- Market size should have peaked out upon declined land supply
- Only a handful developers can maintain presales growth even if the market recovers
- Sentiment to recover in 2Q22 as dust in the sector settles and presales growth resumes
- Top picks: COLI, COGO, CR Land and Longfor
Market size to contract in the absence of substantial pickup in sell-through rate. Data from CRIC shows that residential GFA of new land supply fell 17% y-o-y in 2021 for 62 key cities we track, pointing to a likely drop in saleable resources in 2022. Under the assumption of a stable 60% sell-through rate (on par with average in past years), our scenario analysis indicates that residential GFA sales would be stable y-o-y if c.40% of legacy landbank brought forward is launched for sale. As most developers are likely to be prudent in light of current market uncertainties and weak buyer sentiment, we believe it is unlikely that they will launch sufficient legacy landbanks to make up for the gap. Our analysis suggests a 5-10% decline in 2022 residential GFA sales in the absence of a meaningful pickup in sell-through rates.
Only a handful of developers have secured sufficient new saleable resources to maintain their current operating scale. Land acquisition premium paid for the 28 developers we track fell by an average of c. 30% in 2021, hinting of a meaningful drop in future new saleable resources for most developers. Thus, despite the likelihood that a fair number of names may survive the 1Q22 bond repayment peak, the operating scale of most developers is likely to see a meaningful decline. We believe Greentown (3900 HK), COLI (688 HK), COGO (81 HK), CR Land (1109 HK) and Longfor (960 HK) are among the handful able to maintain decent presales scale and steady growth when the dust settles.
Stay with quality names poised for land acquisition and presales outperformance. Short-term price volatility in the sector is likely to persist as we head into the upcoming repayment peak in 1Q22 and a gloomy results season in March. However, we believe sentiment and valuation will improve as we head into 2Q and 2H22 when the dust in the sector has settled and presales growth swing back to positive territory. Incorporating presales growth outlook and respective valuations, our sector top picks are COLI (688 HK), COGO (81 HK), CR Land (1109 HK) and Longfor (960 HK).