May sales in the Top 8 cities were up 9% M/M and 31% Y/Y, driven by improved
market sentiment. With the supports on policy, credit and the market sentiment,
we expect the strong momentum to continue into June. New starts and land sales
stayed weak in May despite the market pick-up, which make the demand/supply
dynamics more favorable in the next 9-12 months.
As a result, we continue to
expect sales volume to pick up, positive market sentiment to expand from tier-1 to
several tier-2 cities, and will eventually drive slight price increases toward the end
of the year.
■ Buy on tier-2 cities exposure: China’s property sector has underperformed in
May and June mainly due to concerns on share placements. However, with
improving demand/supply dynamics, we expect positive market sentiment will
soon expand into tier-2 with volume improvements and a more generic priceincrease
toward end-2015/early-2016. A bigger wave of upgrades in earnings
and NAV will come around August at the earliest as the year-to-date numbers
are still weak Y/Y. The June and July strong sales will be the key catalysts. On
the back of this, we think investors should shift from tier-1 exposure to tier-2
exposure as good market sentiment in tier-1 is well-known and is mostly priced
in. As a result, we think the next wave of re-rating will come from developers
with strong launch pipelines in key tier-2 cities.
■ Equity top picks: COLI (0688.HK) is our top pick in the large-cap space,
given the new launches from its “land-king” purchased a year ago, and CR
Land (1109.HK) on Shenzhen launch; mid-caps we like are Country Garden
(2007.HK) given its strong sales momentum; we like Shui On Land (0272.HK)
in the small-cap space given its upcoming Shanghai residential and office enbloc
sales. We are cautious on Franshion (0817.HK), Agile (3383.HK) and
Evergrande (3333.HK) still.
■ In our view, we believe gearing for developers might have peaked. This is
mainly attributable to a peak in total debt, given slower land acquisitions, lowball
growth assumption that should mean lower new construction starts, focus on
cash collection, coupled with some equity raisings. We note that issuance so far
this year has been mainly for refinancing. We also expect liquidity to improve
on the back of these factors. That said, leverage could still move higher on
narrower margins in the de-stocking process although we expect the situation to
see gradual improvement in 2H15/1H16.
■ Valuation looks tight but justified by improving fundamentals.
thus further moved down the credit curve on improving fundamentals. We
recently downgraded Country Garden ‘19s, Road King ‘17s and Greentown
perps to Neutral from Overweight from a valuation perspective and to make
room for exposure in the single-B space although we are still comfortable with
the fundamentals of most double-B names. We recently upgraded Agile '19s,
China SCE '17s, Evergrande '18s, and Guangzhou R&F '16s and ‘19s to
Overweight. Technicals are also very supportive at least in terms of slow
. (Read Report)
Source : JP Morgan Asia Pacific Equity Research
Labels: China, Property Sector