Near-term policy support likely
? June property sales for 30 key cities in China are likely to deteriorate with declines of 42% yoy and 18% mom, based on our estimates.
? Given property sector’s value in overall China economy and job creation, we think the weak sales could lead to new supportive measures in near future.
? We highlight eight key measures which we believe could help boost developers’ sales and ease their liquidity problems, if implemented.
? We advise investors to stick to state-owned players, such as CR Land & COLI, or private player Longfor. In high-beta names, we like Country Garden.
June property sales for 30 key cities likely disappointing
High frequency data from Wind – one of the key data providers in China – indicate that June property sales in 30 key cities in China were disappointing. Based on the first 25 days of June, we estimate that collective property sales for 30 key cities fell 42% yoy and 18% mom, vs. typically double-digit growth of 10-20% before liquidity issues started.
Tier-1 cities likely fared better
According to Wind data, we expect property markets in tier-1 cities to fare slightly better with yoy/mom declines of 32%/9% in June sales, vs. tier-2 and tier-3 cities which could see declines of 34%-47% and 16%-23%, respectively. We believe tier-1 cities likely fared better in June due to better economic growth and price outlook in these cities.
Sales in tier-2 and tier-3 cities under more pressure
Tier-2 and tier-3 cities typically fare worse than tier-1 cities during a market downturn, dragged by slower economic growth and higher home ownership in lower-tier cities, in our view. Based on our estimates and channel checks with local property agents, inventory levels in some tier-2 and tier-3 cities could be as long as 2-3 years currently, which are 12- 18 months longer than the levels in tier-1 cities.
State-owned developers likely to outperform in June
Overall, we expect state-owned developers (SOD), such as CR Land and COLI, to report better sales compared with private developers, given their better reputation, stronger balance sheets and more sellable resources in June– the last month of 1H when state-owned developers typically pursue faster sales growth.
Potential measures which could support the sector
Following are some key measures we think regulators could implement to support the property market. To boost property sales, we believe regulators could 1) lower the downpayment to 15-20%, 2) offer more interest discounts on mortgages, 3) advise policy banks to provide funds for home purchases in small cities, and 4) cancel nationwide home purchase restrictions. Meanwhile, to solve developers’ liquidity problems, we believe regulators could 1) ask policy banks to set up property funds to provide funds to developers facing liquidity issues, 2) instruct banks to lend to developers, especially private ones, 3) relax developers’ presales cash custody account, and 4) guarantee developers’ debts.
Top picks: CR Land, COLI and Longfor
Given the importance of China’s property sector in the overall economy, we believe that the latest deterioration in property market sales could lead to a new round of supportive measures in the near future. We reiterate our sector Overweight on potential policy loosening. We prefer state-owned CR Land and COLI, and private players Longfor and Country Garden. Key sector risks include further declines in property sales and more developer defaults in 2H23F; strong policy support and unexpected sales recovery are key potential re-rating catalysts for the sector.
China Overseas Land & Investment Ltd
ADD, TP HK$24.00, HK$16.32 close
As a major state-owned developer with a strong balance sheet due to the recent robust sales momentum, we believe COLI is likely to be a key beneficiary of the rapid consolidation in China’s property market.
China Resources Land
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CR Land is one of the major beneficiaries of the rapid consolidation in the property market due to its SOE status and strong balance sheet, in our view. We also like its high rental income growth (excluding Covid-19-related rent relief) over the next 3-5 years.
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We believe Longfor Group’s solid balance sheet, rapid growth in recurring income, and regulatory support should lead to better valuations.