Weekly Property Sales Flash:Investors waiting on the sidelines

Property sales in ten major Chinese cities retreatedover the past week, with GFA sold declining 3.3% WoW.

The fall in transaction volume was due to the “wait-and-see”stance taken by investors following the NPC, where theoverall tone towards the property market was one oftightening. Volume is likely to pick up as price cuts continueto be made and low mortgage rates drive up demand.

Results season in progress. A number of developershave already announced results. The majority findthemselves having to contend with mounting inventorylevels due to the weakening market now straining underover investment that took place during the good times in2010-2011. Several developers including Guangzhou R&F(2777HK, Underperform) announced they may cut pricesacross all projects by up to c.10% in order to improve salesand net gearing (at 85.9% in FY11).

Mounting inventory levels. Average inventory level of thefive benchmark developers with SOE backgroundsincreased 41.7% YoY in 2011, giving credence to our viewthat it is mounting inventory levels that are compellingdevelopers to cut prices by 10-20% in 2012.

Tight policies unlikely to change. The government hasmade its position on the property market quite unequivocal:it intends to keep a tight rein on property prices throughpolicy tightening. We do not see this attitude changing anytime soon. Policy tightening is yet another reason to expectdevelopers to cut prices in order to encourage sales.

Expect a sustainable recovery. Expected nationwide pricecuts of 10-20% in the coming weeks are likely to releasepent-up demand, with first-home buyers entering the marketas prices become more affordable. We look for a pickup intransaction volume leading to a demand-driven recoverypossibly as early as 2H12.

Pick winners before the recovery takes place. We arenow in a period of transition. Investors would be welladvised to pick defensive names with: (1) high daily tradingvolume with low market exit risk; (2) extensive land bankwith low market concentration risk; and (3) healthy netgearing with low financial risk and high growth potentialdefined by a large number of saleable projects in 2012enabling the company to outperform in the upcomingrecovery. We recommend investors take a close look atCR Land (1109 HK, Outperform), which satisfies thiscriteria.