China Real Estate:Caution,Entering a period of lower risk appetite
Taking a breather: After a record-breaking nine months, the outlook for the sector hasnow become more mixed. We think some stocks have overshot, while others still offerupside. China’s property stocks are up an average of 95%, outperforming the HSI(up 28%), representing the sector’s strongest ever performance for this three-quarterperiod. The rally has been driven by stronger-than-expected sales, but we see tighteningmortgage conditions as a risk that could derail momentum. We now expect risk appetiteto dwindle towards year-end. In terms of valuation, our coverage universe, excludingcommercial property plays, trades at 7.9x 2018e PE, a 38% NAV discount, close to onestandard deviation (1 SD) above the historical mean.
Possibility of disappointment amid exceptionally high growth expectations:The one thing that stands out from the interim 2017 results season is that developersremain optimistic, as they have provided ambitious guidance on growth. In our view,there is significant risk of disappointment if contracted sales are unable to keep up withthe strong YTD momentum, especially going into 2018.
Tweak earnings and NAV estimates after marking to market project average sellingprices: We also narrow the target discount of Agile (3383 HK), Longfor (960 HK),Shui On Land (272 HK), Sino-Ocean (3377 HK) and SOHO China (410 HK) to reflectimproved operational performance YTD. This results in an average 16% increase in ourtarget prices for our coverage universe.
Select opportunities remain – we still prefer Buy-rated COLI (688 HK) andLongfor (960 HK): While we are striking a more cautious tone, we think upsideremains in select names. We like COLI as it is a quality laggard, while Longfor hascontinued to demonstrate an ability to scale up while maintaining competitiveprofitability. On the other hand, we downgrade four stocks to Hold on valuation –China Jinmao (817 HK), GZ R&F (2777 HK), Joy City (207 HK) and KWG (1813 HK)(apart from GZ R&F, they are all consensus Buys). Despite the strong share priceperformance, the average estimated 2017 dividend yield for our coverage universe is4.1% vs 3.4% in HSI. Tightened liquidity remains a key risk that could impactcontracted sales momentum.