China Property:Updates on COLI-CITIC /Policy tightening /Tour takeaways

Tightening policies in Shanghai and Shenzhen should affect ~28% demand, andcould be a negative catalyst for developers with high exposure in the area (CRLand, Shui On). However, as government is still supportive to first homepurchase, and with low inventory plus population inflow, we are still positive for2016. More importantly, after ASP increases over the past year, margin in the twocities have already increased to 30-40% hence even if ASP fell by 5-10%, marginwould still be accretive to developers. We treat the correction as an opportunity toaccumulate. Top picks are CR Land, Shimao, Longfor and KWG, and arecautious on COLI, Sino Ocean and Agile and expect more downside in them.

    COLI’s acquisition of CITIC’s assets could be even more dilutive thanexpected: CITIC announced its 2015 results on Mar 24, during which moreinformation on the disposal to COLI was announced. The asset portion as ofend-2015 attached to the CITIC Real Estate assets is at least Rmb160 bn, vs ourbase case of Rmb96-101 bn. There could be further NAV dilution when moreinformation is reported on the acquisition in our view. Moreover, CITICmanagement also said that the JV/commercial in Shanghai will not be part of theinjection. This again could provide further downside to our GAV estimates onthe CITIC portfolio. We reiterate our negative view on COLI, and prefer CRLand to such. More detailed explanations can be found here.

    Takeaways from recent site visits in Guangdong Province: We have justdone a site visit to Guangdong Province (details here). Peripheral of Guangzhouare showing weaker sentiments than those around Shenzhen, but due to multipleinfrastructure plans, projects around them are seeing stronger investmentdemand, which lead to ASP increase finally after a silent five-year. Projects inZhongshan also attracted incremental demand from Shenzhen. Mortgage is stillloose, and P2P lending is not common in the area due to small amount of downpayment. That said, projects with bad locations are still suffering, and among allAgile has the most projects in the problematic area and is likely to be alaggard, in our view. In contrast R&F, KWG and COLI could be beneficiaries.

    Shanghai’s tightening policy may impact ~28% demand: Shanghai officiallyannounced tightening measures, which are within expectation, more onreiterating existing regulation and tightening non-locals’ eligibility to buy homes(details here). We think the most impactful policy is the lengthening of tax prooffrom 2- to 5-years, which could directly bar 16% of home buyers from buyinghome, and another 12% may be reluctant to buy second home due to increasedinterest cost (Centaline). However, just as Beijing, which implemented such apolicy back in Feb 2011, transactions may slow down in the next 2-3 months,but later there should be ways to get around it. We remain positive for the fullyearas inventory is low. Separately on LTV tightening, our previous analysis(details here) suggest a partial tightening is NOT useful in cooling the market.

    Shenzhen’s tightening focus more on lowering LTV: Compared toShanghai’s tightening, Shenzhen’s tightening focuses more on controlling theLTV and lending on down payments. We think this can help decrease financialrisk and avoid formation of subprime, and is thus positive. By our analysis,lending on down payment accounts for less than one-third of transactions, and itincreases LTV by at most 10%, versus average LTV of 55% from bankmortgages. Hence the impact should also be limited.