Upgrade to OW on policy and low valuations
? We believe the sector bottomed out in mid-Mar and see supportive policies
boosting share prices further. We upgrade the sector to OW from UW.
? Despite recent strong rallies, the sector still trades at attractive valuations of
0.5x P/BV, 1.5 s.d. below its 5-year average, and 5x FY22F P/E.
? Our P/BV analysis implies potential share price upside of 76% on average
for developers, with 96% upside for non-SOE developers.
? We expect non-SOE share prices to outperform SOEs’ when more investors
turn risk-on. Top picks: Longfor, CIFI, CG, KWG and Times.
Upgrading to Overweight (OW) from Underweight (UW)
We upgrade the China property sector to Overweight from Underweight – we downgraded
in Sep and Dec 2021 – on supportive policies ahead and attractive valuations. The State
Council and four regulators issued strong statements in support of the property sector on 16
March and stressed the importance of maintaining a stable property market and reducing
developers’ liquidity issues with timely, powerful and effective measures. We believe the
sector’s valuation bottomed out (0.35x FY21 P/BV) in mid-March and factors in developers’
default risk and most of the negatives (poor FY21 results, delayed announcement of
audited reports, auditor change and trading suspension).
Strong policies should lead to lower default risk for developers
Given the likely strong supportive measures ahead, we may see fewer developers
defaulting than expected, despite some still being unable to repay their debts. Faster
approval of mortgage and project loans, lower down-payment and mortgage rates, less
strict rules for escrow accounts and government subsidies for home purchases could be
some key measures implemented by regulators in the near future, in our view. Policies
could be stronger than expected in light of the unexpected spread of Omicron in China.
Sensitivity analysis suggests a 76% potential share price upside
Despite the recent robust share prices rallies, the sector still trades at an attractive 0.5x
FY21 P/BV, 1.5 s.d. below its 5-year average. Our sensitivity analysis shows potential
upside of 76% on average for developers’ share prices if a more reasonable P/BV
benchmark is assumed, with 19%/96% upside for state-owned developers (SOE)/non-SOE.
Non-SOE developers could outperform when investors go risk-on
SOEs significantly outperformed non-SOEs in the past year, with share prices rising 18%
on average vs. a 63% decline for non-SOEs’. Driven by strong policies and the sector’s
attractive valuation, we believe the trend could reverse when investors’ risk appetite
increases. We saw the share price performance gap between SOE and non-SOE narrow
significantly to 13% in the past month from 81% 12 months ago.
Top picks: Longfor, CIFI, CG, KWG and Times
Based on the above analysis and from a risk/reward perspective, we prefer non-SOE
developers with lower-than-peer default risk. Longfor, Country Garden (CG) and CIFI are
the quality non-SOEs we like. For high beta names, we like KWG and Time, for which we
assess liquidity risk as manageable. For SOEs, CR Land is our preferred name. Please
refer to page 9 for key risks related to our upgrade.