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Summary of Ground Check: Shanghai & Xiamen – Growth to Slow Down in 2014

Core Content

This report provides an analysis of the real estate market performance in Shanghai and Xiamen in the context of the 2014 market outlook. It highlights the trends in sales, average selling prices (ASP), and the impact of policy changes and market conditions on developers. The report also includes valuation data and recommends focusing on reputable developers.

Main Points

• Sales Trends:

  • Sales in both Shanghai and Xiamen have been strong year-to-date (YTD), with average daily sales increasing by 38% and 18% respectively in the first 10 months of 2013.
  • However, the report anticipates a slowdown in the fourth quarter (4Q) and for the full year of 2014, attributed to the absorption of pent-up demand and the tightening of mortgage loans in the later part of the year.
  • In Shanghai, October sales were better than expected due to no new policy announcements, sufficient supply, and strong developer cash positions.
  • In Xiamen, sales in the third quarter (3Q) slowed down, but full-year sales are expected to exceed the previous year's record.

• ASP Growth:

  • ASP growth in both cities has exceeded GDP and income growth, leading to policy uncertainties.
  • In Shanghai, demand has shifted to the outskirts due to rising ASP in the city center.
  • In Xiamen, limited land supply has supported ASP growth, making it challenging for local governments to control prices without introducing stricter policies.

• Policy Outlook:

  • There is no expectation of a nationwide policy post-third plenary session, but regional policies may continue.
  • The property tax pilot is likely to be expanded, especially in cities with high ASP growth.
  • Policies such as the self-use commodity housing initiative in Beijing are expected to be ineffective in curbing price increases due to the existing supply shortage.

• Developer Focus:

  • The report recommends focusing on strong, reputable developers: China Overseas (688HK), COGO (81HK), CR Land (1109HK), and Country Garden (2007HK).
  • These developers are seen as having strong fundamentals and are more likely to perform well despite the market slowdown.

Key Information

• Shanghai:

  • ASP in the city center has increased to above Rmb25k/sm.
  • Projects in the outskirts are well-received and ASP has risen more significantly than in the city center.
  • Oct sales were better than expected due to no new policy announcements and sufficient supply.
  • Mortgage rates have increased, but have not yet significantly impacted sales.

• Xiamen:

  • Inventory levels have dropped from 9 months' sales at the start of the year to 6 months by end-Oct.
  • Limited land supply (only ~758k sm in 10M13) has supported ASP growth.
  • Sales are expected to grow mildly in 2014 despite the slowdown in 3Q.
  • Property consultants anticipate further mortgage tightening towards the end of the year.

Valuation and Recommendation

• Valuation Metrics:

  • The sector valuation is not excessive at 6.4x FY14 PE, 0.9x P/BV, and 49% discount to NAV.
  • The report compares the valuations of various developers, highlighting their market caps, price targets, and earnings growth.

• Recommendations:

  • Buy recommendations are given to China Overseas (688HK), COGO (81HK), CR Land (1109HK), and Country Garden (2007HK).
  • Hold or NR (No Recommendation) is given to other developers, depending on their performance and market position.

Conclusion

The report suggests that while sales in Shanghai and Xiamen remain robust, the growth is expected to slow down in 4Q 2013 and for the full year of 2014 due to a high base effect and forward purchases. Policy uncertainties are rising, but the focus should remain on reputable developers with strong fundamentals. Valuation remains reasonable, and the sector offers potential for growth despite the challenges.