CEBI Research China Property

CEBI Research

China Property

Sector Report ─ China Property

Fine tuning policy yet to boost sales volume

Housing policy shows signal of relaxation especially after Local’s Dominic Chan Two sessions Senior Equity Analyst Debt financing surged with lower funding cost in Jan 2019, [email protected] reflecting a loose credit conditions. (852) 2916-9631 Relatively stable in RMB currency YTD

Chinese property companies met its 2018 sales target, but home sales growth is likely to slow down in 2019 27 Feb 2019 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

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 The commercial land sold before March 30, 2017 can also be sold to individuals.

Qingdao 3/1/2019 High-tech Suspension of the “Rules for the sale of commercial housing in the high-tech zone of Qingdao City”. Zone Fuzhou, Prepare a fine-tuning policy to ensure stable prices, stabilize housing prices, and stabilize 14/1/2019 Xiamen expectations. 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 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 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 Houses are not for speculation, and target to implement fine tuning policy

24/1/2019 Changsha Target to slightly adjust property policy.

Source：Local governemnet

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.

Figure 3：Monthly Debt financing for China property companies in Jan2019

1200

1000

800

600

400

200

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.

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

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 ------5,298.8 14.5% China 5,513.4 5,500 100.24% 5,009.6 10.1% Evergrande SUNAC 4,649.5 4,500 103.32% 3,661.0 27.0%

China 3,012.4 2,900 103.88% 2,320.7 29.8% Overseas

China Res 2,106.8 1,830 115.12% 1,521.6 38.5% land

Longfor 2,006.4 2,000 100.32% 1,560.8 28.5% Group

Shimao 1,761.5 1,400 125.82% 1,007.7 74.8% Property

Future Land 2,210.0 1,800 122.78% 1,264.2 74.8%

Logan 718.0 660 108.79% 434.0 65.4% property Source: Company information

Figure 8： Jan2019 Sales figure for major China property company

Jan2019 Jan2018 Jan2018 Jan2019 contract contract 2019 contract contract sales contract sales sales volume sales (Rmb sales YoY % volume (Rmb (Rmb 100M) (Rmb 100M) 100M) 100M)

Country Garden 330.7 691.6 -52.2% 382.0 756.0

Vanke 488.8 679.8 -28.1% 317.7 444.4

China Evergrande 431.7 643.6 -32.9% 387.7 623.7

SUNAC 239.6 221.9 8.0% 159.2 138.3

China Overseas 290.5 258.3 12.5% 125.2 156.9

China Res land 163.9 111.8 46.7% 97.5 54.1

Longfor Group 149.4 160.2 -6.7% 95.8 115.5

Shimao Property 115.2 100.2 14.9% 685.3 586.6

Future Land 109.6 102.8 6.6% 96.9 98.3

Logan property 43.5 42.1 3.3% 32.5 22.8

Source: Company information

Market has an optimisitc estimates on China 4.00property sector 2018 results

2.00 China property developers will start to announce their 2018 annual results in February. Overall speaking, market is optimistic about the earnings. We summarize 0.00 60 Hong Kong listed China property stocks, according to Bloomberg, market expects-2.00 Property Company to see double digit growth in EPS in 2018, but the growth rate2014-01 will2014-06 slow2014-11 2015-04 down2015-09 in2016-02 2019.2016-07 2016-12 2017-05 2017-10 2018-03 2018-08 一线城市二线城市 Figure 9：Revenue estimates for China Figure 10：EPS estimates for China property property companies三线城市 in 2018/2019整体 companies in 2018/2019

70% 40% 2018E 2019E 35.1% 57.5% 35% 60% 55.7% 54.6% 29.3% 30% 27.2% 50% 25% 22.2% 41.6% 40% 36.2% 33.7% 34.1% 20% 28.9% 29.1% 30.1% 29.7% 27.0% 30% 25.0% 25.4% 15% 23.3% 19.5% 18.9% 16.2%16.7% 16.8% 16.3% 10% 20% 12.9%

5% 10%

0% 0% Revenue growth (%) EPS growth (%)

2018E 2019E

Source: Bloomberg Source: Bloomberg

Stable new home price but overall transaction is sluggish

According to NBS’s 70-city price index, overall home prices remained stable, while the price movement in tier-1 cities was almost flat. In Jan2019, new home prices in tier-1 cities slightly declined by 0.1% MoM, while secondary home prices dropped 0.1% MoM.

In terms of nationwide contracted sales, residential property sales volume and sales value both showed signs of slowing down lately. Residential property sales volume dropped by 14% in Jan2019.

In 2018, Real Estate Investment, GFA under construction and GFA started recorded 9.5%, 5.2% and 17.2% YoY growth respectively, whereas GFA completed fell 7.8% YoY.

Fig 11: MoM change of 70-city price index (new Fig 12: MoM change of 70-city price index home) (secondary home)

4.00 Tier-1 6.00 Tier-1 Tier-2 5.00 Tier-2 3.00 Tier-3 4.00 Tier-3 Overall 2.00 Overall 3.00

2.00 1.00 1.00

0.00 0.00

-1.00 -1.00 2015-01 2015-05 2015-09 2016-01 2016-05 2016-09 2017-01 2017-05 2017-09 2018-01 2018-05 2018-09 2015-01 2015-04 2015-07 2015-10 2016-01 2016-04 2016-07 2016-10 2017-01 2017-04 2017-07 2017-10 2018-01 2018-04 2018-07 2018-10 Source: NBS Source: NBS

Fig 13: Residential property sales volume Fig 14: Residential property sales value

250 (million sqm) (%) 50 1,800 (Rmbbn) (%) 80

40 1,600 70 60 200 1,400 30 50 1,200 150 20 40 1,000 30 10 800 20 100 0 600 10 0 -10 400 50 -10 -20 200 -20 0 -30 0 -30

2015-02 2015-07 2015-12 2016-05 2016-10 2017-03 2017-08 2018-01 2018-06 2018-11 2015-02 2015-06 2015-10 2016-02 2016-06 2016-10 2017-02 2017-06 2017-10 2018-02 2018-06 2018-10

Monthly sales volume YoY change Monthly sales value YoY change

Source: NBS Source: NBS

Fig 15: Selling price of commercial properties Fig 16: Completed and unsold residential (Rmb per sqm) property (mn sqm)

10,000 80,000

9,000 70,000 8,000 60,000 7,000

6,000 50,000

5,000 40,000 4,000 30,000 3,000 20,000 2,000 10,000 1,000 0 0

2008-02 2008-12 2009-10 2010-08 2011-06 2012-04 2013-02 2013-12 2014-10 2015-08 2016-06 2017-04 2018-02 2018-12 2013-02 2013-08 2014-02 2014-08 2015-02 2015-08 2016-02 2016-08 2017-02 2017-08 2018-02 2018-08

Source: NBS Source: NBS

Fig 17: Real Estate Investment Fig 18: GFA under construction

140,000 (100 mn) (%) 12 900,000 (10,000 sqm) (%) 9 800,000 8 120,000 10 700,000 7 100,000 8 600,000 6 80,000 500,000 5 6 60,000 400,000 4 4 300,000 3 40,000 200,000 2 20,000 2 100,000 1 0 0 0 0

2015-02 2015-06 2015-10 2016-02 2016-06 2016-10 2017-02 2017-06 2017-10 2018-02 2018-06 2018-10 2015-02 2015-06 2015-10 2016-02 2016-06 2016-10 2017-02 2017-06 2017-10 2018-02 2018-06 2018-10

Real Estate Investment YoY change GFA under construction YoY change

Source: NBS Source: NBS

Fig 19: GFA started Fig 20: GFA completed

250,000 (10,000 sqm) (%) 25 120,000 (10,000 sqm) (%) 35

20 30 200,000 15 100,000 25 20 10 80,000 150,000 5 15 10 0 60,000 5 100,000 -5 0 -10 40,000 -5 50,000 -15 20,000 -10 -20 -15 0 -25 0 -20

2015-02 2015-06 2015-10 2016-02 2016-06 2016-10 2017-02 2017-06 2017-10 2018-02 2018-06 2018-10 2015-02 2015-07 2015-12 2016-05 2016-10 2017-03 2017-08 2018-01 2018-06 2018-11

GFA started YoY change GFA completed YoY change

Source: NBS Source: NBS

Average interest rate of first home loan in China declined

The average interest rate of first-home loan in China declined to 5.68% in Jan2019, representing 0.03pp MoM decline. Fig 21: Average interest rate of first-home loan in China

5.80%

5.60%

5.40%

5.20%

5.00%

4.80%

4.60%

Jul-17 Jul-18 Jan-18 Jun-18 Oct-17 Oct-18 Apr-18 Sep-17 Feb-18 Sep-18 Dec-17 Dec-18 Aug-17 Aug-18 Nov-17 Nov-18 Mar-18 May-18

Source: Bloomberg

Maintain our bullish view on COLI and Logan property

China property sector’s performance outperformed market YTD. However, we should pay attention to the decline in new home sales, of which would be one of the uncertainty for the sector. The sector is currently trading as 5.9x 2019E P/E, valuation is undemanding. We maintain our bullish view on two major type of China property stocks, including 1) Company with strong balance sheet, such as COLI. 2) Greater Bay Area related stocks, such as Logan Property.

Fig 22: 1- year share price performance (major stocks) (%) 120

115 110

105

100 95

85 80

China Property Hang Seng Index

Source: Bloomberg

Valuation table

Figure 23: Peer comparison table for major property stocks

EPS EPS CAGR P/E ratio P/B ratio Dividend yield ROE Price Ticker Company Name 2017 2018E 2019E 2017 2018E 2019E 2017 2018E 2019E 2018E 2018E Market Cap (hkd m) (Local Currency) China Property 2007 HK EQUITY COUNTRY GARDEN HOLDINGS CO 10.86 1.42 1.84 2.35 29% 7.66 5.92 4.61 1.92 1.56 1.16 5.76 30.67 328351.98 2202 HK EQUITY CHINA VANKE CO LTD-H 30.45 2.93 3.66 4.38 22% 10.38 8.32 6.96 2.12 1.84 1.57 4.16 23.91 298008.68 3333 HK EQUITY CHINA EVERGRANDE GROUP 25.20 2.12 4.08 4.65 48% 11.91 6.17 5.43 1.94 1.98 1.66 10.42 33.54 215205.67 1918 HK EQUITY SUNAC CHINA HOLDINGS LTD 34.30 3.19 3.81 5.93 36% 10.76 9.01 5.79 2.70 2.32 1.77 2.41 31.53 207792.07 688 HK EQUITY CHINA OVERSEAS LAND & INVEST 29.05 3.72 3.65 4.34 8% 7.81 7.95 6.69 1.15 1.07 0.95 3.30 15.21 134707.43 1109 HK EQUITY CHINA RESOURCES LAND LTD 30.15 3.32 3.62 4.21 13% 9.08 8.33 7.15 1.44 1.30 1.14 4.08 17.34 69872.22 960 HK EQUITY LONGFOR GROUP HOLDINGS LTD 24.35 2.51 2.57 3.20 13% 9.72 9.48 7.61 1.68 1.54 1.34 4.27 19.34 39441.78 813 HK EQUITY SHIMAO PROPERTY HOLDINGS LTD 19.90 2.68 3.21 4.16 25% 7.42 6.20 4.78 0.99 0.87 0.77 6.23 17.21 26960.62 1030 HK EQUITY FUTURE LAND DEVELOPMENT HOLD 6.97 0.77 0.99 1.40 34% 9.01 7.08 5.00 2.38 2.00 1.46 5.49 35.72 120262.98 3380 HK EQUITY LOGAN PROPERTY HOLDINGS CO L 11.34 1.35 1.53 2.05 23% 8.39 7.43 5.54 2.19 1.99 1.61 5.84 31.68 39718.86 884 HK EQUITY CIFI HOLDINGS GROUP CO LTD 5.50 0.79 0.85 1.07 17% 7.01 6.51 5.15 1.54 1.35 1.12 5.23 23.53 326499.98 Average 9.01 7.49 5.88 1.82 1.62 1.32 5.20 25.43

Source: Bloomberg

Risks

Risk factors include 1) RMB continues to weaken, 2) Weaker-than-expected sales growth, 3) Changes in housing policy.

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