中金公司2012房地产行业研究报告
Investment Focus
December 2, 2011
Real Estate
RESEARCH
Darkness Before Dawn; Policy to Turn
Peter Hongwei BAI
SFC CE Ref: AMB141
baihw@https://www.360docs.net/doc/001703207.html,
Eric Yu ZHANG
zhangyu3@https://www.360docs.net/doc/001703207.html,
Shaoyan LIU
liusy3@https://www.360docs.net/doc/001703207.html,
2012 Property Sector Investment Strategy
Action
The physical market is approaching its worst period, likely in 2Q12, but property prices are unlikely to experience deep corrections given a sound economic situation and money supply. Policy is expected to loosen by mid-2012, helping the industry bottom out. We expect divergences to widen for different cities, regions, property types, as well as companies. Large players with projects in Tier-1/-2 cities and in central and western regions will outperform peers; and commercial property companies will also benefit from rising rents and structural divergence.
Reasoning
Industry unlikely to suffer deep corrections. New home market to continue to deteriorate until inventory peaks in 2Q next year, but we think the downside risk is limited, the physical market will get support from still decent GDP growth, moderate loan growth and reversing policies. We believe the booming home market will continue after a medium-term healthy correction. Policy easing likely happen in 1H12, along with weakening of the sector, the central government might be tacit about local relaxation. The roadmap for policy loosening is: credit easing →RRR cut →Fine-tuning from local governments →IR cut →HPR canceled.
Structural divergences to widen in 2012. We are optimistic on trading volume picking up in tier-1/-2 cities, while tier-3/-4 cities may face pressure from declining volume. Central/western regions and commercial properties are likely to outperform the market.
Fundamentals analysis on new home market. With driving factors such as home upgrade demand, financing support, rapid growth in both the urbanization rate and macro economy, the long-term trend for China's property market in the next 10 years is still upward. Fast expansion, high money supply and household savings resulted in the rapid growth of property prices, but international comparison shows that the value of China’s housing stock is still at a reasonable level. Bubbles will shrink, however they are hard to burst, mainly thanks to the low financing leverage.
Valuation and recommendation
As long-term investment value emerges, we believe property stocks have already priced in a 30~40% decline in property prices,while we expect a 20% correction at most. It is time for long-term investors to accumulate property names. However, in the very near term, stock prices may continue to face downside risk given that the physical market is approaching its worst period, likely in 2Q12. Investors should be defensive and stock-specific in 1H12. We prefer CRLand, COLI, and Longfor in large plays, and Franshion, Shui-On Land among commercial property developers.
Risks
Big corrections in the macro economy or further extreme tightening measures.
Contents
Our stock picks (6)
Names we like (6)
Names we don’t like (6)
Our logic for choosing stocks given current market conditions (9)
Long-term investment value emerges (9)
Not free of short-term risks (10)
We prefer large players for their defensiveness in 1H12 (10)
Commercial property developers are another defensive choice (14)
Focus #1: What is the long-term trend in China's property market? (15)
Property stock is reasonable, while structure leans toward residential (15)
Market to cool down, but unlikely to collapse amid the economic restructuring (17)
Long-term trend is still upward (21)
Focus #2: How should we look at the current market correction? (24)
Market is now experiencing a medium-term correction towards the long-term trend (24)
Market to enter a new phase after correction (24)
Focus #3: What is the actual supply-demand picture? (28)
Cumulative demand and supply are balanced historically (28)
Potential supply is huge, but will only become available incrementally (28)
Demand to be driven gradually (29)
Price bubbles exist, but will cool down (30)
Price-to-income ratio to improve as price correction continues (31)
Rental yield will become more reasonable (31)
Focus #4: What is our view on the physical market in 2012? (33)
Physical market is approaching its worst period, bottom likely in 2Q12 (33)
No sharp corrections are expected (34)
Policy to turn in mid-2012 (36)
Significant slowdown for industry indicators expected in 2012 (36)
Structural divergences to widen (38)
Focus #5: How are conditions affecting developers in 2012? (42)
Financial position is better now than in 2008 (42)
Developer divergences to widen (43)
China Resources Land (01109.HK): BUY (45)
China Overseas Land & Investment (00688.HK): BUY (46)
Longfor Properties (00960.HK): BUY (47)
Sunac China Holdings (01918.HK): BUY (48)
Agile Property Holdings (03383.HK): BUY (49)
Beijing North Star (00588.HK): BUY (50)
Franshion Properties (00817.HK): BUY (51)
Shui On Land (00272.HK): ACCUMULATE (52)
Sino Ocean Land Holdings (03377.HK): ACCUMULATE (53)
Country Garden (02007.HK): ACCUMULATE (54)
Glorious Property Holdings (0845.HK): ACCUMULATE (55)
Powerlong Real Estate Holdings (01238.HK): HOLD (56)
Greentown China Holdings (03900.HK): HOLD (57)
Shenzhen Investment (00604.HK): HOLD (58)
SOHO China (00410.HK): HOLD (59)
Guangzhou R&F Properties (2777.HK): HOLD (60)
Shimao Property Holdings (00813.HK): HOLD (61)
Evergrande Real Estate Group (03333.HK): NOT RATED (62)
Appendix: The long-term trend of China's housing market (63)
Assumptions on major economic indicators (67)
GDP projections (67)
Urban population and urbanization rate projections (69)
Figures
Figure 1: Reasons for specific stocks (7)
Figure 2: Comparable valuations (8)
Figure 3: Share prices reflect 30~40% property price declines (9)
Figure 4: Current valuations vs. 2008 bottom (10)
Figure 5: Safe valuation for big names in 2008 (11)
Figure 6: Listcos's P/E trend in 2007~08 (11)
Figure 7: Safe valuation for big names in 2011 (11)
Figure 8: Listcos's P/E trend in 2010~11 (12)
Figure 9: Leading developers have better performance in bearish market (12)
Figure 10: Market share increased more quickly in market downturn (13)
Figure 11: Gearing ratios of leading players much lower (13)
Figure 12: Less short-term pressure on leading players (13)
Figure 13: Cash flow analysis (14)
Figure 14: Growth of commercial property rents and CPI inflation have a positive correlation (14)
Figure 15: China’s property value totaled Rmb97trn (15)
Figure 16: Ratios of housing stock value to household savings (M2 and GDP) (16)
Figure 17: Rise of property prices is a monetary phenomenon (16)
Figure 18: Property prices follow the growth of savings (GDP and money supply) (16)
Figure 19: Living conditions in China are far behind Japan (17)
Figure 20: China’s urbanization process should continue to accelerate (18)
Figure 21: Tier-3/-4 cities will play a dominant role in China’s future urbanization process (18)
Figure 22: 120 cities expected to enter the GDP per capita range of US$3,000~8,000 in the next 10 years (18)
Figure 23: New housing construction every 10 years as a percentage of the housing stock in Japan (19)
Figure 24: New housing construction every 10 years as a percentage of the housing stock in South Korea (20)
Figure 25: New housing construction every 10 years as a percentage of the housing stock in China (forecast) (20)
Figure 26: Residential mortgage loans as a percentage of GDP in China and Japan (21)
Figure 27: Housing loans outstanding as a percentage of GDP (forecast) (21)
Figure 28: 2010~50 national new home sales volume projections (sqm mn) (22)
Figure 29: 2010~50 new home sales volume projections for tier-1/2/3/4 cities (sqm mn) (22)
Figure 30: 2010~50 national new home price projections (per sqm) (23)
Figure 31: 2010~50 new home price projections for tier-1/2/3/4 cities (per sqm) (23)
Figure 32: Long-term trend – Nation (24)
Figure 33: Long-term trend – Tier-1 cities (24)
Figure 34: Long-term trend – Tier-2 cities (24)
Figure 35: Long-term trend – Tier-3/-4 cities (24)
Figure 36: Actual residential land supply (25)
Figure 37: New HDB housing construction every 10 years as a percentage of the stock in Singapore (25)
Figure 38: Singapore’s private housing is much more expensive than HDB flats (26)
Figure 39: Land for business use accounts for 50~70% of Japan’s total real estate value (26)
Figure 40: Housing represents 80% of China’s real estate value (27)
Figure 41: Cumulative demand and supply are still in balance (28)
Figure 42: Supply structure (29)
Figure 43: China’s urban population and urbanization rate projections (29)
Figure 44: Housing price in Tier-1 cities (30)
Figure 45: Housing price in tier-2 cities (30)
Figure 46: Housing price in tier-3/-4 cities (31)
Figure 47: Price-to-income ratio forecast (31)
Figure 48: Rental yield will significantly improve (32)
Figure 49: Supply to remain high and housing price to decline (33)
Figure 50: Tier-1/-2 cities may see a ~15% drop in housing price from the peak (33)
Figure 51: GDP vs. property price (34)
Figure 52: Money supply vs. property price (34)
Figure 53: CPI vs. property price (34)
Figure 54: Interest rate vs. property price (34)
Figure 55: Credit loans vs. property sales growth (35)
Figure 56: Estimates on property-related loans (35)
Figure 57: Mortgage rate cut is expected as interest rate already at historical high (36)
Figure 58: Physical market indicators forecast summary (37)
Figure 59: Price forecast by city tier (38)
Figure 60: Trading volume forecast by city tier (38)
Figure 61: Sales forecast by city tier (38)
Figure 62: Property investment forecast by city tier (38)
Figure 63: Price forecast by region (39)
Figure 64: Trading volume forecast by region (39)
Figure 65: Sales forecast by region (39)
Figure 66: Property investment forecast by region (39)
Figure 67: Price forecast by property type (40)
Figure 68: Trading volume forecast by property typ (40)
Figure 69: Sales forecast by property type (40)
Figure 70: Investment forecast by property type (40)
Figure 71: Policy housing new starts to drop sharply (41)
Figure 72: Commodity housing to compensate (41)
Figure 73: Policy housing investment to decline sharply (41)
Figure 74: Slight drop in commodity housing investment (41)
Figure 75: Industry financing tightening but better now in 2008 (42)
Figure 76: Average net gearing and current debt-to-cash ratio (42)
Figure 77: YTD sales (43)
Figure 78: Sales target achieved ratio and revenue lock-in ratio (44)
Figure 79: CRLand – Financial highlights & stock information (45)
Figure 80: COLI – Financial highlights & stock information (46)
Figure 81: Longfor – Financial highlights & stock information (47)
Figure 82: Sunac – Financial highlights & stock information (48)
Figure 83: Agile – Financial highlights & stock information (49)
Figure 84: Beijing North Star – Financial highlights & stock information (50)
Figure 85: Franshion – Financial highlights & stock information (51)
Figure 86: Shui On Land – Financial highlights & stock information (52)
Figure 87: Sino Ocean – Financial highlights & stock information (53)
Figure 88: Country Garden – Financial highlights & stock information (54)
Figure 89: Glorious – Financial highlights & stock information (55)
Figure 90: Powerlong – Financial highlights & stock information (56)
Figure 91: Greentown – Financial highlights & stock information (57)
Figure 92: Shenzhen Investment – Financial highlights & stock information (58)
Figure 93: SOHO China – Financial highlights & stock information (59)
Figure 94: R&F – Financial highlights & stock information (60)
Figure 95: Shimao – Financial highlights & stock information (61)
Figure 96: Evergrande – Financial highlights & stock information (62)
Figure 97: Housing market forecast framework (63)
Figure 98: The relationship between housing prices and GDP per capita for China’s 29 major cities (64)
Figure 99: The relationship between new home sales volume and GDP per capita for China’s 29 major cities (65)
Figure 100: The relationship between housing prices/new home sales volume and GDP per capita (65)
Figure 101: GDP per capita vs. number of new homes being sold and number of urban households (66)
Figure 102: GDP per capita vs. new home sales value as a percentage of GDP (66)
Figure 103: US GDP per capita vs. new home sales value as a percentage of GDP (66)
Figure 104: Assumptions on new home sales as a percentage of the number of urban households/GDP (67)
Figure 105: Assumptions on China’s major economic indicators (67)
Figure 106: Total GDP and GDP per capita: China vs. the US (68)
Figure 107: Forecasts of per capita GDP growth for China’s 657 cities (68)
Figure 108: China’s urban population and urbanization rate projections (69)
Figure 109: Urban population of tier-1/2/3/4 cities (x 1,000,000) (69)
Figure 110: Urbanization rates of tier-1~4 cities (70)
Our stock picks
We believe that long-term investment value is emerging as no sharp corrections are expected in 2012, however, property stocks have already priced in 30~40% property price declines. It is time for long-term investors to take action, although in the near future, stock prices may still face downside risks given that the physical market is approaching its worst period, likely in 2Q12. Our investment suggestions are: be defensive and stock-specific. Potential bad industry data/news, like deteriorating fundamentals, trust/loan defaults, and other factors will come as the physical market approaches bottom, which will in turn offer good investment opportunities.
Names we like
?Leading plays with good sales and strong balance sheets, such as CRLand, COLI, and Longfor.
?Companies focused in Tier-1/-2 cities, like Sunac China and Sino Ocean.
?Commercial properties, especially with projects in prime locations and stable rentals, such as Franshion, Shui On Land, and Beijing North Star.
Names we don’t like
?Those with poor sales and high gearing, like Greentown China, R&F, and Shimao Property
Source: Bloomberg, CICC Research
Source: Bloomberg, CICC Research
Our logic for choosing stocks given current market conditions
Long-term investment value emerges
Historical comparison shows the valuation of the whole sector is already at bottom. Property share corrections are already overdone relative to property price declines. Current stock prices imply a 35~40% property price decline (on average) for H-share developers, and a 30~35% decline for A-share developers. Current valuations of large players like COLI and CRLand, and small-to-medium players such as Agile and R&F, are lower than the 2008 bottom, not only reflected in P/E and P/B ratios, but also in market cap to contracted sales ratio.
Actually, developers deserve a premium to 2008 valuations. We believe that Chinese developers, as least leading plays such as Vanke, COLI, CRLand, Longfor, deserve a premium valuation compared to 2008, since they are now much more experienced and professional, with higher quality and efficiency, than they were in 2008.
We think further downside room for the valuation of the sector is limited. Long-term investment value emerges since: 1) China's property market will remain in its long-term upward trend in the next 10 years (based on our analysis, refer to Focus #1 for details); 2) the current corrections can be seen as medium-term corrections which will drag the physical market closer to the long-term trend (refer to Focus #2), and the property market will enter a new phase with stable healthy development; and 3) no sharp corrections are expected in the coming year (refer to Focus #4).
Not free of short-term risks
We think that stock prices are still risky in 1Q12 given that the physical market is getting worse. Although valuations may be largely flat at the beginning of next year, downward earnings forecast revisions are expected, which will hurt stock prices accordingly. Our view is that stock prices should drop further as long as the physical market continues to deteriorate. We expect the physical market to reach its worst period in 2Q12, stock prices and valuations will pick up a bit earlier, likely at the end of 1Q12 or the beginning of 2Q12.
We prefer large players for their defensiveness in 1H12
Reasoning #1: Safe harbor of valuation
Less valuation volatility: Standard deviation/average P/E ratio of leading players shows solid character with less volatility, the ratios for COLI and CRLand were around 20% in 2007~08, while Greentown and R&F were around 40%.
More defensive: When the market was down in 2008, the P/E ratios of leading developers performed more defensively, we could see that P/E declines for COLI and CRland were around 60%, while Greentown and R&F’s P/E dropped as much as 90%. In 2010 and 2011, the same trend appeared again, so we can conclude that during hard times with market downturn, leading developers are safer in terms of valuation.
Standard deviation
/average PE
Max PE Min PE PE decline COLI
68820%27.29.8-64%CRLand
110918%35.514.4-60%Greentown
390038%14.7 2.0-87%R&F
2777
42%
26.4
2.5
-91%
Ticker Valuation in 2007-2008
Standard deviation
/average PE
Max PE Min PE PE decline COLI 68814%14.6 6.5-56%CRLand 110912%
16.57.1-57%Greentown
390020% 6.7 1.8-72%R&F
2777
19%
9.2
3.1
-66%
Ticker Valuation in 2010-2011
Figure 5: Safe valuation for big names in 2008
Source: Bloomberg, CICC Research
Source: Bloomberg, CICC Research
Figure 7: Safe valuation for big names in 2011
Source: Bloomberg, CICC Research
Source: Bloomberg, CICC Research
Reasoning #2: Sales outperform with more resources and concentrated market share
Leading developers have better performance during tough times, with more resources and diversified sales strategies.
CR land RMB 5.68.042%222791%30 COLI HKD222719%677891%70
R&F RMB1616-1%322473%32 Greentown RMB151611%572971%40 Powerlong RMB n.a18n.a 6.2 4.651%9 Note: R&F’s Target cut from RMB40bn and Greentown’s Target cut from RMB60bn
Source: Company data, CICC Research
Reasoning #3: More tolerance of financial burdens, healthier financial statements
We can see that bellwethers have better risk management ability, with much lower gearing ratios and short-term financial burdens, this gives them more flexibility in future financing and results in healthier financial statements.
Meanwhile, Greentown’s trust issue has caused a lot of concern about trust financing risk and its high financing cost. At the end of 1H11, when Greentown had a relatively high exposure to the trust (Rmb5.3bn, 15% of total borrowing), big names like CRLand, COLI and Longfor had no exposure at all.
Source: Company data, CICC Research
Figure 13: Cash flow analysis
Source: Company data, CICC Research
Commercial property developers are another defensive choice
We believe rents and prices for commercial properties (e.g. office buildings and retail properties) will rise at an accelerated
rate, along with further policy tightening on the housing market and persistent economic growth. Commercial property developers are expected to offer good investment value for their defensiveness.
Source: CEIC, CICC Research
2007
2010
Office Rental
20032004
200820092010
Others
Land premium Construction cost (Tax,interest etc)
A
B
C=A*25%+B*75%D E
F
G=C-D-E-F COLI 52,230 39,000 42,308 15,100 16,700 4,123 6,385 Longfor 18,260 21,700 20,840 6,500 7,000 2,831 4,509 CRLand 13,500
20,000 18,375 4,000 7,200 5,000 2,175 Greentown
20,300 15,000 16,325 6,285 7,500 7,100 (4,560) R&F
13,400
15,000
14,600
3,200
7,000
3,665
735
in Rmb million
2H 2011
Contracted sales
2H 2011 Cash collected 1H 2011Contracted sales Capex expenditure Net operating cash
inflow/(outflow)
Focus #1: What is the long-term trend in China's property market?
It is important to know the long-term trend in China's property market before we make short-term moves. In order to answer this question, we should have a clear picture and understanding on the following:
?After years of development, what is the housing stock situation? Is it reasonable in terms of value and growth rate?
?As China’s economy gradually switches its drivers from FAI (infrastructure and real estate investment) and exports to consumption, will the property sector face the risk of a hard landing?
?What are the key elements deciding the long-term trend in China's property market?
?How will prices and trading be similar?
Property stock is reasonable, while structure leans toward residential
China’s property asset value totaled Rmb97trn. Assuming the price of existing properties is 70% of new properties, China’s property value totaled Rmb97trn at end-2010, of which housing accounted for 76%, or Rmb73trn (urban Rmb64trn and rural Rmb9trn); office buildings, shops, industrial properties and other properties accounted for 11%, or Rmb14trn; projects under construction and land accounted for the rest. Under the optimistic assumption that the price of existing properties is 90% of new properties, China’s property value would total Rmb120trn.
Size of housing stock is still reasonable. In China, the ratio of housing stock value (including projects under construction and landbank) to household savings, GDP and M2 is 2.8x, 2.1x and 1.2x, respectively, similar to the US but much lower than Japan (by ratio of housing stock value to GDP, China’s current level is flat with 1960 Japan); this means China’s housing stock value is not excessive.
Figure 16: Ratios of housing stock value to household savings (M2 and GDP)
land is used to substitute the housing stock value for Japan.
The growth rate of money supply is approximately equal to that of property prices plus the CPI inflation rate. Excessive money supply will push up prices. Although housing prices are generally not included in the CPI basket, housing in essence has nothing different from other goods. Just like CPI inflation, the increase in housing prices is a monetary phenomenon.
Share of commercial real estate is competitively smaller than other countries. Unlike other countries where commercial real estate accounts for a majority of real estate assets, 80% of China’s real estate assets are residential property and the proportion of commercial real estate is rather low. As the economy grows, commercial real estate will be a star in the new phase of China’s property market.
Market to cool down, but unlikely to collapse amid the economic restructuring
The property sector is one of the biggest beneficiaries of China’s economic growth pattern during the past 2 decades. Today, China's economy and property market face a new era. Economic restructuring is a must and already on the way, the government has gradually begun lowering the rate of fixed asset investment, and consumption upgrade will be the next driver. As investment slows, the property market will cool; however, we believe the sector will not collapse as many investors fear. Although the market is suffering from policy tightening, sales deterioration and price cuts, we think a new phase for the property market is coming following the correction.
A hot topic is comparing China's current environment with 1970s Japan, given their similar economies. Some researchers conclude that China's property market may follow Japan’s with a downtrend ahead, though we do not agree given the following conditions specific to China:
Reason #1: Long-term drivers remain
?Housing demand: Home units per household in China’s urban areas is only 0.91, equal to 1953 Japan. International experience suggests that the housing market will be on an upwards trend until that number reaches 1, and property prices tend to experience significant cyclical changes after the number reaches 1.1 units per household. This number already exceeded 1 in 1970s Japan.
Figure 19: Living conditions in China are far behind Japan
?Urbanization rate growth potential: China’s urbanization rate is now at 50%, flat with 1953 Japan, and stands to improve rapidly in the next decade. Some argue that the actual population living in urban areas is far more than the 620mn announced by the National Bureau of Statistics (NBS). We also think the NBS figure may have underestimated the urban population, but this does not change our view on the future of the housing market, since the part of urban population omitted from the NBS numbers is mostly farmers working in cities who have not truly settled in urban areas and will likely return to hometowns and buy homes in nearby tier-3/-4 cities. The urbanization rate for tier-3/-4 cities is now only 29%, well below tier-1/-2 cities. In the long term, we are more positive o urbanization in tier-3/-4 cities.
Source: CEIC, CICC Research
?Economic growth: In the past, China’s rapid economic growth helped drive sustained growth in property prices and transactions. Economic growth will remain high in absolute terms, despite slowing gradually. The growth of money supply and household savings will likely show similar trends. This means that positive macro drivers for the housing market will remain intact. International experience shows that housing consumption tends to see rapid growth when GDP per capita reaches the US$3,000~8,000 range. We expect 120 Chinese cities to move into this range in the next decade, bringing the total number of such cities to 320, or half the national total. Most of these additions will be tier-3/-4 cities.
Reason #2: Rules of thumb
The experiences of Japan and South Korea show that new housing construction every 10 years, as a percentage of the housing stock, follows a downwards trend. We believe China will likely exhibit a similar pattern. We expect China’s new housing construction to be 10bn sqm over 2011~20, or 38% of the expected total housing stock of 26bn sqm at the end of 2020, when housing area per capita in urban areas will be 33sqm and home ownership will be 0.95 units per household. Figure 23: New housing construction every 10 years as a percentage of the housing stock in Japan
Source: CICC Research
Figure 24: New housing construction every 10 years as a percentage of the housing stock in South Korea
Figure 25: New housing construction every 10 years as a percentage of the housing stock in China (forecast)
Reason #3: Development of housing finance
After 1998’s housing reform, China introduced mortgage loans to finance home purchases. Housing finance expanded rapidly over the last ten years, but the absolute amount remains relatively low. We believe China will continue to promote housing finance and residential mortgage loans as a percentage of GDP will increase significantly in the next decade, to an estimated 25% by 2020, flat with current levels in Japan and South Korea, but still lower than Singapore and Hong Kong.