Real Estate Developers:policy tightening constructive; stable outlook ahead

We held a property panel with the topic of “Growing amidst policyuncertainty” during our China Investment Frontier Conference 2010 inBeijing on November 1st. In general, property panelists (includingeconomists, industry specialists, and developers) believe the currentproperty tightening measures promote healthier and more sustainableindustry development, although they expect potential property priceweakness in 2011 due to increasing supply and suppressed demand.

1. On the policy side, most panelists agree that the recent timely tighteninghas been taking effect, as it targets curbing speculation rather thandiscouraging underlying demand. One panelist believes there could be astructural shift in property market supply, with more social property unitsunder construction and to be built in the longer-run.

2. Most panelists remain confident in China’s property market outlook inthe medium and long term driven by further urbanization and a morebalanced growth between tier-1/major tier-2 and those lower-tier cities.

Panelists do expect near-term property price weakness due to accelerationof inventory build-up in a continued policy tightening environment. Thatsaid, they do not expect significant downside in the market given thestrong economic/household income growth outlook.

3. Developers believe property investment in the coming one or two yearsto be more rationalized and generally expect more growth opportunities inthose tier-2/3 cities. They also expect earnings growth outlook amongdevelopers to vary, driven by developers’ different regional focus, productdevelopment/cash management skills, etc.

Our top Buy ideas: Evergrande (3333.HK) and Vanke (A) (000002.SZ), bothon Conv. list. We also have Buy on Fantasia (1777.HK), Vanke (B)(200002.SZ), Poly (600048.SS), Agile (3383.HK), Poly HK (0119.HK), CountryGarden (2007.HK), Gemdale (600383.SS), Sino Ocean (3377.HK) and ChinaResources Land (1109.HK). Our Sell ideas: IFM Investment (CTC; Conv. list),Greentown (3900.HK), OCT (000069.SZ), Shenzhen Investment (0604.HK),and CWTC (600007.SS). Key downside risk: Unexpected gov’t policytightening; macro hard landing. Key upside risk: Stronger-than-expectedvolume growth; potential M&A.