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1、 Sector Note | Alpha series Property China November 8, 2018 IMPORTANT DISCLOSURES, INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT. IF THIS REPORT IS DISTRIBUTED IN THE UNITED STATES IT IS DISTRIBUTED BY CGS-CIMB SECURITIES (USA), INC. AND IS CONSIDERED THIRD-P
2、ARTY AFFILIATED RESEARCH. Powered by the EFA Platform Property - Overall 2019 outlook: Policy may relax in 1H19 We expect both home prices and transaction volumes in China to fall by 10% in 2019F; this is less than the 15% that appears to be priced in currently. Near-term policy relaxation looks unl
3、ikely, in our view; we see some policy relaxation in 1H19F if the prices and transaction volumes decline further. Top-buys: COLI, Longfor, Shimao, CIFI, KWG and Times. Top-sells: Country Garden (CG), Sunac, Greentown and SOHO. Maintain Neutral on the sector. We expect both home prices and volumes to
4、 fall by 10% in 2019F On the back of weaker market sentiment and economic slowdown, we expect residential prices in China to fall by 10% in 2019F, after a strong increase of 11.9% yoy in 9M18. We also forecast transaction volumes to drop 10% in 2019F as home buyers adopt a wait- and-see approach (-3
5、.3% in 9M18). For 2020F, we expect transaction volumes to rebound by 5% while prices remain stable. Our latest China home price forecast for 2019F is 10% below our previous estimate of yoy flat price previously. Government could relax policies in 1H19F We believe the central government would not rel
6、ax its policies in the near term as property market just corrected recently. Instead, we expect the China government to relax selected measures, such as mortgage rates/downpayment requirements for first-time buyers, in 1H19F, if home prices and transaction volumes continue to decline. The property m
7、arket remains one of the major sectors in the Chinese economy, and we believe a stable property market is paramount to sustain economic growth in China. We cut end-FY19F NAVs by 11% and FY1920F net profit by 8%/16% To factor in our assumption of a 10% drop in home prices in 2019F, we cut our end- FY
8、19F NAV estimates for developers we cover by 11% on average. We estimate the developers gross margin to contract by 1.4% pts to 30.3% in FY19F, and by 2.4% pts to 27.9% in FY20F, from 31.7% in FY18F. As such, we lower our forecasts for the developers net profit by 8% for FY19F and 16% for FY20F, on
9、average. Overall, we estimate developers net profit growth of 47%/20%/11% in FY18/19/20F. Trimming developers target prices by 30% on average Given our wider discount (40% vs. 25% before) and lower end-FY19F NAVs, we have, on average, cut our target prices for developers by about 30%. Given the shar
10、p fall in share prices YTD, we maintain our ratings for all names except Sunac, which we downgrade from Hold to Reduce due to its expensive valuations relative to peers. Top-picks: COLI, Longfor, Shimao, CIFI, KWG, Times Companies under our coverage, on average, trade at attractive valuations of 46%
11、 discount to end-FY19F NAV, 4.8x FY19F P/E and 7% FY19F dividend yield, which imply a 15% drop in home prices in 2019F. We view this as too pessimistic. Our top buy calls are COLI, Longfor, Shimao, CIFI, KWG and Times. Our top sell calls are CG, Sunac, Greentown and SOHO. Maintain Neutral on the Chi
12、na property sector. Figure 1: Our China property universe average discount to 12m forward NAV SOURCES: CGS-CIMB RESEARCH, COMPANY REPORTS, BLOOMBERG China Neutral (no change) Highlighted Companies China Overseas Land * Vanke-A data stated in RmbNet Gearing (%)P/BV(x)Yield (%)P/E (x)Property China Pr
13、operty - Overall November 8, 2018 4 2019 outlook: Policy may relax in 1H19F Chinas property policy may loosen slightly in 1H19F Economic slowdown prompts government action 0 Figure 3: China GDP grew at slowest rate since 2011 in 3Q18 Figure 4: and PMI below 50 in 3Q18 suggests contraction SOURCES: C
14、GS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND Dragged down by the continued trade war between the U.S and China, and tight liquidity environment, Chinas economy has shown signs of a slowdown. The 3Q18 GDP growth came in at 6.5% yoy, the lowest in five years. In expectation of a slowdown in
15、 exports ahead, we believe the consensus view is that Chinas economic growth will further decelerate from 6.6% in 2018F to 6.3% in 2019F. In its bid to tackle this, the Chinese government has adopted certain measures including a lower rate of VAT, personal income tax rate cut, and offering tax deduc
16、tions for some selected personal spending, among others - to stimulate the economy in the past few months. Meanwhile, to alleviate the tight liquidity problem and high borrowing costs, the central government has implemented three reserve requirement ratio (RRR) cuts and pumped extra liquidity into t
17、he banking system in 9M18. Central government set to implement more policies to support growth During the Politburo meeting led by President Xi Jingping on 31 Oct 2018, the central government admitted that Chinas economy is currently experiencing significant pressure and pointed out that the governm
18、ent would take proactive fiscal policies to tackle the situation while maintaining its stable monetary policy. In addition, it said that a solution to the problem of financing difficulties and high funding costs, especially for SME corporates, needed to be found. Based on this, we believe the centra
19、l government will introduce more measures to stimulate the economy in the next few months. Chinas economic growth is difficult to sustain without a stable property market We understand that the central government reiterated its policy of “Housing is for living not for speculation” and investors seem
20、 to have generally interpreted this as the central government not likely to directly loosen its housing policy in a bid to support the economy. Despite this, we believe that the central government will find it difficult to ignore the property sector, as property sales and real estate investment (REI
21、) accounted for almost 30% of GDP as at 3Q18 (we estimate that it could be as high as 40% if we include property-related sectors such as cement, steel and white goods). Overall, China will find it difficult to sustain its GDP growth target for 2019F in the absence of a stable property market, in our
22、 view. 4.05.06.07.08.09.010.011.012.003/201103/201203/201303/201403/201503/201603/201703/2018Quarterly GDP (yoy % growth)444648505254565801/201001/201101/201201/201301/201401/201501/201601/201701/2018China PMIProperty China Property - Overall November 8, 2018 5 Figure 5: Property sales accounted for
23、 16% of GDP in 9M18 Figure 6: and REI was about 14% of GDP in 9M18 SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND Property market has cooled off significantly YTD Figure 7: China property prices look strong on a yoy basis Figure 8: however, on a mom basis, China property prices st
24、arted to correct in Sep 2018 SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND Property prices have started to correct recently After a strong performance in 2017 (property prices were up by 10-15% for tier 1 and tier 2 cities), the property markets for tier 1 and tier 2 cities in Ch
25、ina have started to cool off YTD on the back of property-tightening measures introduced by government since the beginning of the year. However, prices in tier 3 cities have outperformed YTD due to the governments supportive measures such as cash subsidies for home purchases by households affected by
26、 the Shanty Town redevelopment plan in the past two years. Figure 9: Prices for tier 3 cities have outperformed those of tier 1 and tier 2 cities Figure 10: We expect China property prices to fall in the next 6-12 months SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND Further dragg
27、ed by the trade war with the US and weaker market sentiment after Sep 2018, we observed across-the-board property price cuts in most of the cities 0%2%4%6%8%10%12%14%16%18%Prop sales / GDP (%)0%2%4%6%8%10%12%14%16%REI/GDP (%)(10)(5)0510152025303540Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct
28、-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18YoY % change - Tier 1 citiesYoY % change - Tier 2 citiesYoY % change - Tier 3 cities-2-101234Jan-11May-11Sep-11Jan-12May-12Sep-12
29、Jan-13May-13Sep-13Jan-14May-14Sep-14Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19MoM % change - Tier 1 citiesMoM % change - Tier 2 citiesMoM % change - Tier 3 cities(10)(5)0510152025303540Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul
30、-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 Apr-17 Jul-17 Oct-17 Jan-18 Apr-18 Jul-18 Oct-18YoY % change - Tier 1 citiesYoY % change - Tier 2 citiesYoY % change - Tier 3 cities01020304050607080Jan-11May-11Sep-11Jan-12May-12Sep-12Jan-13May-13S
31、ep-13Jan-14May-14Sep-14Jan-15May-15Sep-15Jan-16May-16Sep-16Jan-17May-17Sep-17Jan-18May-18Sep-18Jan-19May-19No. of cities with “+“ changeNo. of cities with “No“ changeNo. of cities with “-“ changeProperty China Property - Overall November 8, 2018 6 in China. Based on our discussions with developers,
32、most were offering average price cuts of 5-10% in their bid to boost sales. Of the properties in tier 1, 2 and 3 cities, we believe the prices in tier 3 cities may be under the greatest pressure, especially after the central government slowed down its cash subsidies for home purchase for households,
33、 and in light of the strong property price performance in those cities over the past two years. Figure 11: Tier 1 cities daily sales volume (k sq m) Figure 12: Tier 2 cities daily sales volume (k sq m) Figure 13: Tier 3 cities daily sales volume (k sq m) SOURCES: CGS-CIMB RESEARCH, WIND SOURCES: CGS
34、-CIMB RESEARCH, WIND SOURCES: CGS-CIMB RESEARCH, WIND Transaction volumes have turned much weaker since Oct 2018 In 9M18, transaction volume growth for residential property sales was 3.3%, down from 4.1% in 8M18 and 4.2% in 7M18. We believe that as home buyers have turned more negative since Sep 201
35、8, transaction volumes will fall further in 4Q18F. Sales during the Golden Week holidays - the most important season for developer sales - came in 10-20% lower than we expected for most of the developers. Figure 14: Land price premium ratio has fallen to a 5-year low SOURCES: CGS-CIMB RESEARCH, WIND
36、 Land prices have corrected by about 10-20% from the peak The land price premium ratio calculated as transacted price divided by reserve price set by the government is one of key barometers for the property market, and this has fallen to 9% in 9M18 from 29% in 2017 and 46% in 2016. This is the secon
37、d-lowest level since 2008. Based on local media reports, we understand that land prices have fallen by 10- 20% in the past 2-3 months in certain top-tier cities. Meanwhile, we are seeing an increasing number of instances when government land sales failed to attract any interest. Given that land sale
38、s are one of the key revenue sources for many local governments (could be up to 50% of the budget for some local governments), we believe that some local governments may be more willing to help the sector, though they continue to claim that their property sector policy is unchanged. 0.05.010.015.020
39、.025.030.02018-01-012018-01-152018-01-292018-02-122018-02-262018-03-122018-03-262018-04-092018-04-232018-05-072018-05-212018-06-042018-06-182018-07-022018-07-162018-07-302018-08-132018-08-272018-09-102018-09-242018-10-082018-10-22Tier 1 cities0.05.010.015.020.025.030.035.040.045.050.02018-01-2018-01
40、-2018-01-2018-02-2018-02-2018-03-2018-03-2018-04-2018-04-2018-05-2018-05-2018-06-2018-06-2018-07-2018-07-2018-07-2018-08-2018-08-2018-09-2018-09-2018-10-2018-10-Tier 2 cities0.05.010.015.020.025.030.02018-01-012018-01-152018-01-292018-02-122018-02-262018-03-122018-03-262018-04-092018-04-232018-05-07
41、2018-05-212018-06-042018-06-182018-07-022018-07-162018-07-302018-08-132018-08-272018-09-102018-09-242018-10-082018-10-22Tier 3 cities0510152025303540455020082009201020112012201320142015201620179M18100 Cities Land price premium ratio%Property China Property - Overall November 8, 2018 7 1H19F: may see
42、 loosening of certain government policies Some local governments have already been quietly doing so We believe that the local governments of certain top-tier cities, where cooling measures have been implemented since late-2016, may have started to loosen their property policies as both property sale
43、s and land sales have fallen significantly in the past 2 years. For instance, it was reported on 20 Oct 2018 that Guangzhou was the first tier 1 city to cancel the price cap restriction for property sales. Meanwhile, on 25 Oct 2018, local media outlet 21st Century Economic News, reported that some c
44、ommercial banks in Guangzhou, Hangzhou, and Hefei have lowered their mortgage rates for first-time buyers and sped up the mortgage approval process. What can the local governments do going forward? Currently, the key cooling measures for the property sector include: 1) home purchase restriction (HPR
45、), 2) price cap, 3) higher downpayment requirements, 4) stricter mortgage policy, 5) tighter financing to developers, and 6) sale-on- completion clause (i.e. no presales allowed). As property prices have started to come down by 3-5% over Sep-Oct 2018 and as we expect them to fall further, we believe
46、 the central government may lift the price cap restriction for cities with weaker price performance. Meanwhile, we think the government may consider loosening some policies for home purchases, especially if they are related to genuine demand. We assess that there may be more local governments follow
47、ing Guangzhous example in relaxing the price cap because we believe the current price cap level is unreasonably low, at 10-30% below the developers planned selling prices. Another reason why the local governments are willing to lift the restriction, in our view, is because they had sold the land at
48、high prices previously. Meanwhile, mortgage rates for first-time buyers are relatively high at a 10-15% premium to benchmark rate as of Nov 2018, which is high compared with historical average in the past five years (on par with the benchmark rate). The borrowing cost for developers is also high at
49、35% premium to benchmark rate one of the highest in the past five years. Moreover, downpayments for mortgages also look too high to us at 30-40% for first-time buyers, vs. an average of 20-30% in 2012-17. Figure 15: Summary of borrowing cost for first/decond-time buyers and developers SOURCE: CGS-CIMB RESEARCH, WIND We