The worst is not behind us

■ We downgrade the sector to UW as we expect more developers to have liquidity issues in the near term, which will continue to jitter their share price.
■ We expect 40% of the developers we cover to face liquidity problems in the next 6 months if they cannot get timely refinancing or other financial support.
■ We think policy makers need to do more, especially in restoring the debt market, to avoid more developers from defaulting ahead.
■ Top Reduce: RF, Sunac, Agile, Zhongliang, Yuzhou, Aoyuan. We like Longfor and CR Land from large cap and like CIFI and KWG for high beta plays.

More defaults likely ahead without access to financing

Chinese developers have faced an unprecedented credit tightening since early-2021. Meanwhile, they have a lot of US$ bonds, along with other short-term debts, due in the next three to six months (especially Jan 2022). But many of them are not well prepared to repay these debts, given the unexpected shutdown of refinancing channels (bonds, trust loans, ABS). Despite some policy easing on mortgages and the onshore debt market, we assess that it is not enough to avoid many developers from defaulting.

40% of developers may have liquidity problems in next six months

Given that developers have about 65% of their refinancing channels restricted currently, we assess that about seven of the 17 developers we cover (or 40%) could have liquidity problems in the next six months if they are unable to get timely refinancing or other financial support. These include RF, Sunac, Agile, Zhongliang, Yuzhou, Aoyuan and Shimao. Meanwhile, we think CR Land, COLI, Vanke and Longfor have very low liquidity risk, given their strong credit rating and fewer off-balance sheet debts.

Expect home prices to drop 5-10% in 2022F

Dragged by weak market sentiments on developers’ liquidity concerns and the weak economy, we expect home prices and transaction volume to drop by 5-10% in 2022F.

We cut presales/EPS estimates by 10-23%/17-27% over FY21-23F

As developers are focusing on managing their balance sheets and buying less land this year and ahead, we expect their sales growth to be flat for FY21 and low single digits growth for FY22F and FY23F (10-23% lower than our previous estimates). Dragged by potential ASP cuts of 5-10% in FY21F and FY22F, we estimate developers’ gross margins to fall to 22-23% over FY21-23F (from 25-26%). As a result, we cut FY21-23F EPS by 17% to 27% and expect developers to cancel or cut their dividend payments.

Top Reduces: RF, Sunac, Agile, Zhongliang, Yuzhou, Aoyuan

Given our concerns on developers’ near-term liquidity, we further downgrade the sector to Underweight (UW) after a previous downgrade to Neutral in Sep 2021. As a result, we downgrade eight developers’ ratings. Top Reduce: RF, Sunac, Agile, Aoyuan, Yuzhou, Zhongliang. On potential policy loosening, we like CR Land, Longfor, KWG and CIFI.