China Real Estate:Slower July contracted sales not disappointing

July contracted sales take a breather. Eight developers we track have reportedJuly contracted sales with an average 45% m-o-m decline, but still delivering growthof 27% on a y-o-y basis. In particular, Longfor announced its July sales figureyesterday evening, recording a 38% m-o-m decline. Despite the moderated salesmomentum, we note that Longfor has already secured 94% of its 2017 sales targetas of July, which is the highest among stocks in our coverage universe. Given thestrong sales progress YTD, the sequential downtrend in sales is well within ourexpectations. In 1H17, developers have already achieved c58% of their FY17contracted sales targets on average, which provides some buffer to any slowdown.

    What to make of the slower contracted sales? In our view, developers are by andlarge trying to better manage their full year sales performance, as significantoverachievement leads to a high base of comparison for 2018. Whether or not thecurrent pullback in contracted sales is engineered by developers due to fewer projectlaunches or a reflection of persistent policy intervention remains unclear, although webelieve the former provides a fairer representation of prevailing market conditions.

    Divergent sales execution in 1H; some developers are still under pressure todeliver in 2H. While developers have broadly speaking done well YTD in terms ofsales execution, performance has been fairly divergent, with YTD (through June)contracted sales growth in the range of -49% to 140% y-o-y, and the mid-year saleslock-in ratio (versus target) in the range of 36% to 84%, respectively. In our view, thedivergent sales performance paints a different outlook in the 2H among stocks in ourcoverage universe. While stocks that are well ahead of the game such as Longforand Country Garden are likely to see a more notable slowdown in sales in 2H,several developers such as CRL, China Jinmao and KWG are still under pressure todeliver solid sales in 2H in order to meet their respective full year sales targets.

    Focus stocks – COLI, CRL, Longfor and Shimao (all rated Buy). We like COLI,CRL and Shimao given their attractive valuation. Longfor remains our conviction pick,although its implied upside to our TP is now lower given strong price performance(shares up 92% YTD vs HSCEI +18%).