Bocom International said it is upgrading its call on China’s listed property developers to “Outperform” from “Market Perform.”
“The party hasn’t ended. The earnings growth story is supported by contracted sales momentum, and developers have generally achieved faster year-to-date contracted sales amid the buoyant property market since the beginning of this year,” Bocom said.
Source: BocomThe research house said the booking of these sales revenues should secure turnover and earnings growth in FY13-14, and it expects 19% and 17% CAGR for revenue and core earnings on average, respectively, in FY12-14E.
Land acquisition key to long-term growth
Developers have generally strengthened their balance sheets and cash positions through cash inflows from better-than-expected contracted sales and bond issuances at lower costs in 1H13.
Photo: Agile Property“We expect the sector’s average net gearing ratio to decrease from the peak of 90.9% in FY11 to 58.5% and 52.1% in FY13E and FY14E, respectively.“We suggest focusing on developers that are able to identify and capture profitable land acquisition opportunities. This will be instrumental to potential NAV increment and long-term earnings growth,” Bocom said.
Policy outlook overhang far from fatal
Bocom said it expects a honeymoon period for policy headwinds in the short term.
“Going forward, we think policy fears could still surface from time to time. Having said that, we view these policies as stabilizing measures, not radical ones.
“We do not expect any of these policies to produce a turning point in the property market.”
Agile recently 7.31 hkdBocom added that it believes the current sector valuation has already factored in possible policy headwinds.“The sector turnaround story has just begun, in our view. Thus, we believe the sector should trade at the upper half of the valuation range since 2010 (25-40% discount to NAV).
“Given current valuation at a 44% discount to NAV, we see upside potential of the sector.”
Bocom continues to favor Agile (HK: 3383) and Shimao (HK: 813) as its “Top Picks” given the former’s expected upcoming sales pick up and the latter’s robust contracted sales momentum.
Photo: LongforGoldman: CHINA PROPERTY facing credit crunch
Goldman Sachs said that downside share price pressures exist for China’s listed property developers due to higher financing costs and lower ASP.
“Our China banks team expects tighter liquidity control to lead to slower credit growth, rising financing costs and a possible contraction in China shadow banking, which the property industry relies on heavily for financing,” Goldman Sachs said.
Longfor recently 10.84 hkdThe US research house estimates a 200 basis point one-off increase in financing costs above its base case would negatively affect end-2013E NAV by around 4% and 2014E-15E underlying EPS by 8% across its coverage universe.
“We view the recent share price bounce as merely a relief rally driven by stabilized market sentiment after the Chinese Central Bank indicated its intention to maintain sufficient liquidity conditions in the interbank market.
“We would also expect possible attempts by local governments to ease some property tightening measures should industry investment slow sharply,” Goldman Sachs said.
But it added that unless the government shifts back to its loose monetary policy stance and leverage build-up accelerates again, it believes the marginal change in property policies will be insufficient to drive sustained outperformance of its coverage universe in the medium term.
Greentown recently 11.38 hkd“A more decisive movement towards reform by the China government would be a painful path for the property industry as it would likely result in worsening supply and demand dynamics, increasingly unattractive investment returns and much lower profit growth for our coverage, in our view.”
Goldman Sachs prefers industry leaders with better access to capital and companies with valuations pricing in low growth expectations, with its “Top Picks” (all “Buys”) being Longfor (HK: 960), Greentown (HK: 3900), Vanke (SZA: 000002) and Poly (SHA: 600048).
