Have we seen the worst of liquidity tightening?

• Negative newsflow surrounding bond default risks of several developers has triggered a sell-off in the offshore bond market. Yield-to-worst of the Bloomberg Barclays Asia Ex-Japan USD Credit China High Yield Index rose 146 bps in June, which marked the largest uptick in a single month since Mar-20 during the COVID-19 pandemic. We believe developers have now reached their tightest moments in liquidity, as the State Council is now hinting for a potential RRR cut in response to the evidently increased credit risks, which would unwind fears over further policy tightening.

• The China property sector fell 7.5% in June, underperforming the HSI’s 1.11% decline despite of decent presales growth. Mid-caps posted the largest drop of 12.4% during the month, followed by large-cap’s 9.5% retreat and small-caps’ 4.4% decline.

• With the sector trading near its historical low valuation at 4.0x FY21F PE, we believe uncertainties on margins and policies are already more than priced in. Companies with superior financial strength will likely outperform given better access to quality land under the concentrated land supply policy – thus our top picks of Vanke (2202 HK) and CR Land (1109 HK). We also like Yuexiu (123 HK) for its land banking capability via alternative channels.