China property CHINA
7 September
Inside
Entering mid cycle, not end of cycle 2
Re-positioning and our revisions 6
4Q09 anddemand/supply
dynamics 10
revamp andprices
outlook 17
X-Ray Screening 20
Stage of normalisation but
not tightening 25
property business strategy 30
Policy housing impact limited
in short term 34
Channel checks 38
Commercial property sector 41
Risk 45
Companies 48
Appendices 98
Analysts
Eva Lee, CFA
852 3922 3573 eva.lee@macquarie
Matt Nacard
852 3922 4731 matt.nacard@macquarie
Chris Cheng
852 3922 3581 chris.cheng@macquarie
Eugene Cheung
852 3922 4627 eugene.cheung@macquarie
Huei Lay
852 3922 4072 huei.lay@macquarie
Entering mid cycle, not end of cycle
Mid-cycle consolidation offers good buying opportunities
The China property sector has corrected by about 20% on a cap weighted basis
from its peak due to investor worries over policy tightening. We believe this is
part of a mid-cycle consolidation that follows the sharp, early-cycle recovery rally
seen in the first half of . But in our view, it is not the end of this cycle. During
this ‘mid-cycle’, we believe the outperformers will be stocks that score well on
key characteristics – financial strength and flexibility, specific earnings exposure,
strong cashflow and good growth prospects. Three of our top picks that have
these characteristics were also outperformers in the previous in this mid-cycle
period in 2Q06 when tightening concerns brought the sector down by around
35%. They are COLI, CRL and Yanlord. We believe that with 23% average
upside potential to our target prices for the China property sector, we are now
presented with an excellent opportunity to add to holdings in the sector.
Supply not a concern; inventory tight but policy not
The drop-off in levels of property under development in the past year together
with the rapid sales rebound in 1H09 has lowered China’s residential inventory
from 14 months in Decemberto eight months now. Despite construction
activities showing a strong recovery in June, we expect the new supply of
property will only come on stream 1.5 to 2.5 years from now. As a result, supply
will continue to remain tight, particularly in the Yangtze River Delta and Western
China areas. Even though we do not expect the central government to pump the
market with ultra-easy credit as it did in 1H09, we believe policy is unlikely to be
tightened with the external orientated sectors still very vulnerable and growth in
infrastructure spending likely to fall in .
Roll over to : EPS up ~17%, NAVs up 14% & TP up 10%
We are raising our valuation by an average of 14% and our target prices by 10%
on average on a cap–weighted basis to factor in the refreshed prices in CY09
and new assumptions for CY10. Our top picks are COLI, CRL, Agile, Yanlord
& Sino Ocean, which still offer a collective 25–40% upside potential from
current levels. COLI is the real national brand with a strong balance sheet to
capture land acquisition opportunities. CRL is the rising star just starting on its
fast track of material earnings growth. Agile is the end user developer and its
success in Hainan proves it is not only a Guangdong brand. Yanlord is a quality
developer both for stock investors and property buyers and a YRD player that we
want to exposure to. Sino Ocean is a professionally managed company but still
cheap among SOEs.
Fig 1 Valuation table for key Outperform/Underperforms
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