China Property: Hope in 2H, Selectively Focus on Beta

- Strong June sales rebound— "Key developers we tracked announced an average 45% MoM rebound in June contracted sales vs. the 43% MoM slippage in May. Market giants Vanke, China Poly, COLI, etc. demonstrated strong sales capabilities with monthly sales up 42.6%-98.9% MoM, even hitting monthly record high sales. Apart from several developers such as CR Land, Glorious & Country Garden, the remainder reported a gentle recovery of 20-30% MoM on transaction value."
- June 2010: National residential prices -0.1% MoM; 1st drop in past 16 months
"The strong sales rebound in leading developers was due to price cutting, especially for Vanke and Poly. NBS released the Jun-2010 operating statistics of China property sector that growth momentum on investment and building activities has been decelerating under the tightening while the pricing is resilient, on the grounds that developers are still reining in launching new supply with significant price cuts. Transaction volume recovered on a MoM basis given the low-base sales in previous month as well as price cuts from selective developers."
- Recent share price rally triggered by rumor of mortgage lending loosening — "In the past two trading days, China property stocks rebounded by about 7% on average due to the rumor that a few banks in Shanghai have resumed third home mortgages and loosened standards for second home mortgages."
- Hope in 2H — "In 1H, we suggested investors only stick to quality names such as COLI and Shimao, and they have been the top two best share price performers among all leading developers YTD. Entering 3Q, policy risk has been partially settling along with developers’ price cuts. Potential strong property demand has been well proven. Though we do not think the central government should loosen the tightening in the remainder of 2010, which could be too risky – the central government could lose credibility and could trigger a crazy rebound in volume and property prices – it is still possible for the central government to give more
feasibility to commercial banks in 1Q of next year after considering its critical contribution to economic growth."
- Selectively focus on beta – Shimao and Poly HK. — "If we expect the physical market turning point to emerge in 1Q2011, a good entry timing to the China property sector should emerge in early 3Q 2010, which is also the reason why investors should selectively focus on higher-beta names in 3Q to hunt for returns. After the expected price cuts of 10-15% in June and July, the policy risk should be partially settled already. Entering 3Q, investors could gradually add weights to higher-beta names such as Shimao and Poly HK. We believe these names not only have higher beta but also have specific selling points that could result in share price outperformance."
Citigroup China Property 20100713

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