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China Property Weekly Digest Summary (Issue No. 80)

Core Content Overview

This report provides an analysis of the Chinese property sector, focusing on recent developments in policy, sales performance, and project highlights. It outlines the current market trends, including the impact of potential tax reforms and local policy adjustments on the sector's performance.

Main Points

Project of the Week: COLI (688 HK) – No. 8 the Milestone, Tianjin

• Location: Hexi District, Tianjin
• Project Type: Villas and fitted high-rise units
• Sales Performance:
  • First phase launched in August 2013, recorded Rmb3.5bn last year
  • Latest high-rise block launch achieved a 45% sell-through rate in two weeks
  • Target sales for 2014: Rmb3bn, with Rmb1.35bn locked in YTD
  • One more high-rise block to be launched in June, followed by commercial units later in the year
• Pricing: ASP for apartments ranges from Rmb29,000 to Rmb37,000 per square meter
• Financial Metrics:
  • Gross margin: 23%
  • Net margin: 12%
  • Expected gross/net margins for the high-rise portion: 22%/12%
  • Total development cost: Rmb22,026 per square meter
  • Sales tax: Rmb1,728 per square meter
  • Construction cost: Rmb5,000 per square meter
  • Fitting cost: Rmb4,000 per square meter
  • Finance cost: Rmb405 per square meter
• Market Position: Offers higher ASP than nearby projects

Policy Update

• Tax Reform:

  • The Tax Bureau is studying the replacement of business tax with VAT in the property sector
  • Likely VAT rate: 11%, replacing the current 5% business tax
  • Key questions to assess impact:
    1. Will land appreciation tax be cancelled?
    2. What percentage of developers' cost can qualify for Input VAT Credits?
    3. What percentage of CAPEX can qualify for Input VAT Credits?
  • Based on telecom sector experience, VAT may negatively affect revenue, profit, and cash flow in the short term
  • If LAT is included in VAT, developers' cash flow will be further impacted

• Local Policy Adjustments:

  • Haikou: Issues local IDs to property purchasers of units over 120sm
  • Dongguan: Limits price cuts by requiring developers to reapply for sales permits
  • Wuhu: Subsidizes interest payments for second home buyers
  • Hangzhou: First city to require reapplication for price cuts below 15% of ASP
  • Xuancheng: Loosens HPF mortgage policy, raises mortgage cap to Rmb300k per person
  • Yangzhou: Loosens HPF mortgage policy, allowing HPF for both down payments and mortgages
  • Shenyang: Raises mortgage cap and reduces HPF contribution period
  • Nanning: Allows residents from 5 adjacent cities to purchase property
  • Changzhou: Facilitates conversion of HPF to commercial mortgage with subsidies
  • Chengdu: Tightens residency requirements for non-local buyers

Property Sales Performance

• New Launches:
  • Fewer new launches but improved sell-through rates
  • Tier I cities: 15 projects launched (2,265 units, -30% w-o-w), average sell-through rate over 70%
  • Tier II cities: 19 projects launched (3,616 units, -46% w-o-w), average sell-through rate over 60%
• Sales Trends:
  • Sales volumes increased by 8%/13%/15% in major Tier I/II/III cities
  • ASPs changed by -6% to 2% in Tier I/II/III cities
  • May 2014 sales volume for 51 tracked cities declined by 19% y-o-y

Share Price Performance

• Sector Valuation:
  • Trading at 5.3x FY14 PE and 0.7x P/BV
  • Below 2011 troughs of 4x and 0.5x respectively
• Investment Recommendation:
  • Suggest selective addition to the sector
  • Recommended companies: COLI (688 HK), COGO (81 HK), Country Garden (2007 HK), Shimao (813 HK)

Inventory Levels

• Inventory (000 sm):
  • Beijing: 9,437, weeks to digest: 67
  • Shanghai: 10,511, weeks to digest: 42
  • Shenzhen: 3,275, weeks to digest: 57
  • Guangzhou: 8,640, weeks to digest: 56
  • Hangzhou: 7,753, weeks to digest: 137
  • Ningbo: 12,522, weeks to digest: 140
  • Qingdao: 16,472, weeks to digest: 115
  • Nanjing: 4,961, weeks to digest: 40
  • Fuzhou: 3,437, weeks to digest: 112
  • Nanning: 5,707, weeks to digest: 45
  • Huizhou: 2,391, weeks to digest: 48
  • Jiujiang: 2,042, weeks to digest: 54
  • Nanchong: 4,692, weeks to digest: 66
  • Zhoushan: 2,046, weeks to digest: 107
  • Average: 76 weeks to digest inventory

Key Information

• Tax Reform Impact: The potential replacement of business tax with VAT is a major concern for the sector, as it may affect revenue, profit, and cash flow
• Local Policy Support: Various cities have introduced measures to support property sales, including mortgage policy adjustments and subsidies
• Market Trends:
  • Sales volumes have improved, though new launches have decreased
  • ASPs have fluctuated, with some cities showing declines
  • The sector is undervalued compared to historical levels
• Investment Outlook: Investors are advised to selectively add positions to the sector, with a focus on companies like COLI, COGO, Country Garden, and Shimao

Summary

The report highlights the ongoing tax reform discussions in the property sector, which may have a negative impact on profitability in the short term. It also showcases the improved sell-through rates in Tier I and Tier II cities despite fewer new launches, indicating a recovery in demand. Local policy adjustments are playing a crucial role in supporting the sector, with various cities introducing measures to ease mortgage requirements and offer subsidies. The report recommends selective investment in the sector, emphasizing the potential of specific companies like COLI, COGO, Country Garden, and Shimao. Inventory levels are a concern, with the average number of weeks to digest inventory at 76, suggesting a need for continued policy support and market activity.