China Property Investment Update:After the storm comes the calm – moving towards equilibrium

Golden Week (1-7 October) disappointed the market asthe ban on highway tolls during the holidays encouragedmore people to visit their relatives than usual, which meantthey were not buying property. Sales volume fellaccordingly only to pick up sharply in the week following(8-14 October), albeit not enough to put the market on trackto meet our forecast for flat September-October salesvolume vis-à-vis July-August. For this to occur, the propertymarket would have to achieve 30% WoW growth in terms ofsales volume in the remaining two weeks of October. Weare confident this will be the case given the governmentrequirement that projects granted presale permits at the endof September launch within four weeks and becauselaunches delayed in late September and October will becoming on to the market before the cold weather sets in.

Tighter new supply in coming years may result fromrelatively low growth in accumulated GFA new starts andoverall property investment which has persisted up untilSeptember and could last longer. This would have thepositive effect of alleviating oversupply within the sector andreducing risk in the medium term. Market sentiment in theshort term should improve now that the land market isheating up and as rapidly rising ASPs begin to relent. On thispoint we highlight a recent NDRC report indicating slowingASP month-on-month growth for 70 cities in September.

Drivers. (1) The greater inclination on the part of banks togrant loans to the larger more established developerslooking to purchase land bank; (2) the availability of a widerrange of funding sources which reduces default risk forhighly geared and oversold developers (from 4Q12,developers have been able to raise cash by selling bonds atrelatively low rates; to wit, Longfor’s US$400m 6.875%senior note); and finally (3) property sales through en-bloctransactions as well as bloc equity sales of projectcompanies (e.g. Yuexiu Investment and CC Land). Webelieve greater liquidity within the physical and debtmarkets will eventually benefit property stocks.

Action. We expect more upgrades and re-ratingopportunities within the China property space. Laggardswith strong sales momentum – Country Garden (2007 HK,Outperform), for example – should outperform in the nearterm. We also favor certain developers with SOE pedigreesas they tend to secure better credit terms from the banksand capital markets. Several in this group have made aseries of NAV-enhancing land acquisitions, includingSino-Ocean Land (3377 HK, Outperform) and Poly RealEstate (119 HK, Not Rated).