China Property - H shares : Gradual improvement to continue; gearing to improve

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.

Equity view
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.

Credit view
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. We have 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 issuance. (Read Report)

Source : JP Morgan Asia Pacific Equity Research

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