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DBS Group Research Summary: Equity (16 September 2015)

Core Content

This report discusses the current state of the Chinese property developers sector, focusing on inventory levels, sales targets, and valuation trends. The key points include the reduction in completed but unsold inventory, the planned increase in saleable resources, and the current earnings outlook for various developers.

Key Insights

• Inventory Levels and Saleable Resources:

  • As of mid-2015, inventory levels were lower than end-2013, with a notable decrease in completed but unsold inventory.
  • Developers have planned sufficient saleable inventory for the second half of 2015 to meet full year sales targets.
  • Saleable resources may rise again in 2H15, and inventory carried forward to 2016 will be newer, reducing the risk of supply shortages in 1Q16.
  • The number of months needed to clear inventories using saleable resources decreased to 7.3 months in mid-1H15 from 9.1 months at end-FY14 and 7.9 months at end-FY13.

• Earnings and Valuation Trends:

  • The sector is trading at an attractive 6.2x FY16F PE.
  • Some stocks are trading close to their historical trough levels, suggesting potential for upside.
  • Large-cap stocks such as COLI, Longfor, Shimao, and Franshion are trading at close to their historical trough PE multiples.
  • Country Garden, Longfor, COGO, and Franshion are trading at lower PEs than during their 2011 trough levels, indicating limited downside.

• Performance and Earnings Revisions:

  • The street has revised down FY15/FY16F earnings by 7‰/5% on average, but still expects revenue and earnings growth of 17% and 22% in FY16.
  • Developers have achieved on average 35% of their full-year targets in GFA completions.
  • Developers need a 37% pickup in monthly sales in the next five months from the July 2015 level to meet 2015 sales targets.

Main Points

• Inventory Trends:

  • Completed but unsold inventory levels dropped by 2% in 1H15 from end-2014, reflecting successful destocking efforts.
  • Saleable resources are expected to increase, improving the inventory mix and sales potential.

• Developer Performance:

  • Large-cap developers have a more stable earnings outlook with limited downside.
  • Mid-cap and small-cap developers may still have earning downside, but the overall sector is seen as attractive.

• Valuation and Recommendations:

  • The report recommends buying stocks such as China Overseas, CR Land, and China Vanke 'H'.
  • The average FY16F PE is 6.2x, with some companies trading below their historical trough levels.

Key Developers and Their Performance

Summary of Inventory and Sales

• Inventory Levels:

  • End-FY15E inventory levels for various developers are provided, along with the number of months needed to clear inventory.
  • The number of months decreased to 7.3 months in 1H15 from 9.1 months at end-FY14.

• GFA Completions:

  • Developers have achieved on average 35% of their full-year targets.
  • Some developers, such as Evergrande and Franshion, are building at full speed, while others like R&F have nearly stopped new starts due to high inventory and slow sales.

• Sell-Through Rate:

  • The sell-through rate in 1H15 was 47%, down from 48% in 1H14, due to lower new launches.
  • The sell-through rate is expected to improve in 2H15.

Earnings Revisions

• The consensus earnings revisions for various companies are summarized, with a general downward trend for FY15 and FY16.
• Some companies are expected to see revenue and earnings growth, with aggressive expectations for FY16.

Conclusion

The report highlights a positive trend in the Chinese property developers sector, with improved inventory management and a more favorable mix of saleable resources. Despite some downward revisions in earnings expectations, the sector remains attractive, particularly for large-cap developers, with limited downside in valuations. The report recommends buying stocks with strong fundamentals and potential for future growth.