Property China Credit profiles to improve on lower land acquisitions and solid sales Contents Summary Summary ............................................ 1 Overall policy stance on property industry remains unchanged: we expect the Chinese governments will continue its tight control policies on Property sales ..................................... 2 property industry in 2019 to avoid unwanted overheating in the industry. In Land acquisition .................................. 4 our view, the governments will continue to clamp down the shadow banking financing in the industry and encourage the credit growth through more Property funding ................................. 6 regulated financing channels. On the other hand, with property price under Working capital efficiency ................... 7 control and inventory came off from its peak, a further severe tightening on the industry is unlikely, in our opinion. Industry consolidation ......................... 8 Residential property sales momentum likely to continue but at a slightly Profitability and Cash Flow ................. 9 softer pace: residential property sales value was better than the market Leverage .......................................... 10 expected in the first nine months of 2018, with property sales value rising 16% year over year, according to National Bureau of Statistics (NBS). We Sampled Property Issuers ................ 11 expect to see residential property sales value to grow around 10-15% in the Glossary ........................................... 13 fourth quarter of 2018, and continue to grow at around 10% in 2019, with 3- 4% growth in sales volume and 5-6% growth in average selling price (ASP). Land acquisitions to slow down further and market sentiment unlikely to rebound: we expect the land acquisition activities to continue slow down noticeably in 2019, with the land sale value to grow at around low teen level over the next 12 months. With the poor market sentiment that were damped by the uncertain outlook, property developers have become more prudent in land bank replenishment. Property funding will continue to grow at its current pace: we estimate the property funding growth for Chinese property developers to remain at 9% in 2019, driven by the solid contracted sales. The decrease in trust loans will Contacts be offset by higher bank loans, and bonds will remain as a supplementary source of funding in 2019, in our view. Name Winnie Guo Working capital efficiency has improved and is expected to continue Title Director improving: we believe the overall working capital efficiency has improved in Direct +852 3615 8344 2018 for the China property sector due to faster property sales which has Email [email protected] resulted in a lower inventory. We expect the working capital efficiency to continue improving, thanks to robust property sales and slower land Name Christine Zhang acquisitions. However, we expect property inventory to increase slightly in Title Analyst 2019 as the property floor-square new start to catch up the property floor- Direct +852 3615 8276 square sold. Email [email protected] Leverage to decline slightly but liquidity to remain tight in 2019: the sampled property companies that we analyzed have reported better profitability and higher leverage in the first half of 2018. We expect the leverage to increase in the second half of 2018 and decline slightly in 2019, thanks to slowing land acquisitions and robust property sales. Property companies’ liquidity condition, measured by cashflow adequacy ratio, has improved slightly in the first half of 2018 as many companies have already extended their short-term debt. However, we expect the liquidity for the sector to remain tight, with high refinancing requirement from bonds and syndicate loans in 2019. 30 October 2018 Page | 1 RE02020100001 Property China Residential property sales are expected to remain robust in 2019, driven by positive growth of both volume and price We expect China’s residential property sales value to grow around 10-15% year over year in the fourth quarter of 2018 and continue its growth rate of 10% in 2019, following the robust growth observed in the first nine months of this year in which residential property sales values have grown 16%. Even though the macro deleveraging will continue to be a key focus in China over the next 12 months, we believe the People’s Bank of China (PBoC) will remain accommodative on its monetary policies which will provide sufficient credit growth to the economy. In our opinion, money supply and loan growth are the primary factors that have driven China’s property sales in the recent years (exhibit 1), in addition to other secondary factors such as economic cycles, industry dynamics, and regulatory changes. Over the longer run, China’s property industry is supported by the overall economic growth and increasing urbanization; but it tends to be more impacted by the liquidity condition in the economy over the shorter term. Exhibit 1: Total Loan Balance Growth and Property Sales Growth Exhibit 2: Property Development and Mortgage Loan Mortgage Loan As % of Total (RHS) 100% 17% Development Loan As % of Total (RHS) 70% Porperty Development Loan YoY (LHS) 30% 80% Mortgage Loan YoY (LHS) 16% 60% 25% 60% 50% 15% 20% 40% 40% 30% 15% 20% 14% 20% 0% 10% 10% 13% 5% Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Sep 13 Sep 14 Sep 15 Sep 16 Sep 17 Sep 18 -20% Sep 12 May 13 May 14 May 15 May 16 May 17 May 18 May 12 0% -40% Property Sales YTD YoY% (LHS) 12% -10% 0% Jul 11 Oct09 Apr 13 Oct16 Jun 07 Jan 08 Jun 14 Jan 15 Mar 09 Feb 12 Mar 16 Dec 10 Nov 13 Dec 17 Aug 08 Sep 12 Aug 15 May 17 Total Loan Balance YoY% (RHS) May 10 Source: PBOC, National Bureau of Statistics, Pengyuan International Source: PBOC, National Bureau of Statistics, Pengyuan International China’s M2 growth has been trending down over the past few years and stood at around 8.3% at the end of September 2018. Total domestic loan balance was about renminbi (RMB) 133 trillion, up 13.2% year over year, and new yuan loan balance was RMB13 trillion, up 17.8% year over year at the end of September 2018. Of which, property related loans grew much faster to RMB37.5 trillion, up 20% year over year, and accounted for 28% and 58% of the total loan and new yuan loan balance respectively (exhibit 2). Among the property related loans, mortgage loans are the biggest component and stood at RMB24.9 trillion, up 18% year over year. Meanwhile, property development loan balance jumped by 24% year over year. Out of which, the private housing loan growth accelerating to 19% from a decline of 7% and social housing loan growth slowing to 33% from 48%, at the end September 2018 from March 2017. In addition, the growth of total social financing (TSF) balance, which includes off-balance-sheet forms of financing, slowed to 11% in September 2018 from 14% in June 2017, as a result of governments’ effort to clamp down shadow lending. 30 October 2018 Page | 2 RE02020100001 Property China Exhibit 3: Property Sales Volume Growth and ASP Growth Exhibit 4: Property Sales Volume by Cities 40 Cities 1st Tier Sales Volume YoY% 120% 80% 40 Cities 2nd Tier Sales Volume YoY% 100% 40 Cities 3rd Tier Sales Volume YoY% 80% 60% 60% 40% 40% 20% 20% 0% -20% 0% Oct06 Oct08 Oct10 Oct12 Oct14 Oct16 Jun 07 Jun 09 Jun 11 Jun 13 Jun 15 Jun 17 Feb 08 Feb 10 Feb 12 Feb 14 Feb 16 Feb 18 -40% Feb 06 Jun 13 Jun 14 Jun 15 Jun 16 Jun 17 Jun 18 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Dec 13 Dec 14 Dec 15 Dec 16 Dec 17 Sep 14 Sep 15 Sep 16 Sep 17 -60% -20% Sep 13 -80% -40% -100% Monthly Residential Property FS Sold YoY% Monthly Residential Property ASP YoY% -60% Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International To be more specific, residential property sales volume has grown 3% and nationwide ASP has grown 10% in the first nine months this year according to NBS, as shown in the exhibit 3. We expect the nationwide residential property sales volume to grow at 3-4% in 2019, of which sale volume growth will recover in tier-1 cities due to faster project launching by property developers to raise cash, and slowdown in tier-2 and tier-3 cities due to less monetized resettlement transactions and residents’ weakening purchase power as a result of high property prices. Historically, the sales volume growth has been very volatile across all tiers of cities (exhibit 4). Furthermore, we estimate the nationwide residential property ASP to increase 5-6% in 2019 despite the price control measures imposed by Chinese governments. Data from NBS’ major seventy-cities property survey also show, in September 2018, the number of cities that report a positive year-on-year housing price change increased to 96% of the surveyed sample, from 84% at the beginning of the year (exhibit 5). However, such property price increases are mostly observed among tier-2 and tier-3 cities, which have seen 7% and 9% increases in property prices respectively, and the increases were driven by provincial governments’ supports on first-time buyers and upgraders by relaxing some purchase restrictions. On the other hand, the tightening measures on the property market has led to a significant price slowdown in 2017 in tier-1 cities with no meaningful growth in 2018, according to the seventy-cities survey (exhibit 6). Exhibit 5: Proportion of 70 Cities Price Year over Year Change Exhibit 6: Property Sales ASP by Cities 70 Cities ASP YoY% 100% 40% 70 Cities 1st Tier City ASP YoY% 70 Cities 2nd Tier City