China Property 2012 Outlook

1、China Property 2012 OutlookAsia Pacific Equity Research25 October 2011China Property 2012 OutlookPosition for consolidation2011 was a challenging year for China developers: Credit was tight, restrictive Chinapolicies caused volume to fall,but prices have only just started correcting after 18 Hong Ko

2、ngmonths of tightening. As a result, we see no hope of policy/credit to the sector Propertyeasing in the near term. With more negative newsflowlikely to come (such as Lucia Kwong, CFA ACfurther price cuts, more default cases, and fire sales), the worst isyet to come, in our 6view. We (852) 2800-8526

3、maintain our negative view on the sector over the next 12 months, lucia.yk.kwongand recommend that investors be very selective in stock screening for alpha.Ryan Li, CFA AC 2012 to be the year of consolidation; but could be tough:Looking into 2012, (852) 2800-8529a morechallenging operating environme

4、nt should speed up market ryan.lh.liconsolidation, and should benefit the larger market players. However, this could J.P. Morgan Securities (Asia Pacific) Limitedbe a tough process, during whichproperty prices and land prices couldbe under pressure and the sector couldremain trapped at low valuation

5、s. Short-term range trade: From a short-term trading perspective, we expect a China developersshare price indexvs short-term rally in4Q11when sales may meet investor expectations, which are MSCI ChinaJan 2009=100already low. However the sector couldderateagain in1Q12 when tightening 100resumes and m

6、ore small companies come under financial stress. We suggest 9080investors take this opportunity to exit names thatarefundamentally weak from70either a cashflow/balance sheet strength or execution capability standpoint.60 1H12 50a better entry point for long-term alpha: For value investors looking 40

7、JPM China Property Index30MSCI China Indexfor long-term growth, we suggest entering in 1H12. As the policy environment 20should be more stablein 2H12,we believe investors can add beta then,to pave the way for a recovery in the sector in terms of volume. Market share gains,sales growth,and solid fina

8、ncials are ourkey stockSource: Bloomberg, J.P. Morgan.-picking criteria: In such a volatile market, weprefer developers thatcan gain market share, record contracted sales growth,and that have solid financials. As a result,COLI,Longfor,Country Garden,and Evergrande are our top picks.Equity Ratings an

9、d Price TargetsMkt CapRatingPrice TargetCompanySymbol(HK$ mn)Price (HK$)CurPrevCurPrevAgile Property Holdings Ltd3383.HK20,687.155.96Nn/c7.6013.30C C Land1224.HK4,098.941.61OWn/c2.853.70China Overseas Land & Investment0688.HK106,896.5013.08OWn/c16.50n/cChina Resources Land1109.HK59,659.9710.24Nn

10、/c10.5015.60China Vanke Company200002.SZ94,232.257.35OWn/c10.0013.00Country Garden Holdings2007.HK44,753.702.68OWn/c3.904.60Evergrande Real Estate3333.HK42,892.652.88OWn/c4.956.50Franshion Properties (China) Ltd.0817.HK14,200.311.55OWn/c2.252.35Glorious Property0845.HK8,571.911.10NOW1.502.70Greentow

11、n China Holdings3900.HK6,559.784.00UWN3.0013.00Guangzhou R&F Properties2777.HK6,721.016.62Nn/c7.2010.80Hopson Development Holdings0754.HK8,341.274.76UWn/c4.005.40KWG Property Holding Ltd.1813.HK8,361.202.89OWn/c4.307.20Longfor Properties Co. Ltd.0960.HK45,776.848.88OWn/c13.0015.50Poly (HK) Inves

12、tments Limited0119.HK11,330.493.14UWN3.004.85Renhe Commercial Holdings1387.HK24,108.871.14OWn/c2.001.95Shimao Property Holdings0813.HK23,677.686.67NOW7.2011.80Sino-Ocean Land3377.HK18,9178.583.21UWN3.354.70Shui On Land Ltd0272.HK11,517.612.21Nn/c3.103.90Source: Company data, Bloomberg, J.P.Morgan es

13、timates. n/c = no change. All prices as of 24 Oct 11.See page 69 for analyst certification and important disclosures, including non-US analyst disclosures.J.P. Morgan does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm ma

14、y have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment Oct-11Jun-11Jan-11Sep-10May-10Jan-10Sep-09May-09Jan-09Sep-08May-08Jan-08Lucia Kwong, CFAAsia Pacific Equity Research(852) 2800-8526

15、25 October 2011lucia.yk.kwongRyan Li, CFA(852) 2800-8529ryan.lh.liTable of ContentsChina property 2012 outlook.3Funding is all that matters during industry consolidation.3Strategy from now until 2012 add beta towards end 2012.3Consistent tightening the key catalyst for consolidation.7Let the big fir

16、ms become bigger.9Financial and earnings outlook.11Earnings and NAV estimate changes.12Interconnection of cash flow outlook and earnings growth.14Stock picks.16Industry Outlook.21Private housing starts may see Y/Y decline in 2012.21Sales trend in 2011 to be continued, favoring low-tier cities.22Over

17、supply pressure in some cities, but not nationwide.24Companies.27Agile Property Holdings Ltd pre-empted by gearing.28C C Land operational improvement not priced in.29China Overseas Land & Investment Still a growing company.31China Resources Land Capped by injection model.32China Vanke Company Gr

18、owth appears contained.33Country Garden Holdings Still a relatively safe harbor.34Evergrande Real Estate Growth to continue; cash flow is tight but manageable.35Franshion Properties (China) Ltd. Comfortable cash flow position in FY12.36Glorious Property Earnings growth is getting less visible.37Gree

19、ntown China Holdings Liquidity risks to persist.38Guangzhou R&F Properties Losing market share.39Hopson Development Holdings beware of value trap.40KWG Property Holding Ltd. Sales sluggish, but mostly priced in.41Longfor Properties Co. Ltd. The market share gainer.43Poly (HK) Investments Limited

20、 Expansion at the wrong time; downgrade to Underweight.44Renhe Commercial Holdings Not a value trap.45Shimao Property Holdings Minor de-leverage.47Sino-Ocean Land Regional expansion yet to be proven.48Shui On Land Ltd NAV discount may remain wide.492Lucia Kwong, CFAAsia Pacific Equity Research(852)

21、2800-852625 October 2011lucia.yk.kwongjpmorgan4 Ryan Li, CFA(852) 2800-8529ryan.lh.liChina property 2012 outlookFunding is all that matters during industry consolidation 2011 has been a disappointing year so far for the China property sector,andstock price performancehas goneagainst our expectations

22、 one year ago. The key themes of “go-Tier-3/4 cities”, mass-marketfocus, and low leverage did work out. However, what did not materializeare the broad-based price corrections even after 18 months of policy and credit tightening, housing prices are still holding up while volume are off 50% Y/Y in Sep

23、/Oct. Without an obvious easing in housing prices and inflationeasing only moderately, there is no room for near-term policy / credit easing. With limited funding channels for the industry,the lack of mortgage quotasand mortgage rate rises couldcontinue to dampen home buying demand.We believe the Ch

24、ina property sector will contine to underperform until the policy objective (housing price decline) is fully attained. Credit easing around Chinese New Year, but mightget tight again afterwardsWe are aware that 4Q is usually the season with tightest liquidity when the loan quota is largely used up.

25、In some cities the mortgage quotais limited even by Sep-11, and we expect sales volume to still be affectedin 4Q. Although listed developers arelikely to gain market share, their contract sales areunlikely be much stronger than September levels, assome potential new launches may not draw sufficient

26、demand.There is a high chance of liquidity easing usually before Chinese New Year (Jan 23, 2012), whichcould be factored in and support share valuations in 4Q11. However, liquidity from either banks or shadow banking systems couldtightenafterwards.When willwe see light at the end of the tunnel?We co

27、ntinue to expect mortgage quotastobe relaxed if three criteria are met: 1) more visible housing price corrections as revealed by the 70-major city index; 2) taming inflation;and 3) housing supply remaining abundant,which eventually drives down housing starts. Timing-wise, house price corrections hav

28、e just started and couldcontinue in the next sixmonths; we do not rule out some small unlisted developers gettingdesperate after the Chinese New Year and offeringdeeper price cuts. We mightneed to wait until 4Q12 to see volume normalizeand mortgage quotas increase. Market consolidation mightaccelera

29、te in 2012 more headwindslikely firstWe believe the unprecedented prolonged tightening could result in the acceleration of industry consolidation. This could be in the form of the forced exit of small unlisted firmswhich totally run out of funding channels and large branded firmswith the economies o

30、f scale to take up customers and marketshare. This could be a tough process and there couldbea wave of small firmsexiting the market next year and puttingpressure on property and land prices at some point.Strategy from now until 2012 add beta towards end 2012 We maintain our negative view on the sec

31、tor as a whole overthe next 12 months, and recommend that investors be very selective instock screening for alpha. From a 3Lucia Kwong, CFAAsia Pacific Equity Research(852) 2800-852625 October 2011lucia.yk.kwongRyan Li, CFA(852) 2800-8529ryan.lh.lishort-term trading perspective, we expect a short-te

32、rm rally in 4Q11 when sales mightmeet investor expectations which are already low, but we expect valuationstobe challenged again by 1Q12when tightening resumes and more small companies come under financial stress. We suggest investorstake this opportunity to exit names thatare fundamentally weak eit

33、her from a cashflow / balance sheet strength or execution capability standpoint.For value investors looking for long-term growth, 1H12 should provide good entry opportunities to market share gainers. As the policy environment becomes more stable,we believe investors can add beta in 2H12 to pave th w

34、ay for a recovery in the sector in terms of volume.Figure 1: Year-to-date performance of major Chinese developersCOLI-9%Country Garden-10%SOHO China-12%Renhe-16%Longfor-18%HSI-19%HSCEI-23%Evergrande-24%CRL-28%China Property Developers Index-29%China Vanke B-30%Franshion-34%BCL-37%Sino-Ocean Land-37%

35、CC Land-39%Yanlord-39%Zhong An-40%NWCL-40%Guangzhou R&F-40%SOL-41%Hopson-43%Shimao-43%Agile-48%KWG-51%Greentown-53%Poly (HK)-59%Glorious-59%-70%-60%-50%-40%-30%-20%-10%0%As of October24, 2011Source: BloombergWe incorporatean 8-15% decline in ASPs in FY12 for Tier-1/ top Tier-2 cities, after a ra

36、ther steady ASP trend in FY11. We have assumed a0-6% decline in ASP in the Tier-3/4 cities where the housing market is relatively underdeveloped (in terms of housing stock andhousing starts relative to population), and end-user demand from urbanization and upgrades (from Danwei homes) pre-dominates

37、the market. We cut our FY11/12/13EPS forecasts by 6%/14%/13% and our NAV estimates by 13%.Pecking order: COLI, Longfor, Country Garden, EvergrandeOur long-term preference is forCOLI, Longfor, and Country Garden,and we suggest that investors accumulate during weakness. They share the following attrib

38、utes:1)Strong potential to gain market share due to consistent volume growth;4Lucia Kwong, CFAAsia Pacific Equity Research(852) 2800-852625 October 2011lucia.yk.kwongjpmorgan Ryan Li, CFA(852) 2800-8529ryan.lh.lijpmorgan2)Ableto deliver contract sales growth in FY12;3)We expect strong cashflow posit

39、ions in FY12;4)Gearing below industry average by end FY11.We also have Evergrande as a high-beta pick considering its earnings growth potential vs. low valuation. Evergrande has the largest exposure in Tier-3/4 cities and haslimited exposure to the overheated Tier-1/2 cities. Its cashflow outlook is

40、 less favorable than that of COLI or Country Garden, in our view, but as it trades at 3.5x FY12E we believe most of the risks are well factored in. In case of policy easingFor now we do not expect policy and credit easing for real estate, but over a 2-3 year horizon we do not rule out such possibili

41、ty. It is worth noting that our base case is towards the bear-case scenarios (which we gauge by historical P/BV troughs), and in case of an unexpected easing,most stocks could revert to the mid-cycle P/Es (7-13x P/E or average 11x). However, we are also concerned of the downside risks that the P/BV

42、troughs suggest. Lastly, companies may choose to hold back production to weather the downturn at the expense of earnings and hence any P/E expansion by then may be offset by wipe-out of earnings. Figure 2: China property fair price in bull, bear and base-case scenariosHK$Sino-Ocean Land2.35.0Shui On

43、 Land0.85.1Shimao Properties6.19.7Renhe Commercial0.82.3Poly (HK)2.65.0Longfor Properties7.316.9KWG Property2.77.2Hopson2.47.7Guangzhou R&F6.011.5Greentown2.210.7Glorious Property0.82.1Franshion Properties1.42.9Evergrande Real Estate2.57.3Country Garden2.05.3China Vanke -B shares6.713.3China Res

44、ources Land7.613.5China Overseas Land Investment11.321.5C C Land1.13.9Agile Property4.311.60.05.010.015.020.025.0Source: J.P. Morgan estimates.5Lucia Kwong, CFAAsia Pacific Equity Research(852) 2800-852625 October 2011lucia.yk.kwongRyan Li, CFA(852) 2800-8529ryan.lh.liTable 1: Summary of price targe

45、t and ratingchangesLast PricePotential(HK$)RatingsDec-2012 Price Targetsupside/CompanyTicker24-Oct-11NewOldNewOld% Change(downside)Agile Property3383 HK5.96NN7.6013.30-43%28%C C Land1224 HK1.61OWOW2.853.70-23%77%China Overseas Land Investment688 HK13.08OWOW16.5021.30-23%26%China Resources Land1109 H

46、K10.24NN10.5015.60-33%3%China Vanke-B shares200002 CH7.35OWOW10.0013.00-23%36%Country Garden2007 HK2.68OWOW3.904.60-15%46%Evergrande Real Estate3333 HK2.88OWOW4.956.50-24%72%Franshion Properties817 HK1.55OWOW2.252.90-22%45%Glorious Property845 HK1.10NOW1.502.70-44%36%Greentown3900 HK4UWN3.0013.00-77

47、%-25%Guangzhou R&F2777 HK6.62NN7.2010.80-33%9%Hopson754 HK4.76UWUW4.005.40-26%-16%KWG Property1813 HK2.89OWOW4.307.20-40%49%Longfor Properties960 HK8.88OWOW13.0015.50-16%46%Poly (HK)119 HK3.14UWN3.004.85-38%-4%Renhe Commercial1387 HK1.14OWOW2.001.953%75%Shimao Properties813 HK6.67NOW7.2011.80-39

48、%8%Shui On Land272 HK2.21NN3.103.90-21%40%Sino-Ocean Land3377 HK3.21UWN3.354.42-24%4%Source:Bloomberg,J.P. Morgan.Table 2: China developers -Valuation summaryEnd PriceMarketNAVDis. toCore P/EDiv YieldP/BVFY11E24-Oct-11capCurrentNAVFY11EFY12EFY11EFY11EGearingUS$ RatingStock CodeLC$MMHK$(%)(x)(x)(%)(x

49、)(%)China Vanke -B sharesOW200002.SZ7.3512,15913.43-45%%1.3141%China Overseas Land InvestmentOW0688.HK13.0813,74320.71-37%%1.6842%China Resources LandN1109.HK10.247,67021.32-52%%0.9575%Evergrande Real EstateOW3333.HK2.885,5149.16-69%%1.0874%Country GardenOW2007.H

50、K2.685,7543.05-12%%1.2649%Longfor PropertiesOW0960.HK8.885,88517.47-49%%1.8329%Shimao PropertiesN0813.HK6.673,04418.01-63%%0.6073%Agile PropertyN3383.HK5.962,66014.17-58%%0.8279%Guangzhou R&FN2777.HK6.622,74218.77-65%%0.8695%Sino-Ocean LandUW3377.HK3.

51、212,3377.20-55%%0.4376%Poly (HK)UW0119.HK3.141,4578.09-61%%0.45105%Franshion PropertiesOW0817.HK1.551,8263.92-60%%0.5625%Glorious PropertyN845.HK1.101,1024.65-76%%0.4059%Shui On LandN0272.HK2.211,4817.81-72%%0.3473%Yanlord*OWYNLG.SI1.031,5802.73-62%6.75.

52、91.4%0.7067%KWG PropertyOW1813.HK2.891,07513.61-79%%0.4944%HopsonUW0754.HK4.761,07215.11-68%%0.2175%GreentownUW3900.HK4.0084314.26-72%%0.52274%C C LandOW1224.HK1.615277.82-79%9.04.52.8%0.32-3%Renhe CommercialOW1387.HK1.143,0994.08-72%%1.28-1%Sector average*-50%7.5

53、6.33.9%1.1158%*Yanlords share price and NAV are in SGD; * Excluding Vanke, Renhe and CCLandSource: Companydata, Bloomberg and J.P.Morgan estimates.6Lucia Kwong, CFAAsia Pacific Equity Research(852) 2800-852625 October 2011lucia.yk.kwongjpmorgan Ryan Li, CFA(852) 2800-8529ryan.lh.liConsistent tighten

54、ing the key catalyst forconsolidationFunding channels to small developers are being cut offOne consequence of a prolonged step-up in credit tightening is the forced exit of small property companies. Most of these companies, either state-owned or private, hadbeen drawn inby the high margins and returns in the past and usually had the privilege ofaccess to land at low costs, but are lacking ineconomies of scale and execution capabilit