Waning Market Confidence Restrains Debt Raising Capabilities

2021 property FAI rose 4.4% yoy, the lowest since 2015. Tight liquidity and gloomy market outlook have dampened developers’ appetite, with new construction starts declining 31.2% yoy in Dec 21. Dec 21 property sales rebounded by 40% mom, driven by aggressive project launches and pricing strategies. New home prices slid another 0.3% mom in Dec 21. Waning investor confidence is expected to restrain developers’ debt raising ability from the primary market. Maintain UNDERWEIGHT.

WHAT’S NEW

2021 property FAI rose 4.4% yoy; new construction starts in Dec 21 dropped 31.2% yoy. 2021 property FAI rose 4.4% yoy, the lowest annual growth since 2015. The gloomy market outlook and tight liquidity continue to linger, with the decline in new construction starts in Dec 21 widening to -31.2% yoy, while new construction starts in 2021 dropped 11.4% yoy. Total development funding for 2021 increased 4.2% yoy, with property sales deposits/self-raised funds contributing 37/33% respectively. Meanwhile, financial
institutions have extended support and accelerated loan disbursement to the sector, while real estate loan balance expanded 7.9% yoy as of Dec 21 (3Q21:+7.6% yoy).

Tightened lending standards on LGFVs may further slow land sales. 2021 land transacted value/area growth slowed to +2.8/-15.5% yoy. According to China Real Estate Information System (CREIS), SOEs and LGFVs have aggressively stepped up their land acquisitions starting from the second centralised land auctions. The ratio of land acquired (value) by them spiked from 45% to 74% in both the second and third centralised land auctions. With the support of SOEs and LGFVs, failed auction ratios are likely to remain stable but land premiums may remain under pressure with the lack of competition from peers. However, several domestic banks were reported to have tightened their lending standards on weaker LGFVs in view of their recent aggressive expansion and excessive borrowings, a move that could further deepen local governments’ debt stress.

Dec 21 sales rebounded 40%; unsold inventory rose 2.4% yoy. Thanks to the magnificent start in 1H21, 2021 property sales value and area sold still grew 4.8% and 1.9% yoy respectively to Rmb18,193b and 1,794m sqm, a record high for property sales. Dec 21’s monthly property sales value/area rebounded by 40/41% mom, boosted by developers’ aggressive project launches and pricing strategies. However, the oversupply condition has worsened, with total unsold inventory increasing 8.58m sqm in Dec 21 and cumulatively +2.4% yoy for 2021. According to China Real Estate Information Corporation (CRIC), residential properties’ inventory months for Tier 1/2/3/4 cities were 10.18/14.25/16.66/19.24 months respectively and were 47/59/78/117% higher yoy, with unsold inventory piling up at a faster pace in lower-tier cities.

New home prices fell 0.3% mom. 70-city new home prices continued its downward trend in Dec 21 with a 0.28% mom decline (Nov 21: -0.33% mom), with the number of cities which reported mom declines in new home prices having narrowed to 50 (Nov 21: 59). New home prices have yet to reach the bottom, with Tier 1/2/3 cities reporting -0.1/- 0.3/-0.3% mom changes in Dec 21 and cumulative growth of 4.4/2.8/0.9% yoy in 2021. We expect the divergence of property prices in different city tiers to continue, and for lower-tier cities with spikes in unsold inventory to continue suppressing local home prices.

ESSENTIALS

Waning investor confidence restrains developers’ debt raising capabilities from primary market. Country Garden, the largest developer in terms of sales value (around 6% market share), failed to gather enough interest for their US$300m convertible bonds. This has raised market concerns on Chinese developers’ debt raising ability from the offshore primary bond market. The failed fundraising effort could be attributed to the spillover effects from the series of default events in the industry, especially when the once investment grade developer Shimao is currently facing a liquidity crisis. Investors are particularly concerned over private developers’ actual liquidity condition and the scale of their off-balance sheet debts. Country Garden has decided not to proceed with the convertible bond issuance citing “unsuitable market conditions” and will look into other financing channels.

• Based on our compilations, there are only eight developers currently holding equal or higher credit ratings (Moody’s and Fitch) than Country Garden, with all of them SOEs except Longfor. Therefore, other smaller-scale private developers with lower credit ratings will likely face the same fate or may have to raise debts at higher costs in order to secure fresh funding from the offshore bond market. Liquidity condition for private developers may continue worsening considering: a) limited access to primary bond market (both onshore and offshore), b) tightened pre-sale funds regulations, and c) slowing property sales and homebuyers shunning private developers with high perceived default risk.

ACTION

Maintain UNDERWEIGHT on the sector. The recent favourable policies from the regulators have been favouring “high-quality” developers and especially SOEs, giving easier access to cheap financing from onshore bond market and securing credit facility from domestic banks. Spillover effects from recent default events will continue restrain private developers’ debt raising ability in the offshore bond market even for those with robust balance sheets. Slowing property sales and tightened pre-sale fund regulations may further accelerate their liquidity depletion. Meanwhile, we have yet to see any major M&A announcement from the large SOE names to acquire projects from cash-strapped private developers; the rather conservative approach is not surprising as the major industry M&A in the past were mainly initiated by private developers. We are still unable to gauge the scope and scale of the upcoming M&A, which determines how many cash-strapped developers will be involved.

We maintain BUY on CIFI with a target price of HK$6.66, derived from 40% (-0.5SD) discount to its estimated NAV of HK$10.37. We like CIFI for its: a) high exposure (85% of existing land bank) to Tier 1 and 2 cities, b) sound financial health with ample liquidity on hand (cash-to-short-term debt of 2.7x), and c) aggressive expansion of recurring income base which could compensate the declining profitability of the property development segment. CIFI reported 2021 annual contracted sales of Rmb247.3b (+7% yoy) and
completed 93% of their sales target.

We maintain BUY on Powerlong with a lower target price of HK$6.20, derived from 63% (historical mean) discount to our estimated NAV of HK$16.98. We like Powerlong for its: a) industry leading gross margin of 35.2% for 1H21, b) diversified assets with fast expanding shopping mall portfolio, c) 68.4% of its landbank is located in the Yangtze River Delta, and d) disciplined land acquisition with an average land premium of 3.5% in 1H21. Powerlong reported 2021 contracted sales of Rmb101.2b (+24% yoy) and completed 96% of their sales target.

We downgrade Sunac to HOLD with a lower target price of HK$9.60, derived from 77% (-2.5SD) discount to our estimated NAV of HK$43.12. We lowered our valuation target to -2.5SD from -1.5SD and factored in the share dilution from their recent share placement. The company: a) conducted two share placements activities in the past two months, b) aggressively disposed of Beike’s shares at a loss, c) placed their 5.1% existing Sunac Services’ shares, and d) received a US$450m interest-free loan from Mr. Sun Hongbin, the controlling shareholder of the Company, out of his own funds. These rather aggressive fund raising activities have raised concern on their liquidity condition though they claim they have Rmb160b worth of cash on hand as of 2021. Sunac reported 2021 contracted sales of Rmb597b (+4% yoy), 93% of their annual sales target of Rmb640b.