Founder of Antler Capital

Stanley Tsai, CFA

Thematic (Sector/Industry)

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 746px;">Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)</td>
</tr>
<tr>
<td style="width: 746px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/144/original/image_45072834061624549646155.png?1624549646" class="editor-image img-responsive" data-smartkarma-image-id="215144"></figure>
Source: National Bureau of Statistics, Our analysis
</td>
</tr>
</tbody>
</table>
Related Insights
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
</ul>

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.



Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)




Source: National Bureau of Statistics, Our analysis




Related Insights


China Financials: Silver Linings Playbook 

Glut and Famine: We Might See Snow in China This Summer 

China Macro: Operation Twist | The Deposit Version 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 


China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Equity Research in HK and Mainland China

Li Tang

Vice-Premier Liu He wrote an article in the people's Daily on China's 'dual circulation' strategy on Wednesday in which he noted that the real estate industry influences investment and consumption, and is connected to people's livelihoods and development. Liu's speech maintains existing top-level property policy, but at the same time relates property to investment and consumption, implying that property policy setting could be considered jointly with investment and consumption targets. This suggests a more pragmatic approach towards property policy weighting up risks against growth benefits.
Rumour spread in the market that regulator will tighten the trust funding quota approved due to a risk concern, fears were quick to emerge of a liquidity squeeze for some of China's indebted developer, causing its shares and bonds to tumble. However, in the last week we have seen several cities such as Harbin in last week issuing the policy to support property sales. Those can be seen as policy support for the sector.

Vice-Premier Liu He wrote an article in the people's Daily on China's 'dual circulation' strategy on Wednesday in which he noted that the real estate industry influences investment and consumption, and is connected to people's livelihoods and development. Liu's speech maintains existing top-level property policy, but at the same time relates property to investment and consumption, implying that property policy setting could be considered jointly with investment and consumption targets. This suggests a more pragmatic approach towards property policy weighting up risks against growth benefits.
Rumour spread in the market that regulator will tighten the trust funding quota approved due to a risk concern, fears were quick to emerge of a liquidity squeeze for some of China's indebted developer, causing its shares and bonds to tumble. However, in the last week we have seen several cities such as Harbin in last week issuing the policy to support property sales. Those can be seen as policy support for the sector.

China's Real Estate Sector to Be Tightened

For China regulator, the challenge is to keep the economic ship steady while avoiding creating asset market bubble such as real estate sector. Pan Gongsheng, deputy governor at the PBOC, said last week the central bank would focus on improving the macro-prudential monitoring, evaluating, and alerting systems in key areas including real estate financing.
We believe PBOC liquidity policy object towards real estate is adjusting from a reasonably hands-off approach in H1 to allow the property to support growth to mixed goals: curbing financial risks (developer debt/fast-rising land prices) and still allowing a property to support growth (given macro risks).
There are signs of a more stringent real estate financial regime in Q4 as regulators are seeking more transparency from property developers, calling for more details about current debts, to rein in borrowing costs and quell broader financial impacts.

For China regulator, the challenge is to keep the economic ship steady while avoiding creating asset market bubble such as real estate sector. Pan Gongsheng, deputy governor at the PBOC, said last week the central bank would focus on improving the macro-prudential monitoring, evaluating, and alerting systems in key areas including real estate financing.
We believe PBOC liquidity policy object towards real estate is adjusting from a reasonably hands-off approach in H1 to allow the property to support growth to mixed goals: curbing financial risks (developer debt/fast-rising land prices) and still allowing a property to support growth (given macro risks).
There are signs of a more stringent real estate financial regime in Q4 as regulators are seeking more transparency from property developers, calling for more details about current debts, to rein in borrowing costs and quell broader financial impacts.

China Developer Bond Issuance Still Grow Despite Tightening

<ul class="">
<li>People's Bank of China (PBoC) and Ministry of Housing and Urban-Rural Development (MOHURD) to order large property developers on Thursday(20 Aug )on new financing rules local news reported.</li>
<li>The regulator is expected to take a further step to rein in debt growth among the nation’s property developers, amid signs that a strong housing market recovery has prompted policymakers to refocus on risk prevention.</li>
<li>The new rule is expected to released soon,  it would tighten corporate financing channels for developers, and set restrictions on trust financing, asset management products and overseas financing.</li>
</ul>


People's Bank of China (PBoC) and Ministry of Housing and Urban-Rural Development (MOHURD) to order large property developers on Thursday(20 Aug )on new financing rules local news reported.
The regulator is expected to take a further step to rein in debt growth among the nation’s property developers, amid signs that a strong housing market recovery has prompted policymakers to refocus on risk prevention.
The new rule is expected to released soon,  it would tighten corporate financing channels for developers, and set restrictions on trust financing, asset management products and overseas financing.


China Tightens Domestic Bond Issuance Threshold for Property Developers

We believe that top policymakers have switched China policy priorities from short term growth stabilisation alone to balancing growth with financial risk control . As a result property sector is back to the pre-COVID-19-era as the government continues to clamp down on speculative demand to prevent overheating in the city property market with rapid home price growth. Credit data in July confirm the monetary policy shift towards neutral away from short-term growth stabilisation, with a greater focus on financial risk control.
<ul type="disc">
<li>Improving domestic economy leads to shifting property policy tone</li>
</ul>
<ul type="disc">
<li>National Bureau of Statistics of China (NBS) data shows home prices growth slow in July</li>
<li>Credit data in July confirms policy shift towards neutral</li>
</ul>

 We believe that top policymakers have switched China policy priorities from short term growth stabilisation alone to balancing growth with financial risk control . As a result property sector is back to the pre-COVID-19-era as the government continues to clamp down on speculative demand to prevent overheating in the city property market with rapid home price growth. Credit data in July confirm the monetary policy shift towards neutral away from short-term growth stabilisation, with a greater focus on financial risk control.

Improving domestic economy leads to shifting property policy tone


National Bureau of Statistics of China (NBS) data shows home prices growth slow in July
Credit data in July confirms policy shift towards neutral


China New Home-Price Growth Slows in July

China

China Merchants Shekou Industrial Zone Holdings Co., Ltd. operates as a park integrated developer. The Company conducts land and real estate development and management, community development, and other services. China Merchants Shekou Industrial Zone Holdings provides services in China.

China Merchants Shekou Industr (001979 CH)

Price Gauge
52-week Range	0.00 - 0.00
Market Cap (USDm)	0.00
P/E	0.00
Dividend (Yield)	0.00

China Merchants Shekou Industr (001979 CH)

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Housing FAI in May continued a secular trend that may make or break China's recovery. Inventory drawdowns may afford developers some breathing...

Stanley Tsai, CFA

China's Real Estate Sector to Be Tightened

Overall property policies lean towards tightening.The change will constrain highly leveraged developers mostly but providing opportunities for...

Li Tang

China Developer Bond Issuance Still Grow Despite Tightening

The new real estate financial rules have not yet had an impact on developers,China Developer bond issuance still grow despite tightening rule.

Li Tang

China Tightens Domestic Bond Issuance Threshold for Property Developers

People's Bank of China (PBoC) and Ministry of Housing and Urban-Rural Development (MOHURD) to order large property developers on Thursday(20 Aug...

Li Tang

China New Home-Price Growth Slows in July

We believe that top policymakers have switched China policy priorities from short term growth stabilisation alone to balancing growth with...

Li Tang

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)