China Property:Look likes a bottom

Event

    After stock prices bottomed during first week of May, it seems like transaction volume has also bottomed. T1 cities’ weekly volume was up 14% compared with 9 weeks ago (last week of May), while T2 was up 12% last week when compared to 4 weeks ago (last week of June). Comparing the past four weeks with the prior four weeks, sales volume declined by 6% in T1 cities, but picked up 12% in T2 cities. In terms of YoY comparison, T1 and T2 cities declined by 8% and 13% YoY, respectively, over the past four weeks.Residential inventory level continued to increase. In Shanghai, Guangzhou, Fuzhou and Qingdao, inventory units all reached historically the highest levels but the escalation slowed and even declined a little bit. We expect the overall sales weakness and high inventory levels to continue in July and August, with sluggish customer sentiment.

    Policy tailwinds continue to blow in the property market, with more cities loosening home purchase restrictions (HPR). In Xi’an, house units smaller than 60 sqm and brick-concrete structured houses are excluded from the HPR.Households with the mentioned houses are qualified to upgrade, and any customers can purchase units under 60 sqm. HPR is also relaxed for non-local university graduates in Xi’an. Meanwhile, in Wuxi, large units above 90 sqm are removed from the HPR. There will no longer be up limits on the number of units purchased by both local and non-local customers for unit size above 90 sqm. The two directions of HPR removal in Xi’an and Wuxi suit their current situations.In Xi’an, the government targets encouraging more employment and young graduates to settle down, and hopes to support residences to upgrade their living conditions. However, Wuxi is suffering from high inventory, with 50% inventory units above 120sqm, so the policy is targeting to clear this part of the inventory.

    Mortgage rates are seeing a slight improvement in Shanghai. Big 4 banks are reported by the media to offer a 0.95x mortgage rate for first time-home buyers in Shanghai. Agriculture Bank of China confirmed it would adjust mortgage rates from Aug for selected individual borrowers. From recent news, we saw mortgage rate discounts appear in Beijing, Guangzhou and Nanjing, and benchmark mortgage rates come back to Shenzhen and Wuhan. Mortgage conditions improved significantly in key cities versus March. We think additional mortgage loosening will be the next catalyst to the China property sector.

    Outlook

    Major developers’ sales should continue to improve MoM in July due to their strong brand and flexible execution, while national sales should be flattish due to tight credit and weak buyer sentiment. On average, 32 key developers achieved 43% of their annual sales target by the end of June, which is lower than the 53% target achieved in 1H13. The sector is trading at a 5.6x PE, 0.8x PB and 38% discount to NAV.

    We expect additional loosening measures as well as positive comments from government officials, and we continue to be bullish on the China property sector. We target real estate investment growth to bottom by the end of Aug, and physical prices to bottom by the end of Sep; we believe stock prices have already bottomed and expect 50% growth on average from here in the next 6 months. We recommend small caps first, Kaisa, Sunac and KWG, followed by big caps: COLI, CR Land and Shimao.