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China Property Industry Report Summary

Core Content

This report provides an analysis of the China property market and key developers for the period 2018-2020, highlighting a shift towards a more stable and healthier market environment in 2019. The report discusses the impact of tightening policies, economic slowdown, and market expectations on property sales and land prices, while emphasizing the resilience of key developers due to strong fundamentals and market consolidation.

Main Viewpoints

• Market Slowdown and Health: The property market experienced a U-turn since mid-2018 due to tightening policies, economic slowdown, and reversed expectations. The market is expected to slow down in 2019E but remain healthier, with end-users dominating and land prices/margins normalizing.

• Sales and ASP Trends:

  • Property sales are expected to retreat by 5% in 2019E, with flattish ASP due to high base and policy control.
  • T1 cities are expected to see a rebound in sales growth to 15% in 2019E, driven by a low base and limited inventory.
  • T2 cities will maintain moderate growth, while T3 cities will experience slower growth due to high inventory levels.

• Land Market:

  • Land market will remain quiet in 2019E with transacted land value and land price both expected to drop by 10%.
  • T1 cities will see a flattish land value, T2 cities a mild retreat, and T3 cities a significant correction.

• Policy Outlook:

  • The government has completed its tightening policy goals and is expected to maintain stability in 2019.
  • Administrative measures such as purchase restrictions and price caps will remain, with some adjustments to reduce market distortion.

• Credit Conditions:

  • Credit to homebuyers and developers has tightened, with marginal finance costs increasing by 50-450 bps for developers.
  • Refinancing pressure is expected in early 2019 due to the expiration of cheap funding.

• Company Fundamentals:

  • Key developers are expected to deliver 19-32% contracted sales growth and 18-35% core profit growth in 2018-2020E.
  • Developers with strong financials and exposure to the Greater Bay Area are highlighted as top picks.

Key Information

Sector Valuation

• The property sector has corrected by 34% from the peak in 1Q18 due to lower sales growth expectations and rising finance costs.
• Current valuation is considered defensive with a 60% discount to NAV and a 4x 2019E P/E ratio.
• The sector retains a Neutral rating, with top picks including Vanke (2202 HK), Aoyuan (3883 HK), and COLI (688 HK).

Financial Highlights of Top Picks

Market Performance

• Property Sales Forecast:

  • Nationwide property sales are expected to slow down to -5% YoY in 2019E.
  • T1 cities are expected to rebound to +15% growth, T2 to +5%, and T3 to single-digit growth.

• Land Sales Forecast:

  • Land market will see a 20% drop in transacted land value in 2019E.
  • T1 cities will remain stable, T2 cities will experience mild retreat, and T3 cities will see a significant correction.

• Policy Impact:

  • The government has achieved its policy goals and is expected to reduce intervention in 2019.
  • Administrative measures will largely remain, with some relaxation on price caps and other market-distorting policies.

Investment Thesis

• The sector is considered defensive with a 60% discount to NAV and a 4x P/E ratio.
• Despite the slowdown, key developers are expected to maintain strong earnings and profit growth.
• The report suggests that investors should focus on quality earnings and strong financials rather than growth metrics.

Conclusion

The China property market is expected to slow down in 2019E but remain healthier, with key developers showing resilience. The sector is currently undervalued, and the report recommends a Neutral rating, with Vanke, Aoyuan, and COLI as top picks due to their strong financials and strategic positioning.