- Speculation on new wave of tightening measures led to recent mini sell-off —
"Given improving sales performance and expected lower policy risk, the China property sector had recorded a strong share price rally since mid-June. However, this week caution has returned due to recent speculation the government may introduce a new wave of tightening targeting: 1) development schedules, 2) crack down on land hoarding, and 3) further tightening of mortgage loans for third-unit purchase. Moreover, it has been reported by the local press that China banks have been asked to stress-test for a 60% home-price fall. The above news got a lot of market attention, resulting in a mini sell-off in the China property sector, though most of the news has not yet been made official."
- Policy side neutral, precaution is good for sustainable recovery — "As for recent
speculation of new tightening, we don’t think it is likely, instead believing that in 2H the Central Government will mainly focus on the implementation of existing tightening measures. Moreover, it should shift more focus onto the construction of social welfare housing and monitoring developers’ construction schedule, to prevent a potential construction slippage. The Central Government must balance property market tightening with overall economic growth. However, relative to the recent strong volume rebound and significant improvement in market sentiment, we view the Central Government is wise to introduce precaution measures before property/land prices revert to an upward trend. For us, these kinds of precautions are positive for a sustainable recovery of the China property market outlook."
- Leading developers’ life is not so tough, likely become market consolidators —
"The leading developers have seen sales improving significantly in 3Q given better brand names, product quality, and flexible pricing strategies. We estimate profitability would still be decent (GP>30%) even if they cut prices by c.20% from the peak. In June/July, the land market overshot the property market significantly, with achieved land price down 30% from the peak vs. property price only mildly correcting by 10% in key cities. As for leading developers, if they can use the opportunity to replenish prime land reserves at a reasonable price, this should be positive for sustainable growth. This has led to leading developers hungry for capital raisings, which are unrelated to concerns on their own financial positions. We prefer low cost capital raisings, such as share placement, syndicated loan etc."
- Selectively focus on beta – Shimao and Agile — "If we expect the physical market
turning point to emerge in 1Q2011, a further opportunity to buy into 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. Moreover, second tier market developers – such as our top picks Shimao and Agile – offer defensive valuations. We believe these names not only have higher beta but also have specific catalysts that could result in outperformance."
"Given improving sales performance and expected lower policy risk, the China property sector had recorded a strong share price rally since mid-June. However, this week caution has returned due to recent speculation the government may introduce a new wave of tightening targeting: 1) development schedules, 2) crack down on land hoarding, and 3) further tightening of mortgage loans for third-unit purchase. Moreover, it has been reported by the local press that China banks have been asked to stress-test for a 60% home-price fall. The above news got a lot of market attention, resulting in a mini sell-off in the China property sector, though most of the news has not yet been made official."
- Policy side neutral, precaution is good for sustainable recovery — "As for recent
speculation of new tightening, we don’t think it is likely, instead believing that in 2H the Central Government will mainly focus on the implementation of existing tightening measures. Moreover, it should shift more focus onto the construction of social welfare housing and monitoring developers’ construction schedule, to prevent a potential construction slippage. The Central Government must balance property market tightening with overall economic growth. However, relative to the recent strong volume rebound and significant improvement in market sentiment, we view the Central Government is wise to introduce precaution measures before property/land prices revert to an upward trend. For us, these kinds of precautions are positive for a sustainable recovery of the China property market outlook."
- Leading developers’ life is not so tough, likely become market consolidators —
"The leading developers have seen sales improving significantly in 3Q given better brand names, product quality, and flexible pricing strategies. We estimate profitability would still be decent (GP>30%) even if they cut prices by c.20% from the peak. In June/July, the land market overshot the property market significantly, with achieved land price down 30% from the peak vs. property price only mildly correcting by 10% in key cities. As for leading developers, if they can use the opportunity to replenish prime land reserves at a reasonable price, this should be positive for sustainable growth. This has led to leading developers hungry for capital raisings, which are unrelated to concerns on their own financial positions. We prefer low cost capital raisings, such as share placement, syndicated loan etc."
- Selectively focus on beta – Shimao and Agile — "If we expect the physical market
turning point to emerge in 1Q2011, a further opportunity to buy into 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. Moreover, second tier market developers – such as our top picks Shimao and Agile – offer defensive valuations. We believe these names not only have higher beta but also have specific catalysts that could result in outperformance."
Citigroup China Property 20100806
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