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China Property Weekly Digest Summary (Issue No. 67)

Core Content

This report provides an overview of the Chinese property market, focusing on buying sentiment, policy updates, sales performance, inventory levels, and recent developments in key cities across Tier I, II, and III classifications. It also highlights a specific project, Agile - Hainan Clearwater Bay, and discusses the financial performance and future expectations of developers.

Main Points

1. Project of the Week: Agile - Hainan Clearwater Bay

• Location: Hainan, Lingshui
• Developer: Agile
• Unit Sizes: 60–90 square meters (sm)
• ASP (Average Selling Price): Rmb20,000/sm
• Land Cost: Rmb300/sm
• Construction Cost: Rmb5,000/sm
• Fitting Cost: Rmb1,500/sm
• Finance Cost (capitalized): Rmb325/sm
• Total Development Cost: Rmb6,800/sm
• Gross Profit: Rmb11,760
• Gross Margin: 62%
• Net Profit: Rmb4,800
• Net Margin: 25%
• 2013 Sales: Rmb7,800 million
• 2014 Target: Rmb8,000 million
• 2014 Saleable Resources: Rmb18,000 million

The project has seen decent presales in 2M14, with subscribed sales of over Rmb1.6 billion, up from Rmb1.1 billion in 2M13. Management plans to launch more units in May, aiming for Rmb7–8 billion in sales this year, similar to the previous year. The low land cost is expected to support strong margins.

2. Policy Update

• Shanghai Caps Construction Land Supply: The local government has set a cap of 3,200 sq km by 2020, which translates to 150 sq km per annum, limiting growth. The policy is expected to focus on fine-tuning land supply structure rather than simply reducing supply.
• Industrial Land Supply Reduction: Industrial land is likely to be reduced, while residential supply will be maintained to control price increases.
• HPF (Housing Provident Fund) Policy Adjustments:
  • Hangzhou Xiaoshan: Increased monthly contribution requirement for HPF mortgage from Rmb3k to Rmb5k.
  • Suzhou: Restricts new commercial properties by requiring developers to hold a portion for three years.
  • Chongqing: Introduced a progressive downpayment system and reduced HPF mortgage cap for couples to Rmb600k.
  • Qingdao: Increased eligibility period for HPF mortgage from 6 months to 12 months.
  • Kunming: Raised downpayment for second homes to 70%, reduced HPF mortgage cap to Rmb600k per household, and introduced a 2-year window period.
  • Wenzhou: Offered incentives for professional talents, including increased HPF mortgage caps and reduced contribution requirements.

These policy changes are expected to slow land supply growth and influence market dynamics by controlling prices and encouraging redevelopment of old towns.

3. Property Sales Performance

• Tier I Cities:
  • 6 launches (2,080 units) with an average sell-through rate of 63%.
  • Sales volume increased by 20% week-over-week (w-o-w).
  • ASP increased by 24% in Tier I cities and 4% in Tier II cities.
  • Tier III cities saw a slight drop in ASP by 2% w-o-w.
• 9W14 Sales Volume:
  • 51 cities tracked: 11% lower y-o-y.
  • Tier I cities: 35% lower y-o-y.
  • Tier III cities: 8% higher y-o-y.
  • Major Tier II cities: 4% higher y-o-y.

4. Market Valuation and Sentiment

• The sector is currently trading at 5.5x FY14F PE, which is higher than the troughs of 4.6x (2008) and 3.9x (2011).
• Market sentiment is weak in the near term, making it difficult to trigger a re-rating.
• Some stocks, such as COLI, Country Garden, Franshion, and Shimao, are attractive valuations.

5. Inventory Level

• Inventory (in thousands of sm):
  • Beijing: 7,242
  • Shanghai: 10,111
  • Shenzhen: 3,054
  • Guangzhou: 7,034
  • Hangzhou: 7,042
  • Suzhou: 6,558
  • Ningbo: 11,312
  • Qingdao: 14,804
  • Nanjing: 4,348
  • Fuzhou: 2,964
  • Nanning: 5,246
  • Huizhou: 2,146
  • Jiujiang: 1,818
  • Nanchong: 4,183
  • Zhoushan: 1,862
• Average inventory (in thousands of sm): 5,652
• Weeks to digest inventory:
  • Tier I cities: 149 weeks (average)
  • Tier II cities: 97 weeks (average)
  • Tier III cities: 72 weeks (average)

The inventory levels indicate slow absorption in the market, particularly in Tier I cities, suggesting a weak demand.

6. Recent News and Company Updates

• Major banks have not changed lending policies for developers but are shifting trust loan preferences from Tier III/IV cities to Tier I/II cities.
• Land acquisitions by key developers:
  • Vanke (000002.CH):
    • Nanjing: 102,300 sm, land cost Rmb214 million, average cost Rmb2,092/sm.
    • Shenzhen: 250,600 sm, land cost Rmb1,766 million, average cost Rmb7,047/sm.
  • Wanda (n.a.):
    • Guilin: 248,300 sm, land cost Rmb337 million, average cost Rmb1,359/sm.
  • Greenland (n.a.):
    • Changsha: 321,000 sm, land cost Rmb481 million, average cost Rmb1,499/sm.
  • Agile (3383.HK):
    • Foshan: 143,300 sm, land cost Rmb666 million, average cost Rmb4,647/sm, with a 71% premium over asking price.
  • CIFI (884.HK):
    • Beijing: 132,200 sm, land cost Rmb778 million, average cost Rmb5,885/sm, with a 49% premium.
  • Kaisa (1638.HK):
    • Shenzhen: 205,700 sm, land cost Rmb800 million, average cost Rmb3,889/sm, with a 0% premium.
  • Mingfa (846.HK):
    • Nanjing: 79,500 sm, land cost Rmb665 million, average cost Rmb8,365/sm, with a 0% premium.

Key Takeaways

• Hainan is experiencing increased buying sentiment due to better air quality compared to Shanghai and Beijing.
• Tier I cities have seen a mild sales pickup and higher ASP increases, but sales volumes are still lower compared to previous years.
• Tier II cities show moderate performance, with some cities like Wuhan and Chongqing experiencing positive changes in GFA and ASP.
• Tier III cities have lower sales volumes and more inventory, indicating weak demand.
• Policy changes are shaping the market by limiting land supply and controlling price increases.
• Developers are redeveloping old towns and maintaining residential supply.
• Market valuations are attractive for some developers, but near-term sentiment remains weak.
• Inventory levels are high, and sales performance is mixed, with Tier I cities having the highest weeks to digest.

Conclusion

The Chinese property market is showing signs of improvement in certain areas, particularly in Hainan and Tier II cities, but Tier I and III cities still face challenges. The policy changes are expected to fine-tune supply and demand and control price increases, while inventory levels remain elevated. Developers are adapting to these changes by focusing on redevelopment and maintaining residential supply. Some stocks are attractive valuations, indicating potential investment opportunities.