Bocom: CHINA PROPERTY ‘Market Perform’
Bocom International said it is maintaining its “Market Perform” recommendation on the Chinese property sector, adding that the ongoing policy and contracted sales overhang should persist until March.
According to the latest data from local authorities, residential property sales volume dropped 27% m-o-m in the first week of February (2nd-9th).
Most major Chinese cities recorded significant m-o-m declines, including Beijing (-20%), Shanghai (-37%) and Guangzhou (-42%).
Chongqing was the only major city to record a m-o-m increase (+23%) and the 1st-tier and 2nd/3rd-tier cities recorded the same extent of decline (-27% m-o-m) in sales volume during the period.
“We view the data as typical ahead of the Chinese New Year (CNY) holiday. The sector has rallied after the CNY holiday, given that the slowdown of property sales would probably relieve the policy fear in the short term.
“Nevertheless, we are rather cautious on this view,” Bocom said.
There has been a significant rebound in both sales volume and property prices in major cities since 4Q12.
Also, we maintain our view that the introduction of new policies would depend on whether the property market heats up again after the CNY. Thus, the policy overhang should persist until March,” the research house added.
On the other hand, Bocom maintains its view that 1st/2nd-tier cities will still outperform smaller cities, attributable to the former’s better supply-demand dynamics.
“This scenario would reverse only if new policies are introduced in the major cities. We favor Agile Property (HK: 3383) as our top pick, given its penetration into major 2nd-tier cities and undemanding valuation.”
Guoco: CHINA PROPERTY ‘Overweight’
Guoco Capital said it recommends an “Overweight” position on Chinese property developers.
“Now is the right time to buy leading Chinese property developers after a deep share price correction. Share prices of the ten largest Chinese property developers peaked in early January and declined an average 12.6% over the past month versus a drop of 0.7% for the Hang Seng Index and 2.4% for the HSCEI during the same period,” Guoco said.
The research house said it believes the sector correction is mainly due to profit taking (share prices of the Top 10 PRC developers up 79% on average in 2012) and concerns Beijing may launch new administrative measures to cool the housing market.
“As real estate is one of the pillar industries of China’s economy, we do not think the PRC government will introduce drastic measures to change the property market direction.”
According to the China Index Research Institute, average new home prices in 100 major PRC cities rose 1.0% month-on-month (up for eight consecutive months) and 1.2% year-on-year in January.
China’s total gross floor area of newly-started residential properties decreased 11.2% year-on-year in 2012, a phenomenon which removed oversupply concerns.
“According to our estimates, total contracted sales revenue of the ten largest Chinese property developers amounted to 54 billion yuan in January, up 18% month-on-month and 274% year-on-year.”
Over the past two months, 22 Chinese property developers raised approximately 9.6 billion usd through the issue of senior notes and ordinary shares while the average cost of debt is 200-300 basis points lower compared with a year ago.
“Robust property sales revenue, falling inventory and lower financing costs mean better earnings outlooks for Chinese property developers in 2013,” Guoco said.
In terms of valuation, China’s top 10 property developers are currently trading at an average 2013 PER of 8.2x with EPS growth of 13%, 2012 P/B of 1.6x and 31% discount to NAV.
“Valuations are attractive by historical standards. Top picks will be leading players with excellent earnings record and strong execution capability such as China Overseas Land (HK: 688), China Resources Land (HK: 1109) and Longfor Properties (HK: 960).”