20180117-招商证券_香港_-China_Property__2018_outlook__a_revitalizing_year_18页_2mb

China Property Sector Outlook: 2018

Core Content and Key Insights

The China property sector is expected to experience a revitalizing year in 2018, with tightening policies nearing their peak and a potential mild loosening in the next 6-9 months. This shift is anticipated to benefit developers by reducing land costs and improving profitability.

Main Points

• Policy Tightening is Over: The tightening measures introduced in early 2017 have effectively suppressed the residential market, but the strictest phase is expected to fade by 2Q18e. Developers are likely to see a turnaround in sales growth.
• Land Supply and Cost Trends: Land supply has increased significantly since 2H17, with land premium rates declining. This is expected to lead to lower land costs in 2018, which in turn could boost developers' margins by 5-10%.
• Sales Performance: Most developers met their 2017 sales targets, with a total contracted sales growth of 51% YoY. We expect at least 30-40% of sales targets to be achieved in 2018e.
• Sector Valuation: The sector is currently trading at 8.5x forward P/E, which is 1 standard deviation above the historical average. This suggests the valuation is undemanding and there is potential for re-rating.
• Top Picks: Developers with strong balance sheets and aggressive land acquisition strategies are favored. Vanke (2202 HK) and Yuzhou (1628 HK) are highlighted due to their solid financial positions and high sales growth visibility.

Key Risks and Catalysts

• Risks:
  • Further credit tightening
  • Unexpected decline in ASP (Average Selling Price)
• Catalysts:
  • Earlier than expected loosening of tightening policies
  • Improved financing conditions and faster contracted sales growth

Sector Performance

• Outperformance in 2017: China property stocks outperformed HSCEI by 60% in 2017 and by ~20% YTD.
• Sales Growth: Developers are expected to achieve a YoY growth of 30-40% in 2018e due to improved macroeconomic conditions and policy adjustments.

Financial Highlights

Demand Analysis

• Residential Sales: Suppressed in 2H17 due to tightening policies, but expected to stabilize and grow by 2Q18e.
• Long-term Demand Trends: Newborn population and aging demographic are expected to drive housing upgrades and senior care housing demand, shifting the focus from first-time buyers to upgraders.
• Rental Market: Expected to accelerate in 2018 with more cities introducing "for rental only" land sites and incentive measures. Rental yields are low but are anticipated to improve as land costs decrease and demand rises.

Supply Analysis

• Land Supply Increase: Land supply in GFA terms increased by 71% from May 2017 to Nov 2017, and is expected to grow by 10-15% in 2018e.
• Construction Activity: New starts of residential construction have been recovering since 2016, with a rebound to 9% and 8% in 12M16 and 12M17e respectively. Expected to grow by 12-15% in 2018e.
• Inventory Levels: Expected to rise slightly in 2H18e, reaching up to 18 months, indicating a more stable market environment.

Sector Valuation

• Valuation: Sector is currently at 8.5x forward P/E, above historical average of 7.6x.
• Re-rating Potential: Expected to continue as more developers revise their 2018e sales targets upward.
• Peer Comparison: Developers with lower net gearing and higher sales growth visibility are favored, with Vanke and Yuzhou as top picks.

Conclusion

The China property sector is positioned for a recovery in 2018, supported by a slowdown in tightening policies, increased land supply, and improving macroeconomic conditions. Developers with strong balance sheets and strategic land acquisition plans are likely to outperform. The sector is undervalued and offers good entry points for investors.