China Property:Taking a look at latest mortgage tightening

Mortgage tightening to have different impact on different developers

    Recent mortgage tightening has led to overall share price weakness. We seethis as an opportunity to pick up quality leaders like COLI, COGO, CR Land.

    Mortgage tightening towards year-end expected, but will affect sales pace

    In the past few years, mortgage tightening has always happened as year-endapproaches, as banks’ overall loan quotas start to get exhausted. Hence, thelatest mortgage tightening is not unexpected and should not be viewed as newtightening measures by the government. That said, the tighter mortgagesituation has come earlier this year and will nonetheless affect the sales paceof the small-medium-size developers, like Sunac, in 4Q13.

    Which developers will be affected more by year-end mortgage tightening?

    In our view, developers with the following characteristics will be affected moreby the latest mortgage tightening: 1) a focus on high-end properties in Tier-1and bigger Tier-2 cities rather than end-user properties; 2) a high % of 2013sales target not yet achieved; and/or 3) a high net gearing and/or those thathave been aggressively buying land in Tier-1 and bigger Tier-2 cities recently.

    With tighter mortgage situations and the potential impact on property sales,these developers should now face a bigger dilemma between sales speed andsales prices, and have to choose between better cash flow and better margins.

    Which developers will be less affected by year-end mortgage tightening?

    For each property project, there normally would be a total project loan quota –for project financing and homebuyers’ financing. And if a developer can drawdown less on project financing (e.g. construction loans), a higher % of theproject loan quota should become available as mortgages for homebuyers. Inthis case, sales of that developer should not be affected that much by the yearendtighter mortgage situations. Among the listed developers, COLI, COGO, CRLand have been relying much less on domestic project financing (given easieraccess to cheaper bank financings in HK), hence their projects should havemore mortgages available for homebuyers, and sales should remain solid.

    Some developers now face greater risks of missing 2013 sales targets

    The listed developers we tracked have by end-Aug 2013 on average achieved66% of 2013 full-year sales targets. The outperformer is COLI, as it hasachieved almost 100% of its original sales target (82% of its revised up target).

    Yet, some developers have achieved less than 60% of their 2013 full-year salestargets, and they include SZI, Sunac, Agile, Hopson, Powerlong, Fantasia, andBeijing Capital Land. In a tight mortgage environment with the likely impact onsales pace, these developers could face higher risks on meeting 2013 targets.

    Government likely to continue to support end-user properties in Tier-2,3,4 cities

    While we have a structurally positive view on long-term property demand inChina, there are segmental and geographic differences that underpin our stockpreferences. For residential, our top picks are developers focused on endusers:COLI, COGO, CR Land, R&F and Country Garden. For new-formurbanization and social housing, we like Kaisa, CCRE and CSCI. For expectedgrowth in domestic consumption, we prefer Hang Lung Prop and Wharf.

    However, developers with high exposure to high-end, Tier-1/bigger-Tier-2 cities– such as Sunac, Sino Ocean, Yanlord and Agile – should face biggerchallenges. Key risks: unexpected economic volatility and changes in policies.