China Overseas Land & Investment Ltd ADD, TP HK$28.20, HK$21.65 close
As one of the key SOE developers, we expect COLI to be a key beneficiary of its strong balance sheet. It trades at an attractive valuation of 6x FY22F P/E.
China Resources Land ADD, TP HK$48.20, HK$32.75 close
Given its SOE status and strong balance sheet, we believe that CR Land is one of the key beneficiaries of rapid consolidation in the property sector. Moreover, we also like its fast rental income growth over the next 3-5 years.
Longfor Group ADD, TP HK$49.50, HK$26.20 close
We think Longfor is one of the main beneficiaries of the property market’s rapid consolidation given its strong balance sheet. Strong rental income growth and stable property development earnings should allow it to deliver EPS growth of 10% p.a. in FY22-24F.
Mortgage boycott hurt developers’ Jul sales
- Developers’ Jul 2022 sales likely dropped by 26% mom and 41% yoy, weaker than expected, due to negative sentiment from mortgage boycott.
- CIFI and Logan stand out with about 20% mom growth on more sellable while distressed developers (Aoyuan, Sunac) continued to underperform.
- In order to reverse the weak sales in 2H22, we think that government needs stronger measures and dedicated funds to resolve developers’ liquidity issues.
- We expect weak sales to hurt market sentiment further. We recommend staying with defensive names CR Land, COLI and Longfor.
Weak Jul 22 sales, dragged by mortgage boycott
The China Real Estate Information Corporation (CRIC), one of the largest real estate brokers in China, expects sales of the 17 developers we cover to drop 26% mom and 41% yoy in Jul 22. This is lower than our and market’s expectations, due to 1) further weakening of market sentiment as a result of mortgage boycott and suppliers declining to pay loans, and 2) a higher base in Jun 22. Logan and CIFI are the only two which CRIC expect to register positive mom growth in Jul 22 of 24% and 19%, respectively. Meanwhile, KWG and CG fared better with mom sales falling by 4-12% mom. COLI and CR Land sales were also down 56% and 30% mom, respectively due to a relatively high base in Jun 22. Overall, we expect the market to react negatively to these weak sales in near term.
7M22 sales down by about 48% yoy with a low run rate of 35%
In 7M22, 17 developers’ sales were down about 48% yoy with State-owned developers (SOEs) and quality large developers comparatively outperforming (down 21-40% yoy). Meanwhile, distressed developers underperformed and CRIC expect their sales to fall by 60-80%. We think that listed developers’ sales could drop by c.30-40% yoy in FY22F.
Need stronger measures to boost sales in 2H22
In order to reverse the current weak market sentiment of property markets and capital market (debts and equity), we think that central government and regulators need to unveil the detailed plan of property relief fund or stronger measures, which are critical to resolve the developers’ liquidity issues and boost property sales in 2H22.
Stay with defensive names CR Land, COLI and Longfor
We stay Overweight on the sector because of supportive policy from regulators. We however think that the weak sales should hurt market sentiment on the sector in near term. We recommend staying with defensive SOE names such as CR Land and COLI or large quality private developers such as Longfor. For high beta names, we like CIFI and Country Garden. Key downside risks are Covid-19 outbreaks and more developers not repaying their debts. A re-rating catalyst is faster-than-expected sales recovery in 2H22F.