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Summary of DBS Group Research on China Developers (11 March 2014)

Core Content

The DBS Group Research report from 11 March 2014 provides an analysis of the performance and valuation of China's real estate developers. It outlines the current operating environment, compares it with previous downturns (2008 and 2H11), and suggests investment recommendations based on company fundamentals and market conditions.

Main Points

• Domestic Credit Environment: The domestic credit environment is more favorable than in 2H11, with the M2 growth target for 2014 at 13%, which is not much different from 2013 levels. The RRR requirement and PBOC interest rates have stabilized at lower levels compared to late-2011.

• Mortgage Approval: Mortgage approvals are slower, taking 2 to 3 months, which is shorter than the 3 to 4 months in 2H11. Developers with strong creditworthiness can still obtain mortgages within two months, and trust financing is becoming less accessible but still manageable for most developers.

• Demand and Supply Forces: The demand side remains more favorable than in previous downcycles, with affordability at 45% and a stable policy stance supporting first-time home buyers. Inventory levels are healthier, at 11 months for 13 cities, compared to 18 and 17 months in 2008 and 2H11, respectively.

• Peripheral Uncertainties: The sector's performance is likely to be affected by rising global uncertainties, such as US QE tapering and tension in Ukraine. These concerns may limit share price upside despite favorable domestic conditions.

• Valuations: The sector is currently trading at relatively low valuations, with a 5.4x FY14F PE, 0.8x P/BV, and a 59% discount to NAV. These levels are approaching those seen during the 2008 and 2011 troughs.

• Investment Recommendations: The report recommends focusing on large-cap developers with strong fundamentals and event-driven catalysts. Companies such as China Overseas, Country Garden, CR Land, Franshion, and Shimao are highlighted as "Buy" recommendations. Smaller companies may have a more mixed outlook, with some being "Hold" or "NR" (Not Rated).

Key Information

• M2 Growth: In 2014, there is less pressure to decelerate M2 growth compared to 2008 and 2011.
• Interest Rates: The 1-year lending rate has stabilized at 6.0% since mid-2012.
• Trust Loans: Trust financing accounts for 9% of total loans, with some developers having higher exposure, such as Evergrande (26% in 1H13).
• Affordability: The mortgage-to-disposal income ratio is at 0.45, lower than in 2008 and 2011.
• Inventory Levels: The inventory level is at 11 months, lower than previous downcycles.
• Valuation Comparison: The report provides a detailed comparison of valuations across different periods, highlighting the current discount to NAV.

Investment Picks

• Buy Recommendations:

  • China Overseas (688 HK): Target Price HK$29.84
  • Country Garden (2007 HK): Target Price HK$6.31
  • CR Land (1109 HK): Target Price HK$25.77
  • Franshion (817 HK): Target Price HK$3.83
  • Shimao (813 HK): Target Price HK$22.85

• Hold or Not Rated (NR):

  • Longfor (960 HK)
  • Shui On Land (272 HK)
  • Sino-Ocean Land (3377 HK)
  • Soho China (410 HK)
  • Yanlord Land
  • Zhong An (1628 HK)

Valuation Table Highlights

Summary of Key Metrics

• M2 Growth Target for 2014: 13%, similar to 2012 levels.
• RRR Requirement for Big Banks: Stabilised at 20% since mid-2012.
• Property Sales and Prices: Sales volume and prices have not seen a huge correction, with a stable policy outlook.
• Affordability: At 45%, lower than previous downcycles.
• Inventory Level: At 11 months, healthier than previous years.

Conclusion

The report suggests that while peripheral uncertainties may cap performance, the domestic credit environment and demand forces are more favorable than in previous downturns. It recommends focusing on developers with strong fundamentals and event-driven catalysts, despite the sector's current low valuations and the risks posed by global uncertainties.