China Property Sector
Partial re-rating to continue
• Continued local policy fine-tuning is priced in; nearterm policy shift at the central level is unlikely
• Presales performance will be a key share price driver
• Evergrande sales in 2Q may surprise on the upside
• Top picks: CRL (1109HK), Evergrande (3333HK), Country Garden (2007HK) and Central China (832HK)
Recent sales performance doesn’t justify further loosening from central government. The market is speculating that the central government may introduce more policies to boost sales in view of the recent economic slowdown. Yet, we view near-term central policy change as unlikely because a meaningful price correction has just begun, and developers were able to move sales with price cuts. While local governments may continue to fine-tune their policies to boost demand amongst first-time home buyers -- such as relaxation of the housing provident fund (HPF) policy -- this has largely been priced-in, with the sector outperforming MSCI China by 15% YTD.
Sales and valuations are keys. The sector is now trading at 7x FY12 P/E, a 53% discount to NAV and 0.9x FY11 P/BV (vs 2008 toughs at 4.5x P/E, 72% discount to NAV and 0.6x P/B). In our view, the share price performance in 2Q will depend on pre-sales by developers and their valuations. At this level, we view partial re-rating as being more likely than sector rerating. Thus, we suggest investors focus only on developers with good pre-sales outlooks and with attractive valuations.
Evergrande may see their sales surprise in 2Q. We estimate that Evergrande’s pre-sales in 2Q are likely to more than double its 1Q sales, as a result of its low base in 1Q, strong launch pipeline and mass market focus. Its recent new launches have seen a strong pre-sales performance and we expect it to report strong April sales recovery next week. Due to its weak 1Q sales, Evergrande, as the top 3 developer in China, is still trading at 5.7x P/E (vs Agile at 7.5x, Longfor at 9.4x). Its strong April and 2Q presales shall alleviate market concerns that its pre-sales may fall short of its FY12 target, and should boost its share price. Elsewhere, we also like Shimao, CR Land, Country Garden, and Central China for their decent 2Q pre-sales outlook and undemanding valuations.
Source/Extract/Excerpts/来源/转贴/摘录: DBS Vickers Research
Publish date: 07/05/12