China Property: Current sector rebound could be shortlived; sales performance is the key

- June sales stabilized: "Primary home sales in the eight major cities in June slipped only 1% M/M after a 46% decline in May. That said, sales in fact increased at end-June as some developers started offering more sizable discounts in the sales price. In 1H10, sales in the eight
major cities dropped 36% Y/Y, in contrast to the 20% Y/Y growth for sales volume nationwide in 5M10."
- Price correction underway: "In June, the Centaline Leading Index (secondary transaction price) for the top five cities fell 1.0% to 3.6% M/M, thus bringing the overall cumulative decline to 3.2% since April’s peak. More price cuts are underway with a 20-30% price drop seen in Tongzhou (beyond 5th-ring-road) in Beijing. According to government statistics, in 5M10 the national average ASP reached Rmb4,959psm, and affordability is now close to 47% based on our estimates. We therefore see room for a further correction, especially in overheated cities, where we expect a 20-30% price decline."
- Sector may stay range-bound: "We also do not anticipate any nearterm easing of policy measures. The effect of any policy easing in late 2010 could be offset by a potential sharp increase in inventories. Hence we expect the sector to remain range-bound and prefer companies with better sales performance due to their more flexible pricing strategies (e.g. Vanke) and companies with improvement in net gearing (e.g. R&F). We are concerned about the slow run rate of some mid-cap names such as Shimao, Agile and CR Land relative to their own targets. While we have a long-term bullish view and OW rating on these stocks, in the next quarter their share price performance could be constrained by slower contract sales until sales catch up, say in 4Q10."
JPMorgan China Property Monthly Wrap 20100715

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