China Property Investment Update : Further corrections then a rebound in 1Q14

Further corrections in the property market. This wasthe overriding concern of most people we spoke with onour recent marketing trip in Hong Kong and Shenzhen.

Their apprehension is justified in our view given(1) continuing implementation of price controls in secondandthird-tier cities; (2) higher second-home-loan downpayments in Shanghai, Shenzhen and Guangzhou;(3) further tightening in housing purchase restrictions fornon-locals in these cities, and (4) further tightening inpresale permit approvals in Beijing.

Short-term rebound in 1Q14F, based on (1) relaxedcredit conditions after bank loan quotas reset at thebeginning of the year; (2) weaker YoY GDP growth in1Q14F and weaker QoQ GDP growth from 3Q13 to4Q14, making further property curbs less likely; and(3) cheaper valuations and more buying opportunities inthe aftermath of the Third Plenary meetings as propertystocks continue to underperform until the end of 2013F.

Greater tolerance for upgrade demand. Questionsraised on our trip tended to center around land reforms,the long-term controlling mechanism and the effects ofurbanization. We believe a priority of China’s newleadership is to create policies that lead to a more stabledomestic property market. Towards this end, we thinkland supply will be boosted in 2014F while controls areput in place to regulate demand. A key change, in ourview, will be greater acceptance of the fact that peoplewant to improve their living standards by upgrading theirhomes. Over the next few years, we expect (1) thehigh-end market to loosen up, (2) more support for themiddle-end housing market, and (3) more protection forlow-end housing.

Our top picks within the sector are COLI (688 HK,Outperform), Shimao Property (813 HK, Outperform),Greentown China (3900 HK, Outperform) and ShenzhenInvestment (604 HK, Outperform). We have noticed ashift in market interest away from Country Garden(2007 HK, Neutral) and many other sales outperformersof 2013. Agile Property (3383 HK, Underperform) andother developers in danger of missing their annual salestargets are also being avoided.

Risk. Possible introduction of LAT pretax rates followingthe misleading CCTV report on LAT delays.