Real Estate:Better volumes in 2Q; execution drives divergence

We hosted a three-day property trip visiting governors, developers, banks,agencies, and property projects in Chongqing, Xi’an, and Chengdu. Keyhighlights:(1) Moderate volume/price drop expected in CD/CQ/XA: Developersexpect a 10%-20% yoy volume drop and a moderate (about 10%) pricecorrection, by factoring in about 20% demand contraction from homepurchase restrictions, another 10%-20% from homebuyers’ wait-and-seemood, and a 10%-20% increase in GFA launches. They believe that gradualinventory build-up and increasing cash flow pressure could bring sellingprices down (though only a few developers have moderately cut pricesthus far), but that price cuts will not be significant in 2011. Near-termoutlook: Developers expect volumes to bottom in March/April thenimprove sequentially thereafter on the back of sentiment stabilization andincreasing launches, in line with feedback from our last Yangtze River Deltaregion (YRD) trip.

(2) Quality developers’ market share to increase. We expectdevelopers with mass-market focus and product competiveness tosignificantly outperform the market. Vanke/Poly/Gemdale’s localmanagement teams expect contract sales in CD, CQ, and XA to grow 20%-50% yoy (vs. a potential 20% decline for the entire market), with ytd saleson track to reach full-year targets. Meanwhile, we also expect relativelyweaker sales performance for developers with a high-end focus.

(3) Concerns over further property tightening are low.

Developers believe the tightening policies have taken effect. They believethe possibility of further policy tightening is low, though actual executionof HPR thus far is not as strict in CD, CQ, and XA as in tier-1 cities.

Risk/reward attractive; prefer asset turn with healthy exposure。

Relief from further tightening concerns helped stabilize valuations in recentweeks. We believe another share price rally could hinge on the resilientsales performance from developers, depending on geographic exposure,product focus, and execution skills. We reiterate our preference forundervalued developers with high exposure to mass products, central andwestern China, and/or prudent cash flow management. Our top picks (Buy,on Conv. List) are: Evergrande, Vanke (A) and Beijing Capital Development.