China Property Credit Survey | No. 1-2014:Worse than we thought

Results from our latest survey on property loan information across major banks in major Chinese cities surprised us - in a bad way. Credit conditions are far worse than we expected. Current valuations for the stocks in our China property universe are based on the premise that credit conditions have been improving because of the new loan quotas. It turns out, however, based on the findings of our survey, that the major banks are still very cautious towards both mortgage and property development lending. Loan prices are high and approvals slow.

More stringent quarterly loan-to-deposit checks have been choking off lending activities even as the banks demand additional deposits, wealth product purchases and other fees from mortgage applicants. Loan approvals have been slow, loan prices flat and discounts hard to come by.

Action

To reflect the poor credit conditions, we widen the target discounts to NAV across our China property universe by 10-20% and lower all of our target prices (see table at bottom of page 2).

In the approach to results season, we expect the majority of major Chinese property names to enjoy a price bounce. We would view this as a profit taking opportunity and a good time to rotate out of the sector. If credit conditions improve along with the new launches expected in March-April we would consider a return to the market.

For investors with a strong risk appetite, we recommend Shimao (813 HK, Outperform). For simple sector exposure, we would accumulate COLI (688 HK, Outperform) and CR Land (1109 HK, Outperform). We advise avoiding Agile (3383 HK, Underperform) as we believe it is likely to miss its sales targets.

Risk of a hard landing grows the longer credit conditions remain tight because of rising ASPs in key cities. Many believe price curbs are imminent. Upside risk comes in the form of any loosening in existing controlling measures, especially relaxation of housing purchase limits.