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Hong Kong and China Property 19 February 2019China Property
UBS Research THESIS MAP MOST FAVOREDLEAST FAVORED
COLI, Vanke, Logan and Times Evergrande, KWG and Agile
PIVOTAL QUESTIONS Q: Where are we in the China property cycle
After an upcycle in 2017-18 we expect a moderate slowdown in 2019, driven by the fading
contribution from shanty redevelopment and weaker purchase sentiment. We think this downcycle is
demand driven, unlike the supply-driven downcycles in H211-H112 and 2014. We view this as more
positive, as demand can be stimulated by government policy or mortgage rates/accessibility, while it
takes much more time for the market to digest oversupply.
”UBS Evidence Lab inside: cycle is healthier than past cycles; assume coverage with positive view” 1/2/2019
Q: Will developers' leverage cause them financial distress in the current slowdown
No. 1) Inventory in the system is lower than in the last two downcycles (see PQ1 discussion),
suggesting there is less inventory pressure sitting on their balance sheets 2) We think there is more
room for developers to preserve their cash flow by cutting back on land acquisition, as land costs are
the largest cash outflow item. 3) Listed developers have now gone through multiple downcycles, and
have experience in balance sheet management, as suggested by their lower short-term debt to cash
ratios. 4) Listed developers have become more geographically diversified, and are therefore less
exposed to a sharp slowdown in a single city or region.
”UBS Evidence Lab inside: cycle is healthier than past cycles; assume coverage with positive view” 1/2/2019
UBS VIEW
We view this downcycle as less severe: we view this downcycle as different from the past two
because it is demand driven. We think it will be easier for developers to weather than downcycles
driven by oversupply, in which it can take a long time to digest inventory. We think the sector’s current
close-to-trough valuations factor in a distressed situation for developers.
EVIDENCE
The September 2018 UBS Evidence Lab China Housing Survey suggests purchase intentions and
property price expectations have slowed, due to rising mortgage rates and macro concerns, instead of
too much supply. Our supply analysis suggests inventory remains lower than in the H211 and 2014
downcycles as new starts have been lower than in 2010 and 2013.
WHAT'S PRICED IN Valuation close to trough cycle in H211 and 2014: Using PE valuation, the MSCI China Real Estate
Index is trading at 5.5x, -1.1 SD since 2010, similar to the H211 and May 2014 trough cycles of 4.7x
and 5.3x. We think the market is concerned about developers' balance sheets and margins. After our
stress test on developer margins, we estimate downside risk of about 17% to 2019 consensus
earnings. This implies the MSCI China Real Estate Index PE would return to 6.2x, between -1 SD of 5.8x
and the average (since 2010) of 7.5x. We think margin risk may have been priced in at this level.
National new starts, sales area, and cumulative inventory—base case
Source:CEIC, UBS estimates
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500
1,000
1,500
2,000
2,500
3,000
3,500
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200
400
600
800
1,000
1,200
1,400
1,600
1,800
Jan
-05
Jul
-05
Jan
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-06
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-08
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Jul
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Jul
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Jan
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Jan
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Jul
-19
National new starts, sales area, and cumulative inventory -base case
Inventory in the pipeline (RHS)Completion (T12M, LHS)New starts (T12M, LHS)Sales area (T12M, LHS)
m sqmm sqm
Sector was adding stockSector was destocking
2019E: Sales -4%; New starts -3%
Inventory down 15% from peak
Hong Kong and China Property 19 February 2019Our interpretations of the GBA Outline
Development Plan
The Hong Kong government officially released the Outline Development Plan for
the GBA on 18 February 2019. The plan provides a broad, directional development
framework for the GBA, but lacks details on specific policies to facilitate
development. Our key takeaways from the plan include: 1) the government has set
the positioning for the GBA cities, especially for the four core cities (Hong Kong,
Macau, Guangzhou and Shenzhen); 2) the government has provided a time frame
for developing the GBA, as the plan covers the period from now to 2022 for the
near term, and to 2035 for the long term; and 3) since the plan only provides an
overall framework for developing the GBA, we believe the central government may
leave it to the local governments to roll out detailed policies at a later stage. Please
see Figure 1 below for a summary of the plan.
Figure 2: Summary of the Outline Development Plan for the GBA
Development time
frame
The plan covers the period from now to 2022 for near-term development, and extends to 2035 for long-term development.
Positioning of the
cities
- Hong Kong: To consolidate and enhance its positioning as an international financial, transportation and trade centre; to strengthen its status as a
global offshore renminbi hub and as a risk management centre; to promote the development of high-value-added financial, commercial and trading,
logistics and professional services, etc.
- Macau: To develop it into a world-class tourism and leisure centre, as well as develop a trade cooperation service platform between China and
Lusophone countries.
- Guangzhou: To strengthen its functions as an international commerce and industry centre and an integrated transport hub; to enhance its
functions as technological, educational and cultural centres.
- Shenzhen: To transform it into a modern and international city, as well as a capital of innovation and creativity with global influence.
Infrastructure
enhancement
- To build a rapid transport network in the GBA to reduce the travelling time among major cities in the GBA to one hour or less; to focus on
connecting the mainland with Hong Kong and Macau, and the east and west banks of the Peal River Estuary.
Manufacturing
industry layout
- To leverage: 1) the strengths of Hong Kong, Macau, Guangzhou and Shenzhen in innovation and R&D; and 2) the complete industry chains in
other GBA cities, to enhance collaboration and connectivity among industries in the GBA.
Hong Kong as a
financial hub
- To consolidate and enhance Hong Kong's status as an international financial centre; to establish a platform for investment and financing serving
the Belt and Road Initiative.
- To promote mutual financial markets access, including: 1) expanding the scale and scope of the cross-boundary use of the renminbi in the GBA; 2)
widening the scope for cross-boundary investment by Hong Kong and mainland residents and institutions.
Cooperation in social
security
- To explore allowing Hong Kong and Macau residents working and living in Guangdong to enjoy equal treatment as mainland residents in
education, medical care, elderly care, housing and transport.
Source:Outline Development Plan for the Guangdong-Hong Kong-Macao Greater Bay Area
GBA = Hardware + software integration
Conclusion: We believe the aim of the GBA development is to enhance the
region's competitiveness by lowering transaction cost and increasing integration
among cities, a positive to economic activities and property market. Our study of
Greater Tokyo Area’s development history since 1920 suggests the GBA would
enhance the