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CEBI Research China Property CEBI Research China Property Sector Report ─ China Property Fine tuning policy yet to boost sales volume ñ Housing policy shows signal of relaxation especially after Local’s Dominic Chan Two sessions Senior Equity Analyst ñ Debt financing surged with lower funding cost in Jan 2019, [email protected] reflecting a loose credit conditions. (852) 2916-9631 ñ Relatively stable in RMB currency YTD ñ Chinese property companies met its 2018 sales target, but home sales growth is likely to slow down in 2019 27 Feb 2019 ñ Maintain our bullish view on COLI (688 HK) and Logan Property (3380 HK) More fine tuning policies to come: China property sector continued to rebound in 2019. During the working conference held by Ministry of Housing and Urban-Rural Development of China by the end of 2018, the ministry highlighted 10 key tasks in 2019, including stabilize home and land prices in 2019. Meanwhile, more cities announced fine-tuning policies on property market, we expect more to come in the near future. Debt refinancing surged by 90% in Jan2019: As per our Key Data previous report, debt repayment for China property companies Avg.19 E P/E (x) 5.88 Avg.19E P/B (x) 1.32 will soar from 2019 to 2021. However, China property succeed to Avg.18 E Dividend Yield (%) 5.20 raise money by debt refinancing in recent months. According to Source: Bloomberg, CEBI the data of CRIC,the amount of debt issuance in Jan2019 was Rmb109.6bn, surged by 91.8% MoM. RMB appreciated against US dollars: As developers are Sector Performance (%) having a high level of foreign-denominated debt, RMB 1-mth 7.6 depreciation will weigh on their profitabilities and cash flows. 3-mth 15.6 However, situation changed as RMB appreciated against USD YTD 12.3 YTD. Source: Bloomberg, CEBI Expect a conservative 2019 sales target by China developer: Most of the China property companies met sales target in 2018. We expect they will set a conservative new home sales targete in 2019, after a strong growth in 2018. Weak Jan 2019 new home sales in China: New home sales weakened in Jan2019. Based on the 10 major companies under CEBI’s Stock Pick our cover, the sales value decreased by 15% YoY. Logan Property (3380 HK) Bullish view on COLI and Logan property: We maintain our COLI (688 HK) bullish view on COLI, given that its lower credit risk and stronger profitability among its peers, and Logan property, thanks to the theme under Greater Bay Area. Sector Performance Absolute Relative 1-mth 2 More specific fine-tuning policy to come There are no major changes in the board-based restrictive policy for China property market, with the policy of housing is for living, not for speculation remains unchanged. During the Central Economic Work Conference held in Dec 2018, the Chinese central government reiterated the importance of property market controls and the need to establish long-term effective mechanisms for the healthy growth of the real estate market, city-specific housing policies. During the working conference held by Ministry of Housing and Urban-Rural Development of China by the end of 2018, the ministry highlighted 10 key tasks for China property market in 2019, including 1) Aims to stabilize home and land prices in 2019, helping China property market to grow in a healthy way. 2) Ramp up the supply of rental housing to tackle home-affordability issues. Started from late 2018, several cities slightly adjusted the restrictive housing policy. We expect more fine-tuning policies to come this year. In December 2018, Heze in Shandong province announced the cancellation of the restricted sales policy, while some cities such as Hangzhou, Zhuhai also adjusted the property market regulation policy. In addition, Guangzhou made adjustments to the housing policy, by canceling some restrictions on the sales of real estate sales. On the other hand, many banks in Shanghai have lowered the interest rate on the first home loan. It is obvious that some cities have begun to fine-tune the real estate policy, which has suppressed the rigid demand for residents to purchase their own houses while suppressing investment in real estate. Figure 1：Recent policy relaxation in particular cities in China ñ Cancel the restruction that the newly purchased commercial housing and second-hand housing can be Heze, 18/12/2018 listed and traded at least two years after they have obtained the property right certificate. Local Shandong residentshouse purchase restriction transfer time is not less than 3 years. 19/12/2018 Guangzhou ñ The commercial land sold before March 30, 2017 can also be sold to individuals. Qingdao 3/1/2019 High-tech ñ Suspension of the “Rules for the sale of commercial housing in the high-tech zone of Qingdao City”. Zone Fuzhou, ñ Prepare a fine-tuning policy to ensure stable prices, stabilize housing prices, and stabilize 14/1/2019 Xiamen expectations. ñ Continue to implement precise control over the real estate market, improve market monitoring, Anhui 17/1/2019 evaluation and early warning mechanisms, adhere to classified control, and fine-tuning policy to Province promote non-residential commercial housing destocking. Henan ñ Continue to implement the real estate market to regulate the government's main body system, adhere 17/1/2019 Province to local conditions, and comprehensively implement policies. Zhejiang ñ Accelerate the establishment of a long-term mechanism for stable and healthy development of the real 18/1/2019 Province estate market. Hangzhou and Ningbo will design fine-tuning policy afterwards. 24/1/2019 Chengdu ñ Houses are not for speculation, and target to implement fine tuning policy 24/1/2019 Changsha ñ Target to slightly adjust property policy. Source：Local governemnet 3 Relatively stable in RMB currency rate RMB depreciated against USD from the peak by 10% in 2018. Given that the high proption of foreign-denominated debt, RMB depreciation will negatively impact their profitabilies and cash flows. The situation changed in 2018, given that RMB sighly appreciated by 3% YTD. The reasons for appreciation against USD are 1) United States slow down the pace of interest rate hikes, 2) China implemented several issues to boost economy, technical rebound given the big decline in 2018. Figure 2： RMB currency rate 7.0000 6.8000 6.6000 6.4000 6.2000 6.0000 Source: Wind Surge in debt issuance with lower funding cost Mainland developers actively issued bonds overseas at the end of last year and early this year. In Jan2019, 40 mainland real estate companies have raised funds through the issuance of various types of bonds or notes. Based on CRIC’s data, the amount of financing for domestic real estate enterprises in January was 109.5 billion yuan, of which the domestic debt issuance scale exceeded 74 billion yuan, a year- on-year increase of 1.4 times, and foreign debt was 50 billion yuan. At the same time, the funding cost has also dropped.Using China Evergrande as an example. In November 2018, the Company issued additional USD 1.1 billion senior notes due 2020, with an interest rate of 11%, but in January 2019, an additional US1.1 billion senior notes due 2020 issued, but interest rate declined to 7%. The decline in the financing costs of domestic enterprises reflects that the current credit market in the Mainland is relatively loose compared to the end of last year. We believe the overall funding cost will decline in 2019. 4 Figure 3：Monthly Debt financing for China property companies in Jan2019 1200 1000 800 600 400 200 0 Source: CRIC Figure 4：Funding cost for China property companies in Jan2019 Total amounts Financing tools MoM (%) Funding cost (RMB 100M) Foreign bonds 740.4 141.9% 7.86% Corporate bonds 178.4 -19.0% 5.65% Middern-term notes 35 250.0% 4.49% others 142 305.7% 4.68% Source: CRIC High refinancing needs during 2019-2021 Debt repayment will soar from 2019 to 2021. According to the Bloomberg, the total debt repayment of China property industry will be Rmb 417.27bn, 462.15bn and 671.34bn respectively in the above period. However, we believe market is less concern on the financial situation of China property industry, given that the strong loan issuance in Jan2019. 5 Fig 5: Debt repayment amount of China property industry during 2019-2033 900000 800000 700000 600000 500000 400000 300000 200000 100000 0 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030 2031 2033 Amount (RMB M) Source: Bloomberg Fig 6: Debt level and the percentage of foreign debt of property developers (As at Jun 30, 2018) 180,000 (Rmb mn) （%） 90 160,000 80 140,000 70 120,000 60 100,000 50 80,000 40 60,000 30 40,000 20 20,000 10 0 0 CNY debt USD debt HKD debt Debt in other currencies Percentage of foreign debt Source: Bloomberg 6 New home sales declined in Jan2019 China developers performed well in 2018. Although they set an aggressive sales target, most of them can meet its 2018 sales targets. Among them, Evergrande, Vanke, Country Garden are the best perfomers in terms of sales volume. However, China property developers reported a decline in home sales in Jan2019, below table shows the sales figure of major China property developers in our watch list. Moreover, we expect China property developers will set a relatively conservative sales target for 2019. From now only China Evergrande set a full year sales target of Rmb600bn in 2019, representing a 9% YoY increase. Figure 7： 2018 Sales figure for major China property company 2017 contract 2018 contract sales 2018 sales target Completion sales (Rmb YoY % (Rmb 100M) (Rmb 100M) rate 100M) Country 7,000.0 --- --- 5,508.0 27.1% Garden Vanke 6,069.5
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