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Property | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED Property | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED Alvin Wong +852 2252 1563 [email protected] BULLISH ANCHOR REPORT Crossing the threshold Stocks for action Strong fundamental demand and a likely shift in policy focus are keys to our call to We favour: 1) less exposure to move into China property. Investors trying to time an overweight stance on the sector overheated cities; 2) strong balance ran into several false starts last year and we were cautious in our October 2010 sheets; and 3) high earnings visibility. initiation, primarily because of policy overhang. But we expect a policy shift — from Our top picks remain COLI, Agile and controlling demand to increasing land supply — as the government looks to rein in KWG. Sino Ocean is now a BUY inflation in the broader economy. At the same time, demand has proved resilient in the following COSCO’s share disposal. face of the Oct-Nov 2010 tightening, with contracted sales exceeding expectations and boosting FY11F earnings lock-in. Our analysis indicates an 11% increase in sales Price Stock Rating Price target volume this year, backed by first home buyers and upgraders. Even assuming an Agile (3383 HK) BUY 12.58 15.66* average 5% price correction in 2011F, we look for annualised ASPs to rise. We are COLI (688 HK) BUY 15.38 21.30* lifting FY11F earnings, end-11F NAVs and PTs by 3%, 7% and 9%, respectively. Our Country Gdn (2007 HK) NEUTRAL 3.03 3.30* new FY11F earnings forecasts are 16% above consensus and we expect upward CR Land (1109 HK) NEUTRAL 15.54 15.79* revisions by the street. From a 30% discount at the time of our initiation, the sector is GZ R&F (2777 HK) REDUCE 12.16 10.46* KWG (1813 HK) BUY 6.67 7.98* now at a 35% discount to end-11F NAV. Favouring less exposure to overheated cities, Poly (HK) (119 HK) BUY 8.19 10.52* together with strong balance sheets and high earnings visibility, we keep big-cap COLI, Shimao (813 HK) BUY 12.90 16.54* mid-cap Agile and small-cap KWG as our top picks. Sino Ocean (3377 HK) BUY 5.50 6.66* Upgrading from Neutral * Revising PT up The right time to revisit China property Local currency; prices as of 5 Jan close Policy shift from demand to supply -> more equity friendly Analysts Alvin Wong Confidence reflected in earnings / NAV revisions +852 2252 1563 [email protected] Nomura Anchor Reports examine the key themes and value drivers that underpin our Jianping Chen (Researcher) sector views and stock recommendations for the next 6 to 12 months. +852 2252 2139 [email protected] Any authors named on this report are research analysts unless otherwise indicated. See the important disclosures and analyst certifications on pages 81 to 84. Nomura 10 January 2011 Property | CHINA 2011 Outlook NOMURA INTERNATIONAL (HK) LIMITED Alvin Wong +852 2252 1563 [email protected] BULLISH Action Stocks for action We believe now is the time to revisit the China property sector. 2010 brought many We favour: 1) less exposure to false starts for investors trying to time an overweight sector stance. In our view, the overheated cities; 2) strong balance recent rebound is sustainable, backed by a sound base of fundamental demand sheets; and 3) high earnings visibility. and a likely policy shift toward increased supply. Following strong 2010 contracted Our top picks remain COLI, Agile and sales, we lift FY11F earnings and end-11F NAVs and PTs by 3%, 7% and 9%. KWG. Sino Ocean is now a BUY following COSCO’s share disposal. Catalysts Price Strong 2010 contracted sales figures are likely to trigger earnings / NAV revisions Stock Rating Price target by the street in the coming months, in our view. Agile (3383 HK) BUY 12.58 15.66* COLI (688 HK) BUY 15.38 21.30* Country Gdn (2007 HK) NEUTRAL 3.03 3.30* Anchor themes CR Land (1109 HK) NEUTRAL 15.54 15.79* A likely policy shift from demand to supply is positive for developers. We expect less GZ R&F (2777 HK) REDUCE 12.16 10.46* KWG (1813 HK) BUY 6.67 7.98* aggressive measures in 2011F, with controlling broader inflation likely to be top of the Poly (HK) (119 HK) BUY 8.19 10.52* Shimao (813 HK) BUY 12.90 16.54* government’s agenda. Recent policies have had little impact on fundamental Sino Ocean (3377 HK) BUY 5.50 6.66* demand, and rate hikes should have little impact on share prices initially. Upgrading from Neutral ; * Revising PT up Local currency; prices as of 5 Jan close Crossing the threshold Analysts Alvin Wong The right time to revisit China property +852 2252 1563 [email protected] We believe the recent rebound in the China property sector is sustainable, given signs of a shift in policy focus from administrative demand controls to increasing Jianping Chen (Researcher) land supply. Better-than-expected contracted sales in Oct-Nov 2010 suggest to us +852 2252 2139 that fundamental demand is intact, even under property tightening. Moreover, [email protected] history tells us that, in the early stages, interest rate hikes don’t have a significant impact on share price performance. Investors ran into several false starts in trying to time an overweight position in China property in 2010. We believe now is the time to revisit the sector. Policy shift from demand to supply -> more equity friendly Instead of introducing more administrative demand controls, we believe the central government is leaning towards increasing land supply, which should be favourable for developers, in our view. Our comprehensive and conservative demand/supply analysis suggests that fundamental demand from first home buyers and upgraders will remain strong in 2011F, supporting an 11% y-y increase in sales volume. Annualised ASPs should rise, even assuming an average price correction of 5% across all cities in 2011F. This explains why we are comfortable in expecting further improvement in contracted sales going into 2011F. Confidence reflected in earnings / NAV revisions Following strong 2010 contracted sales figures, we expect upward earnings / NAV revisions by the street. On our estimates, across our China property universe, a full 62% of FY11F earnings are locked in. We are therefore confident in our revised earnings forecasts, which are 16% above consensus. On average, we revise up FY11F earnings, end-11F NAVs and PTs by 3%, 7% and 9%, respectively. We find the sector is trading at a 35% discount to our average end-11F NAV estimates, vs a 30% discount at the time of our initiation in Oct 2010; we see attractive returns. We have 6 BUYs, 2 NEUTRALs and 1 REDUCE in our coverage universe. Our top picks remain COLI, Agile and KWG. Nomura 1 10 January 2011 Property | China Alvin Wong Contents Executive summary 5 Supporting factors 5 2011F policy surprises unlikely 6 Stock picks 6 Valuation and price target methodology 6 Risks to our investment view 6 Sensitivity of earnings, end-11F NAV 6 Sound base of fundamental demand 8 Policy shift toward increased supply 8 More housing supply expected in 2011F 8 We expect 20% y-y rise in 2011F new housing starts 9 Fundamental demand should continue to drive volume in 2011F 9 Transaction volume up 11% y-y to 939mn sqm GFA in 2011F 10 We estimate end-user demand will reach 821mn sqm GFA 12 Will prices come down? 14 Annualised ASPs should still trend up 14 2010: the most stringent tightening year 15 Toughest measures had only two-month impact 17 More importantly, still no meaningful price correction 17 Concerns of ongoing tightening have weighed on share prices 18 2011F: policy surprises unlikely 19 2010 contracted sales beat consensus 23 Despite tightening, all developers met 2010 sales targets 23 Encouraging contracted sales to spur FY11F earnings revisions 23 Good grounds for above-consensus earnings estimates 24 End-11F NAV estimates revised up 25 Raising price targets by 9% on average 25 Fundamentals offset further policy risk 25 Time to BUY China property sector 26 Top picks 27 Continue to favour COLI, Agile and KWG 27 Rating upgrade: Sino Ocean Land 28 Share price impact of previous policy measures 33 Nomura 2 10 January 2011 Property | China Alvin Wong Latest company views Agile Properties 34 China Overseas Land & Investment 39 China Resources Land 44 Country Garden Holdings 49 Guangzhou R&F Properties 54 KWG Properties 59 Poly (Hong Kong) Investments 64 Shimao Property Holdings 69 Sino-Ocean Land Holdings 74 Also see our 4 October Anchor Report Also see our 7 December China on China property: Policy … many Strategy report: 2011 Outlook — Higher possible moves ground Nomura 3 10 January 2011 Property | China Alvin Wong In a nutshell Exhibit 1. Valuation summary Net End-11F NAV P/E P/BV debt/ Last Price Market Yield equity Bloomberg price target Upside cap Disc PT disc FY10F FY11F FY10F FY10F FY11F FY10F Company Ticker Rating (HK$) (HK$) (%) (HK$mn) (HK$/sh) (%) (%) (x) (x) (%) (x) (x) (%) China Property developers COLI 688 HK BUY15.38 21.30 38125,693 18.06 (15) N.A 13.6 10.1 2.1 2.5 2.1 45.8 CRL 1109 HK NEUTRAL15.54 15.79 283,712 19.74 (21) (20) 20.7 14.2 1.4 1.7 1.6 53.5 Shimao 813 HK BUY12.90 16.54 2845,762 23.62 (45) (30) 11.7 7.7 2.6 1.5 1.3 76.4 Guangzhou R&F 2777 HK REDUCE 12.16 10.46 (14) 39,184 17.44 (30) (40) 9.5 7.9 3.2 1.8 1.6 91.4 KWG 1813 HK BUY6.67 7.98 2019,297 11.40 (41) (30) 15.6 9.8 1.9 1.5 1.3 62.5 Agile 3383 HK BUY12.58 15.66 2443,687 22.37 (44) (30) 11.0 8.6 3.3 2.2 1.9 42.4 Sino-Ocean 3377 HK BUY5.50 6.66 21 31,011 9.51 (42) (30) 14.1 9.7 2.3 0.9 0.8 61.2 Poly (HK) 119 HK BUY 8.19 10.52 28 29,553 13.15 (38) (20) 20.9 13.6 0.7 1.3 1.2 68.7 Country Garden 2007 HK NEUTRAL 3.03 3.30 9 50,598 4.71 (36) (30) 14.4 8.5 2.5 1.9 1.6 37.7 Note: We derive our price target for COLI based on 14x FY11F EPS.
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