20171113-广发证券_香港_-2018_Property_Sector_Outlook_11页_956kb

2018 Property Sector Outlook Summary

Sector Overview

The property sector in China is expected to face a cautious outlook in 2018, marked by declining contract sales and ongoing restrictive policies. These factors are anticipated to continue affecting the market, leading to a new down-cycle. Despite this, there is potential for improving earnings growth due to solid contract sales and rising gross margins in 2016-17. However, the sector is seen as having limited share price catalysts.

Core Content

• Industry Consolidation: Industry leaders are leveraging their brand names, standardized operations, and economies of scale to expand market share, putting pressure on smaller developers.
• Restrictive Policies: Local governments have implemented purchase and sales restrictions since 2016, and banks have increased mortgage rates, affecting developers' asset turnover and financing.
• Contract Sales Decline: Most developers are expected to see a decline in contract sales in 2018, with a forecast of a 10% YoY drop in GFA sold and flat ASPs.
• Earnings Growth: Based on 2016-17 performance, most developers are expected to achieve 10%–20% YoY earnings growth, though this may be constrained by slowing sales.
• Valuation Trends: Developers are trading at the mid to upper end of their 2014–17 P/B ranges, suggesting current valuations are relatively expensive, and stock picking is recommended.

Key Themes

• Guangdong-Hong Kong-Macau Bay Area: Developers with premium land banks in this region are expected to benefit from ongoing property price appreciation. Property prices in major cities are projected to double over the next 5–8 years.
• Economic Growth and Talent Inflow: The region is anticipated to be a major growth driver due to economic development and an influx of capital and talent.

Investment Strategy

• Preference for Strong Performers: Given the lack of sector-wide catalysts, the report suggests focusing on developers that are likely to exceed sales and earnings expectations.
• Focus on Land Owners: Developers with substantial land holdings in the Bay Area are highlighted as potential beneficiaries of rising land prices.

Top Picks

Yuexiu Property (123 HK, Buy)

• Land Bank: Has a premium land bank of 7.7m sqm in the Guangdong-Hong Kong-Macau Bay Area.
• Valuation: Trading at 0.5x 2017E NBV, which is considered undervalued given the land price appreciation potential.
• Performance: Oct contract sales rose 35% YoY to Rmb3.2bn, with 10M17 sales up 28% YoY to Rmb31.9bn.
• Target Price: HK$2.60, equal to 1.0x 2017E NBV.
• Earnings Growth: Expected to grow 42%–40% in 2018/19, with management guidance indicating stronger performance than the market consensus.

Gemdale P&I (535 HK, Buy)

• Performance: 10M17 contract sales increased 1.3x YoY to Rmb36.4bn, with GFA sold up 1.2x YoY to 2.0m sqm.
• Earnings Growth: Management expects earnings to double in 2018, with a forecast of at least 50% CAGR in 2018–19.
• Valuation: Trading at 10x 2017E P/E, which is considered undervalued.
• Target Price: HK$1.60, equal to 10x 2017E P/E.
• Acquisition Impact: Acquisition of Guangdian Property is expected to boost earnings growth.

Risks

• Upside Risk: 2018 contract sales may exceed estimates.
• Downside Risk: Ongoing property and land price bubbles in first- and major second-tier cities may lead to business risks.

Industry Trends

• Land Price Appreciation: Land prices in first and second-tier cities have been rising at a CAGR of 20% from 2011–2016. In 9M17, land premium increased by 46% YoY to Rmb814.9bn.
• Market Share Growth: The top ten developers' market share increased from 11.4% in 2015 to 15.8% in 1H17.
• GFA Sold: Overall GFA sold increased by 10% YoY to 1.16bn sqm in 9M17, but is expected to drop 10% YoY in 2018.

Financial Highlights

Yuexiu Property (123 HK)

• EPS Growth: Expected to grow from Rmb0.138 in 2017E to Rmb0.196 in 2018E and Rmb0.275 in 2019E.
• P/B Ratio: Trading at 0.5x 2017E NBV, which is considered undervalued.
• Valuation: Target price of HK$2.60, representing 1.0x 2018E NBV and 11.0x 2018E P/E.

Gemdale P&I (535 HK)

• EPS Growth: Expected to grow from Rmb0.089 in 2017E to Rmb0.135 in 2018E and Rmb0.208 in 2019E.
• P/E Ratio: Trading at 4.3x 2018E P/E, suggesting undervaluation.
• Target Price: HK$1.60, equal to 10x 2017E P/E.

Conclusion

The report highlights that while the property sector faces headwinds from restrictive policies and declining contract sales, certain developers with strong land positions in the Guangdong-Hong Kong-Macau Bay Area are poised for growth. Yuexiu Property and Gemdale P&I are identified as top picks due to their potential for earnings growth and undervalued stock prices. The report suggests a cautious approach with a focus on stock picking and selecting developers that can exceed market expectations.