SOE Players Will Continue To Outperform In A Gradually Recovering Market
With more easing on the demand side and relatively cautious supply-side policies, we
forecast a modest recovery in sales starting from Jun 22. SOE developers will continue
to outperform in terms of sales, investment and finance. Ample saleable resources
place SOEs in a better position for a sales recovery while strong IP brands and
pipelines will further strengthen their market competitiveness. Initiate coverage on CR
Land (Target: HK$46.50) and COLI (Target: HK$31.10) with BUY ratings.
INVESTMENT HIGHLIGHTS
• Supply-side policies expected to remain relatively cautious in 2H22. The
government has started to ease policies on the property sector since 4Q21 but these
revisions are focused mainly on the demand side. Top officials have maintained a
relatively cautious tone on the supply-side policies during this round of policy easing,
reflecting their commitment to deleverage the property sector. In our base-case scenario,
top officials will maintain this policy mix in 2H22 (relaxed demand-side policies and
cautious supply-side policies). Considering: a) a lower base in 3Q21/4Q21, b) continuous
improvement in demand-side policies, and c) normalising market supply upon lifting of
lockdown measures starting from June, we expect the decline in property sales to narrow
from -23%/-27% in 1Q22/2Q22 to -15%/- 6% in 3Q22/4Q22. Property sales are expected
to decline by 18% yoy in 2022.
• SOE developers to continue outperforming in a challenging market. SOEs have
been gaining market shares since 2H21, as reflected by: a) rising share in developers’
bond issuance market (3Q21/4Q21/1Q22/2Q22: 65%/75%/78%/84%); b) better sales
performance among the top 100 developers in 5M22 (SOEs: -56% yoy vs POEs: -66%
yoy on average); and c) rising share in land acquisitions of top 100 developers
(12M21/5M22: about 62%/about 90%). We expect financial institutions and homebuyers
to continue to favour SOEs in a relatively challenging market (estimated 18% decline in
sales), due to: a) relatively low gearing (SOEs 53% vs POEs 83% on average for listed
companies), b) much better financial discipline, and c) implicit support from the
government.
• Ample saleable resources position SOEs for sales recovery in 2H22-2023. Based on
data from China Real Estate Index System (CREIS), attributable land acquisition/
attributable contracted sales for 5M22 was 29%/4% for SOEs/POEs, reflecting that SOEs’
saleable resources remain resilient while POEs may face notable contraction in landbank.
CR Land and COLI excel in land acquisition and sales recovery among both SOEs and
POEs: a) CR Land and COLI are ranked no.1 and no.4 respectively in terms of
attributable land acquisition in 5M22, and b) monthly property sales for COLI and CR
Land grew 30%/35% mom respectively in May 22, outperforming all the leading SOE
peers (+10% mom on average). The above statements also prove CR Land’s and COLI’s
capability to gain market share during an industry downturn.
• Diversified business model hedging against cyclical factors; growing IP portfolio
optimising revenue mix. Leading developers have started diversifying their operations into
various non-property development segments, namely property management, investment
properties (IP), rental housing, construction management etc. With an established brand and
strong pipeline, we expect sector leaders will see strong growth in recurring income. CR
Land and COLI are the respective segment leaders in shopping malls and single-title office
space operations, with a forecasted 20% and 25% three-year CAGR in recurring income.
• Maintain MARKET WEIGHT on China’s property sector. With better execution of
COVID-19-related restrictions and more project launches starting from June, we think the
worst period of sales has passed. However, as supply-side policies remained relatively
cautious, developers will still be facing great liquidity pressure. We also expect a gradual
recovery of demand as economic outlook turned gloomier recently. We maintain MARKET
WEIGHT on the property sector.
STOCK PICK
• Initiate coverage on CR Land with a BUY rating and target price of HK$46.50. This is
derived from a 20% discount to its estimated NAV of HK$58.10, implying 10.0x 2022F PE
and 1.1x 2022F P/B. Core net profit is estimated to grow at a CAGR of 13.5% over the
next three years. CR Land’s abundant saleable resources and high exposure to Tier 1
and Tier 2 cities put it in a good position to capture the sales recovery. Its recurring
income in 2021 was able to fully cover annual interest and dividend payments. Shopping
malls will remain its investment properties’ key growth driver, with its portfolio expected to
double by 2025. It still has ample room for future debt-raising activities while keeping its
BBB+ credit ratings.
• Initiate coverage on COLI with a BUY rating and target price of HK$31.10, derived
from a 25% discount to its estimated NAV of HK$41.48, implying 8.0x 2022F PE and 0.8x
2022F P/B. Core net profit is estimated to grow at a CAGR of 7.5% over the next three
years. COLI has abundant saleable resources in 2022 to back its healthy pace of
contracted sales growth. Its strong presence in Tier 1/core Tier 2 cities will help it better
capture the expected sales recovery in 2H22 and 2023. COLI’s investment property
portfolio will expand from 5.77m sqm in 2021 to 10.98m sqm upon the completion of
pipeline projects. At last, COLI has the highest credit ratings among peers, and the lowest
average financing cost of 3.55%.
CATALYSTS AND RISKS
• Catalysts: a) Stronger-than-expected property sales; b) easing of supply-side policies.
• Risks: a) Resurgence of COVID-19 in China and tightening of COVID-19 restrictions, b)
weaker-than-expected policy effectiveness in stimulating property sales, and c) Jun and Jul
22 seeing more developers’ bonds maturing. Further defaults will dampen investors’
confidence.