China Property Outlook : Flying through an opening in the clouds

Market sentiment towards China’s property sector is likely toimprove once developers report interim financial results inAugust. We expect our covered names to report strong YoYgrowth in booked sales (48.0% YoY), earnings (38.2% YoY)and improving margins (up 2.0ppt). Chinese developers arealso looking forward to a busy launch schedule that willdovetail with the September- October peak sales season. Inthis positive environment, be on the lookout for opportunitiesto accumulate developer stocks. We expect a short-term15-20% rally in the coming weeks followed by mixed and flatstock performances later in 4Q, as upside will be largelycapped by tightening credit policies and with renewedconcerns over price controls, property tax trials andrefinancing risk.

Market consolidation is accelerating. We look for leadingnational players, including COLI (688 HK, Outperform) andShimao Property (813 HK, Outperform) to make upwardrevisions to their full-year sales targets (up by an estimated20-25%). In contrast, developers with back-loaded salesplans in 2013 are at risk of seeing some slippage in sales andlaunch delays.

Valuations. Property stocks under our coverage are tradingat 6.8x FY13F P/E, 1.0x P/B and a 39.9% sector averagecurrent discount to NAV compared with the 1-year historicalmean of 9.3x P/E, 1.5x P/B and a c.31.0% discount to NAV.

Action. Considering the overhangs on the sector, we adviseinvestors to consider a pair trading strategy within the spacethat hedges against sector-wide policy risk while stillgenerating modest returns. Long Greentown China(3900 HK, Outperform) and short R&F Properties (2777 HK,Neutral) would be a good example. We also adviseaccumulating Country Garden (2007 HK, Outperform),CR Land (1109 HK, Outperform) and Shimao Property onany weakness in the property market, as all three nameshave in the past exhibited greater defensiveness duringvolatile periods. For investors with a slightly stronger stomachfor risk, SUNAC (1918 HK, Outperform) offers a good betaplay. It has promising new launches in 3Q and sufficientsaleable resources to meet rising demand.

Risks are attendant on price curbs triggered by sustainedASP growth, insufficient property loan quotas and moreexpensive borrowing, all leading to valuation de-ratings, NAVcontraction and sales target slippage.