China Property:Quality names touching PB troughs but most others not yet

Share price adjustments provide valuation support for COLI

    Property stocks’ share price performance has been under pressure recently due to concerns on potential monetary and property market policy shifts by the government, and the share prices of big-cap, quality names like COLI were also affected. On our analysis, after recent pullbacks, we see good valuation support for COLI, CR Land, Longfor, with their PBs reaching or close to respective historical troughs, which in our view presents good buying opportunities. In addition, we also expect COLI to benefit from the potential changes of policy and the liquidity environment for more growth-enhancing landbank acquisitions.

    Quality names are now at or close to historical P/B troughs

    On our analysis, currently the average PB of the 18 major listed China developers is 0.67x, which is already lower than the troughs of 0.69x seen in the 2008 financial crisis and 2011-2 tightening. Overall, the average PB of these developers has not yet reached the all-time low PB of 0.48x seen in 2013-4, However, selected names are now at attractive valuations. For example, as of 16 May, COLI and COGO are both trading at historical troughs. In addition, Longfor and CR Land are also trading at 4% and 6%, respectively, above their historical troughs. On the other hand, excluding those developers that are at PB troughs, as well as Vanke - A (halted for trading since 18 December 2015), the other developers are still trading at an average of 38% above their all-time PB troughs. Moreover, companies such as Sunac/ Yuexiu/ Evergrande are trading at 45% / 60% / 123% above their historical PB troughs.

    Potential liquidity tightening and policy shifts would benefit COLI

    The likely tighter monetary and property market policies should increase the difficulties in getting new loans or loans at lower costs for non-state-owned developers, hence we see rising risks for developers with high gearing (e.g., Evergrande), and with aggressive land acquisitions in 2015 and 2016 YTD (e.g., Country Garden, Evergrande and Sunac). In contrast, for those with strong financial positions and with expertise to time the market, like COLI, we think such changes would lead to better opportunities for the company in land acquisitions at more rational prices as a result of a cooling down in the property and land markets.

    Buy quality names such as COLI, COGO, CR Land, Longfor; Sell Evergrande

    Our top pick is COLI, as we expect solid property markets in T-2 cities for the rest of 2016 and we see potential positive stock-specific catalysts for COLI to come from the proposed merger of CITIC property business with COLI, which would transform COLI into the largest and strongest state-owned developer in the China property market. We also prefer developers with high exposures to Guangzhou, Tier-2 cities, and developers that are more disciplined in landbank purchases in open land markets and can acquire new landbank via other sources: R&F, Longfor, Joy City, and China Jinmao. We base our target prices on NAVs. Key risks: unexpected economic and political volatility.