China Property Investment Update:Christmas gifts from the China Property sector

We have just returned from site visits and reverse road shows in Fujian, Zhejiang, Guangxi and Sichuan where we learned: (1) Branded large players dominate the upper and high-end housing markets in tier-3 and -4 cities, accelerating market consolidation by squeezing out local and small players; and (2) active land banking and strong growth in GFA new starts will lead to a year of destocking in 2014 while intensive new launches will help curb rapidly rising ASPs. Negative feedback from commercial space and the oversupply means branded commercial players are facing fierce competition. Only the largest projects occupying prime sites will survive.

Accumulate property stocks on dips before Christmas and New Year, and expect a strong rebound in 1Q14 based on (1) relaxed credit conditions at the beginning of the year due to banks resetting loan quotas; (2) further property curbs less likely due to weaker year-on-year GDP growth in 1Q14F and quarter-on-quarter GDP growth from 3Q13 to 4Q13F; (3) cheaper valuations and more buying opportunities as China property stocks continue to underperform until the end of 2013F after the Third Plenary meetings.

Action. Our top picks within the sector are COLI (688 HK, Outperform), Shimao Property (813 HK, Outperform), Greentown China (3900 HK, Outperform) and Shenzhen Investment (604 HK, Outperform). We have noticed investors shied away from Country Garden (2007 HK, Neutral) and other property outperformers of 2013. It is no surprise when names like Agile Property (3383 HK, Underperform) and other developers, in danger of missing their annual sales targets, are also being avoided. For risk-averse investors, we advise either sticking with COLI to simply gain sector exposure in coming months, or trading the pair of Shimao and Country Garden (long/short), as the two tend to move along the same pace at a similar beta. We prefer Shimao for a possible higher-than-expected sales target in 2014, with stronger pricing powers across the YRD and Fujian regions.

Risk. Continuing rapid increases in housing prices will trigger further price curbing policies, especially in key cities; oversupplied commercial space in many tier-2 and -3 cities further undermines the ROEs of major commercial property players.