20140604-DBS_Group-Ground_Check__Beijing_and_Tianjin–_Better_than_2008_and_2011_19页_1mb

Ground Check: Beijing and Tianjin – Better than 2008 and 2011 Summary

Core Content

This report analyzes the real estate market conditions in Beijing and Tianjin, focusing on policy changes, market sentiment, and sales performance in the second half of 2014. It also includes valuation data for key real estate companies, highlighting the potential for market recovery and investment opportunities.

Main Points

Policy and Market Conditions

• Tianjin:

  • Loosening administrative policies are expected, including allowing residents to purchase a third property and enabling multiple-home owners to buy in Binhai New Area as long as they don't own property elsewhere.
  • The Lanyin Hukou policy is set to end by end-May, which previously facilitated student enrollment in universities, affecting housing demand. This is expected to cause a drop in June sales.
  • Price cuts are anticipated to stimulate sales, with a 10% price cut being sufficient to double sales. However, further cuts may have diminishing returns.
  • Credit environment is expected to improve, with banks increasing cash disbursements to support first-time home buyers, though interest rates remain unchanged.
  • The government is considering a shift from capping price increases to setting a floor on price cuts, as seen in Hangzhou and Dongguan.

• Beijing:

  • The launch of self-use commodity housing has intensified "wait-and-see" sentiments towards regular housing, with 20k units planned for 2014 and 50k for 2015.
  • Anti-corruption measures have affected the demand for upgrader properties, as civil servants now make up a smaller portion of the customer base.
  • Credit conditions have improved, with some banks supporting end-user demand, though not at the common rate.
  • Market conditions are better than in 2008 and 2011, based on sales office traffic and sell-through rates.
  • Sales in May are similar to April, but a strong rebound in June and July is not expected due to hot weather and a traditional low season.

Sales and Inventory Trends

• Sales recovery is expected to be faster for mass market products than for mid- to high-end ones, as buyers with urgent needs are likely to return once prices stabilize.
• Inventory levels are high, with current levels requiring 24–25 months to clear. Including developments-in-progress, Tianjin's inventory could take up to 46 months to clear in Binhai New Area.
• Government pressure on developers to complete projects within two years of land purchase may ease if inventory levels continue to rise.

Valuation and Investment Recommendations

• The real estate sector is currently trading at 5.3x FY14 PE and 0.7x P/BV, compared to 2011 troughs of 4x and 0.5x.
• The sector may not reach the peak PE levels of 2012 (8.9x) or 2009 (19x), but is expected to trade up to 7x FY14 PE, implying a 32% upside.
• Top picks include Country Garden, COLI, Shima, and COGO, with buy recommendations and target prices.

Key Companies and Valuation Metrics

Key Insights

• Market sentiment in both cities is more positive compared to the 2008 and 2011 downturns.
• Price cuts are seen as a potential catalyst for sales recovery, with a 10% cut being effective.
• Credit policy improvements are expected to support the sector, though the impact may be limited.
• Inventory levels are a concern, with developers potentially slowing construction if they continue to rise.
• Valuation is currently at a discount compared to historical levels, suggesting potential upside for the sector.

Conclusion

The real estate market in Beijing and Tianjin shows signs of recovery, supported by policy loosening and improved credit conditions. While sales are expected to gradually improve, especially for mass market products, the sector remains at a valuation discount compared to historical levels, presenting potential investment opportunities.