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China Property Sector Analysis Summary

Core Content

This report provides an in-depth analysis of the Chinese property sector from 2015 to 2017E, focusing on the role of property quantitative easing (QE), mortgage trends, asset restructuring, and sector valuation. The report highlights that the property sector is expected to benefit from continued QE measures and M&A activities, while also addressing concerns about credit risk and asset quality.

Main Themes and Views

1. Property QE to Continue

• Key Themes: Property QE, M&A, and asset restructuring are expected to be key themes in 2015-2017E.
• Mortgage Policies: The PBOC is expected to maintain mortgage easing policies to boost home sales. Although mortgage loans have increased, the credit quality is healthier than during the US subprime crisis.
• Sales Growth: The report revises the full-year national home sales growth to 14% (previously 7%), supported by affluent mortgages.
• Sector Outlook: The property sector is rated as OVERWEIGHT, suggesting it is expected to outperform the market.

2. Mortgage Growth to Moderate in 2H16E

• Mortgage Loan Growth: In 1Q16, the mortgage to total loan ratio increased to 15.7% from 15.4% in 2015. New long-term household loans surged by 82% YoY, but this growth is expected to slow in the second half of 2016E due to cooling measures and a bottleneck in overall domestic loan growth.
• Sales Forecast: The national home sales growth is expected to decelerate to 3% YoY in 2H16E, compared to 61% YoY in 1Q16.
• Full-Year Forecast: The report estimates 2016/17E national home sales growth at 14% / 5% YoY, reaching RMB8.3tn / 8.7tn.

3. Comparison with US Subprime Crisis

• Credit Quality: China's mortgage NPL ratio was 0.3-0.4% in 2015, significantly better than the US subprime crisis level.
• Debt to GDP Ratio: China's household debt to GDP ratio was 40% in 2015, much lower than the 98% level in the US in 2008.
• Down Payment Ratio: The minimum down payment ratio for first-time home buyers in China is 20%, higher than the 0% in the US during 2005.
• Lending Practices: Chinese banks enforce strict mortgage approval procedures, unlike the aggressive lending practices in the US during the subprime crisis.

4. Possible New QE Measures

• Future Measures: The report suggests potential new credit easing measures such as lower down-payment requirements, subordinate mortgages, and mortgage-backed securities (MBS).
• Valuation Discount: The sector is trading at a 40% discount to its 1-year forward NAV, indicating potential for re-rating.

Key Information

2016E Outlook

• Mortgage Growth: Expected to moderate due to cooling measures and loan growth bottlenecks.
• Loan Quotas: The PBOC and MOHURD have introduced measures to increase loan quotas, but the growth is not as strong as in 2015.
• Housing Provident Fund (HPF): HPF mortgage flows are expected to remain above RMB2tn in 2016E, with a utilization rate of 81% at the end of 2015.

Sector Valuation

• Discount to NAV: The sector is trading at a 40% discount to its 1-year forward NAV.
• Valuation Metrics:
  • P/E ratio: 51.8 (FY15 average)
  • P/B ratio: 1.1 (FY15 average)
  • Net gearing: 76.3% (FY15 average)

Investment Recommendations

• Recommended Companies:
  • COLI (688 HK): Buy, with a target price of HK$28.20, 16% upside, and a 23% NAV discount.
  • CR Land (1109 HK): Buy, with a target price of HK$23.80, 23% upside, and a 37% NAV discount.
  • CIFI (884 HK): Buy, with a target price of HK$2.00, 3% upside, and a 57% NAV discount.
  • Shimao Prop (813 HK): Buy, with a target price of HK$14.00, 38% upside, and a 64% NAV discount.
  • COGO (81 HK): Buy, with a target price of HK$3.30, 35% upside, and a 69% NAV discount.
  • Agile Property (3383 HK): Buy, with a target price of HK$4.60, 16% upside, and a 65% NAV discount.
  • Yuzhou (1628 HK): Buy, with a target price of HK$2.60, 9% upside, and a 64% NAV discount.
  • CM Land (978 HK): Buy, with a target price of HK$1.50, 27% upside, and a 51% NAV discount.
  • Yuexiu Property (123 HK): Buy, with a target price of HK$1.39, 34% upside, and a 77% NAV discount.
  • Greentown (3900 HK): Neutral, with a target price of HK$6.70, 20% upside, and a 66% NAV discount.
  • Country Garden (2007 HK): Neutral, with a target price of HK$3.00, -3% upside, and a 39% NAV discount.

Figures and Data Highlights

• Figure 1: National home sales growth.
• Figure 2: Bank mortgages as a percentage of total loans.
• Figure 3: Monthly new long-term household loans.
• Figure 4: Housing provident fund flows.
• Figure 5: New bank mortgages from 2006 to 2017E.
• Figure 6: Household debt to GDP ratio (1990-2015).
• Figure 7: HPF mortgage data for 2015.
• Figure 8: Sector valuation based on closing prices as of 7 June 2016.
• Figure 9: Peers comparison in valuation.
• Figure 10: Housing provident fund mortgages in 2015.
• Figure 11: MBS in the US.
• Figure 12: NAV band of the China property sector (2009 onwards).

Investment Ratings

Company Ratings

Analyst and Regulatory Disclosures

• The analysis is prepared by China Merchants Securities (HK) Co., Ltd.
• The report is for informational purposes only and does not constitute investment advice.
• Analysts are certified that the views expressed reflect their personal opinions.
• Regulatory disclosures are available on the CMS HK website.