20211019-招银国际-China_Property_Sector__This_time_is_different_13页_1mb

China Property Sector Summary

Core Content

The China property sector is currently facing a period of continued volatility and weak fundamentals, despite some recent policy adjustments aimed at stabilizing the market. The government's stance, as emphasized by President Xi Jinping, is focused on long-term structural reforms rather than short-term easing. This includes the introduction of property tax trials and tighter regulations on pre-sale fund supervision. The report suggests that investors should focus on quality developers who can manage their cash flow and debt levels effectively.

Main Views

1. Is property policy likely to be further easing?

• Unlikely. The government's policy remains consistent and tight, aimed at reducing speculation and improving market mechanisms.
• Qualitatively: President Xi's emphasis on "house is for living" and the introduction of property tax signals a long-term approach rather than an easing cycle.
• Quantitatively: Property investment growth remained at 9% YoY in 9M21 and is expected to slow only to 6% even with a 5% YoY decline in 4Q21. Sales volume and value could still grow at 3% and 5% YoY, respectively, even with a 15% and 20% decline in 4Q21.

2. What will PBOC do to stabilize the property sector?

• PBOC aims to minimize systematic risks within the financial system and housing delivery.
• Banks are encouraged to speed up mortgage approvals and provide appropriate loans to developers compliant with "three red lines".
• Pre-sale fund supervision is being strengthened to ensure liquidity and reduce risks.

3. Which policy is expected next?

• Property tax is the likely next policy. The government may accelerate its trials after mentioning it in the Qiushi magazine.
• Shenzhen is expected to be the next trial city after Shanghai and Chongqing.
• Key factors for the success of property tax include the tax rate (preferably close to rent yield, e.g., 1.5%) and coverage of existing homes with some exemptions.

4. Has the fundamental bottomed yet?

• No, the fundamentals are still weak.
• Property sales volume and value declined further in September 2021, with a YoY drop of 13% and 16%, respectively.
• The sell-through rate in major cities dropped below 60% in the first week of October.
• Property investment also declined in September, though the YTD figure remained stable at 8.8% YoY.

5. Can Evergrande survive on its own?

• There could be some silver lining. Evergrande has focused on key areas like the Yangtze River Delta and Pearl River Delta.
• It has a significant amount of land and projects in these regions, which could support its delivery targets.
• The company may need to sell assets to fund construction, including Evergrande Services and other subsidiaries.

6. Which developers would benefit or continue to suffer?

• Developers are evaluated based on four dimensions: cash inflow (sales), cash outflow (debt and construction costs), sales targets, and debt transparency.
• Top picks include COLI, CR Land, and Longfor, which are expected to meet sales targets, have less off-balance sheet debt, and manage construction costs effectively.
• These developers are also noted for their aggressive land acquisition in September.

7. Has all the negatives been priced in?

• Not yet. The sector is still trading at 0.8x 2020 PB, which is not at the bottom given the tight policy and weak sales.
• There is potential for more defaults among developers, especially those with high USD bond exposure and weak financial positions.
• The introduction of property tax could further dampen sentiment if the tax rate is higher than in previous trials.

Key Information

• Property tax trials: Expected to be accelerated, with Shenzhen likely to be the next city after Shanghai and Chongqing.
• Sales performance: Property sales continued to weaken in September 2021, with volume and value down 13% and 16% YoY, respectively.
• Developer performance: COLI, CR Land, and Longfor are highlighted as quality names due to their financial transparency and ability to meet sales targets.
• USD bond exposure: Evergrande, Country Garden, and Kaisa have significant USD bond exposure, increasing the risk of default.
• Market sentiment: Property tax trials could negatively impact sentiment if not well-managed.

Conclusion

The China property sector is expected to remain volatile in the short term due to weak fundamentals and continued policy tightening. The government's focus is on long-term structural reforms, such as property tax and pre-sale fund supervision, rather than short-term easing. Investors are advised to focus on quality developers like COLI, CR Land, and Longfor, which are better positioned to navigate the current market conditions. The sector has not yet reached its fundamental bottom, and further risks, including potential defaults and negative sentiment, remain.