China Property:Downpayment relaxation unlikely to provide significant boost

First downpayment reduction in Sept 2015 fails to lift overall property market

    The PBOC announced on 2 February to lower downpayment requirements for first-home buyers in cities without HPRs (i.e. Tier-2/3/4 cities) from 25% to 20% Some market watchers see this a major policy stimulus, but from the property market response after the first downpayment relaxation on 30 Sept. 2015, we note that it had not led to any significant pick-up in nationwide property sales in 4Q15. In our view, weak purchasing power, changed ASP expectations, high absolute inventory in some Tier-2-4 cities, and an already high base of sales may not necessary lead to a significant boost to the property market simply by allowing higher leverage via a lower downpayment.

    Tier-2 cities have better responses to the Sept. 2015 downpayment relaxation

    Our analysis of MoM and YoY changes in property sales value, volume and ASP for the whole country and Tier-1,2,3,4 cities after the first downpayment relaxation (i.e. downpayment for first-home buyers lowered from 30% to 25% for Tier-2,3,4 cities) in 30 Sept. 2015 suggests no significant MoM increase in nationwide sales value and sales (i.e. no statistically significant pick-up in sales vs. the normal seasonal pattern) and no acceleration in YoY growth of sales value and volume in Oct, Nov, and Dec 2015. Instead, the property market in Tier-1 cities, which saw no downpayment relaxation, remained the strongest. Interestingly, Tier-2 cities as a group showed stronger positive responses in terms of sales value and volume (i.e. increases sales that are slightly better than the normal seasonal pick-up) in 4Q15. And if we further break down the Tier-2 cities by absolute inventory, we find tier-2 cities without inventory issues had stronger positive responses to the Sept 2015 policy relaxation than those with high inventory. Lastly, we observe no significant boost to property sales value, volume and ASPs for Tier-3/-4 cities as a group.

    Demand-side stimulus alone is unlikely to solve inventory problems

    Hence, we believe lowering downpayment alone can, at best, keep sales momentum stable only, (i.e. prevent sales from deteriorating further) and is unlikely to boost sales significantly unless it is accompanied by improved homebuyer sentiment and stronger purchasing power. Overall, to resolve the inventory issues in Tier-2, -3, and -4 cities, we believe there should be more focus on supply-side reforms (i.e. cutting land sales and controlling construction scale).

    Be selective: Buy COLI for its high and quality exposure to Tier-2 cities

    While we expect more property-related relaxations by the government (i.e. potential tax incentives and interest rate/RRR cuts), we expect the government to focus more on supply-side reforms (i.e. cutting land sales and controlling construction scale) to address the housing inventory issues in lower-tier cities. This suggests a significant demand-side stimulus is unlikely near-term. We recommend staying selective - Buy state-owned names with good earnings visibility and growth prospects from continued market-share gains: COLI, CR Land, Poly A, China Jinmao, CSCEC, and names with restructuring upside potential such as Joy City and Greentown. We maintain Sell on names with poor earnings visibility, high leverage and continued margin pressure: Sunac, Shimao, Evergrande, Country Garden, Yanlord, Agile, and Gemdale. We base our TPs on NAV discounts. Risks: unexpected economic, policy/political volatility.