY16)
  • Average: 38.1% (FY12), 35.8% (FY13), 33.7% (FY14), 29.8% (FY15), 29.0% (FY16)

• Estimated GPM on Recently Acquired Land Sites:

  • Average estimated GPM is 21.5% in 2017, reflecting the impact of rising land prices.

Investment Recommendations

• Longfor (960 HK):

  • Rating: BUY
  • Target Price (TP): HK$15.15
  • TP is set at 8.6x 17E P/E, 1 SD above historical average.
  • Strong recurring rental income, better balance sheet, and superior capital and cost management.

• COLI (688 HK):

  • Rating: BUY
  • TP: HK$25.43
  • TP is set at 8.2x 17E P/E, 0.5 SD above historical average.
  • Track record of gaining market share during tightening cycles.

• Country Garden (2007 HK):

  • Rating: NEUTRAL
  • TP: HK$6.63
  • Fairly valued at 10.2x 17E P/E.
  • Spillover effects from Tier-1 cities may reverse.
  • Target price is set at 7.6x 17-18E average P/E, 1.5 SD above historical average.

Investment Ratings

• Industry Rating:

  • OVERWEIGHT: Expect sector to outperform the market over the next 12 months.
  • NEUTRAL: Expect sector to perform in-line with the market over the next 12 months.
  • UNDERWEIGHT: Expect sector to underperform the market over the next 12 months.

• Company Rating:

  • BUY: Expect stock to generate 10%+ return over the next 12 months.
  • NEUTRAL: Expect stock to generate +10% to -10% over the next 12 months.
  • SELL: Expect stock to generate loss of 10%+ over the next 12 months.

Conclusion

The China property sector faces significant challenges due to tightening policies, leading to reduced transaction volumes and lower sales visibility. Despite relatively stable home prices, the rising land prices have dampened developer profits. The sector is currently valued at a premium compared to past tightening cycles, and the overall rating is UNDERWEIGHT. Among the developers, Longfor and COLI are recommended as BUY, while Country Garden is rated NEUTRAL. Investors are advised to consider the specific financial circumstances and investment objectives before making decisions.