China Property - More challenging 2016: relaxations positive but earnings visibility low


Policy relaxations likely hindering structural adjustments in property market
Two consecutive years of decline in land sales while construction starts have led to a healthy adjustment (like improving demand-supply balance) in the China property market but resulted in weaker real estate FAI, hurting GDP growth. We expect further policy relaxation in next six months to boost FAI, which presents positive trading catalysts for China property stocks. However, such relaxations could stimulate aggressive landbanking and borrowing behavior among Chinese developers, leading to sharp land price increases (i.e., faster than home price growth), resulting in greater margin squeeze, slower organic NAV and earnings growth, and higher net gearing for the developers.

We expect divergent property market performances in different cities in 2016
Overall, we expect nationwide commodity residential home price changes in 2016 to be in the range of -3.1% to +5.4%, and sales volume to be in the range of -1% to +5%. For Tier-1 cities, we expect home price growth of 0-20% and sales volume growth of -5%-0%. For Tier-2 cities, we expect home price growth of -10%-+20% and volume growth of 0-5%, while for Tier-3/4 cities, we expect home price growth of -10% to +5%, and sales volume growth of 0-5%.

In particular, among the different types of cities, we expect:
1) Tier-1 cities: Shanghai and Beijing to see better ASP growth, Guangzhou to be stable while Shenzhen could see ASP declines;

2) Tier-2 cities: Nanjing, Hangzhou, Ningbo, Hefei, Xiamen, Nanchang, Zhengzhou to see higher ASP growth, while Wuxi, Haikou, Sanya, Chongqing, Xi'an, Yantai should see ASP declines due to high absolute levels of inventory and/or high inventory periods;

3) Tier-3/4 cities: Nanning, Guiyang, Kunming, Yinchuan, Tangshan, Yangzhou, Xuzhou, Luoyang, Yichang, Yueyang, Changde and Luzhou to show relatively more favorable ASP movements, while Hohhot, Lanzhou, Xining, Urumqi, Qinhuangdao, Baotou, Jinzhou, Mudanjiang, Wenzhou, Bengbu, Quanzhou, Ganzhou, Huizhou, Zhanjiang, Shaoguan, Guilin, Beihai, Nanchong, Zunyi and Dali should see higher ASP declines.

Poor earnings visibility set to remain a key issue for private developers in 2016
In 2015 YTD, a larger number of developers recorded YoY declines or low YoY growths in contracted sales, with low sale target hit-rates, which suggested high risks of missing 2015 sales target. With continued downward pressure on margins (given a lack of meaningful contracted ASP growth for the listed developers and sharp rises in land prices since 2012), we see continued weak earnings prospects for most private developers in the upcoming FY15 and 1H16 results seasons in March and August 2016. With land prices rising faster than home prices (e.g., land prices now make up 90% of ASP in T-1 cities), we see continued weak earnings prospects in 2016-17 for most listed developers.

Technical Analysis
Daily Chart
Buy state-owned developers; Sell private developers into any policy strength
Given more supportive policies, on top of COLI and CR Land, we recommend buying the more attractively valued, higher-beta SOE names: Greentown, CSCEC, Poly A, Jinmao, Joy City and Sino Ocean, for which we see better growth prospects and more visible earnings growth. However, we would see any significant policy-driven share-price rally as presenting opportunities to sell Shimao, Evergrande, Country Garden, Yuexiu, Yanlord, Agile, Sunac and Gemdale given our concerns on growth and profitability. We base our TPs on NAV discounts. Risks: unexpected economic, FX, and policy/political volatility. (Read Report)

Source : Deutsche Bank Markets Research

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