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2H18 A-Share Property Sector Outlook Summary

Core Content

This report provides an outlook on the A-share property sector for the second half of 2018, focusing on fundamental analysis, stock valuations, and potential risks. It is authored by Ou Yafei from GF Securities (Hong Kong) Brokerage Limited, with contributions from Le Jiadong, a research team member.

Main Points

1. Fundamental Analysis

• Major Cities: Fundamentals in major cities improved as expected in the first half of 2018. The central government continued its control policy, tightening regulations on cities with rapidly rising property prices.
• Local Governments: Local governments have implemented policies based on local conditions, continuing the trend from 2017 where policies for skilled workers were gradually rolled out.
• Sales Recovery: March 2018 is seen as a turning point for sales growth in major cities, with a recovery observed due to increased supply and price restrictions affecting liquidity.
• Third and Fourth-Tier Cities: Sales in these cities slightly exceeded expectations as developers took advantage of the time window for selling, aiming to increase returns.
• Forecast: The area sold in 2018 is expected to decline by 2% YoY, while sales value is projected to rise by 2% YoY. Local government debt maturity and urban construction investment bonds are expected to drive a peak period of returns in the next three years.

2. Stock Valuations

• Current Valuations: Mainstream property stocks are currently at low valuations, comparable to levels seen in 2014.
• P/E Ratios: Leading property stocks have P/E ratios of around 7x for 2018 and 5x for 2019 after dividend payouts.
• Absolute Returns: Despite low valuations, the industry environment (credit and inventory) and earnings stability are better than in 2014, suggesting that valuations should be higher than in 2014.
• Recommendation: The report recommends cheaply valued first and second-tier property leaders, emphasizing their potential for absolute returns.

3. Recommended Stocks

• First-Tier Leaders:

  • China Merchants Shekou Industrial Zone (001979 CH)
  • Vanke (000002 CH)
  • China Fortune Land Development (600340 CH)
  • Future Land (601155 CH)

• Second-Tier Leaders:

  • Zhongnan Construction Group (000961 CH)
  • RiseSun Real Estate Development (002146 CH)
  • Yango Group (000671 CH)
  • Guangyu Development (000537 CH)
  • Languang Development (600466 CH)

• Sub-Industry Watchlist:

  • Everbright Jiabao (600622 CH)
  • China World Trade Center (600007 CH)

Key Risks

• Tightening property controls
• Further tightening of liquidity and credit environment
• Supply improvement in key cities smaller than expected
• Rapid decline in transactions in third and fourth-tier cities
• Inventory levels falling short of expectations
• Continued tightening of financing for property developers
• Acceleration in the cost of interest within the property industry
• Weaker-than-expected growth at mainstream property companies
• Continued decline in valuations of mainstream property stocks

Rating Definitions

Company Ratings

Sector Ratings

Disclaimer and Legal Information

• This report is for informational purposes only and does not constitute an offer to buy or sell securities.
• The research is intended solely for use by clients of GF Securities (Hong Kong).
• The report may not be sold in certain jurisdictions.
• No liability is accepted for any loss arising from the use of this material, unless excluded by law.
• The views and opinions expressed are those of the analysts and may change without notice.
• GF Securities (Hong Kong) may issue other communications that differ from the views in this report.
• The report does not consider the specific investment objectives, financial situations, or needs of individuals.

Copyright

• Copyright © GF Securities (Hong Kong) Brokerage Limited.
• Unauthorized copying or redistribution is prohibited without prior written consent.