AMTD Research - 30 June 2017

2H17 China Property Sector Outlook - Bubble Burst? Nope! Just Slow Down!

Be cautious on giants, look for safety margin

We expect the property sector valuation to de-rate in 2H17. We selectively overweigh developers with achievable presales growth, less share price gain YTD, and relatively low valuation. We are cautious on developers with big share price gains YTD, as main consolidators such as Evergrande and Country Garden performed very well YTD, up by 187% and 106%. Thanks to the rapid growth of contracted sales in 3rd tier cities. Sunac also gained 137% YTD. We believe positive factors of 3rd tier cities have been priced in share price of Evergrande/ Country Garden/ COGO.

The 12mth forward P/E of property sector is about 8.3x, approaching their highs in 2015 and in 2012. We look back to 6 year ago, the hardest time in 2011, the market cap weighted P/E of property sector was only 4x. Giants and 3rd tier cities players with over 50% gain YTD should be avoided. On the other hand, names with low P/E & P/B, 15% ROE and high dividend yield should have higher safety margin and attractive.

Omni-directional tightening in 2017

New HPR introduced in 2017 reduced valid demand in 1st tier cities. A couple used to be allowed to own 4 units, but now is only allowed to own 2 units. The HPR requires 5 year social security record for home buying. Buyers with unpaid mortgages are required to put down 50%/70% down payment for their first home/second homes. 1st and 2nd tier cities introduced 2-3 year lockup period for home resold. Presale price cap is stricter than before, making developers to delay project launches. Land supply have been enlarged to stabilize land price in short term.

Sales growth momentum halted

As the HPR loosened in 2016, GFA sold grew strongly by 22.5% yoy in 2016. However, as HPR tightened again, the growth in GFA sold in 5M17 slowed down to 14.3% yoy, comparing to a 33.2% yoy growth for 5M16. Sales performance in larger cities and that in lower tier cities diverged in 5M17: GFA sold in top 36 cities declined by 25% yoy vs. national GFA sold grew by 14% yoy. Most developer are patient to wait till Golden Sept. & Silver Oct (金九银十) in order to launch projects at a desirable price. We believe the strict tightening intends to cool down the market and lower home price, not clamp down the market.

Inventory lowered and investment of real estate come to steady and healthy growth

Due to the strong sales in 2016/17, national inventory months have declined to a very healthy level of only 21.3 months in May 2017, the lowest level since 2011. This gives room and time for the tightening policies. Saleable GFA peaked in Feb. 2016. Then it declined steadily and recorded yoy declined in Nov. 2016. It is the first time recorded yoy decline of saleable GFA since 2004. In May 2017, saleable GFA declined by 8.5% yoy, while saleable residential GFA further declined by 17.8% yoy. Meanwhile, the growth of newly commence GFA are lower than that of GFA sold in 2015/2016/first 5 months of 2017. It indicates 1) developers are more cautious on commencement, in order to avoid liquidity crisis; and 2) uncertainty of policy trend in the near term.

Great improvement after a loosening year

18 of 29 developers have lowered their net gearing ratio in FY16. Booking GPM in FY16 have significantly improved as well. In FY15, only 4 of 29 companies recorded yoy increase of GPM. In FY16, only 7 of 29 companies recorded decline of GPM.

The era of oligopoly has come

Listed developers’ performances are unexpectedly good. 5 companies have achieved over 50% of their target. Longfor even achieved 69% of its target. Developers mainly in 3rd tier cities, Evergrande, Country Garden and COGO, achieved 75.9%/ 30.9%/ 126.5% yoy growth. The era of oligopoly has come. Top 20 companies accounted for 25.2% of total home sales in China. Top 100 companies accounted for 44.8% of total sales. 21-100 ranking companies only accounted for 19.6% of total sales. In first 5 months of 2017, top 20 accounted for 59.6% of total sales, top 100 accounted for 37.1% of total sales, 21-100 ranking companies only accounted for 22.5%.