Equity Research in HK and Mainland China

Li Tang

Thematic (Sector/Industry)

The China Real Estate Association (CREA) reportedly summoned 10 key developers to a discussion meeting last Friday, including <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd" target="_blank" data-smartkarma-citation="entities:26076:1" rel="noopener">China Vanke (000002 CH)</a> , <a href="https://www.smartkarma.com/entities/sunac-china-holdings-ltd" target="_blank" data-smartkarma-citation="entities:240:1" rel="noopener">Sunac China Holdings (1918 HK)</a> , <a href="https://www.smartkarma.com/entities/china-overseas-land-investment-limited" target="_blank" data-smartkarma-citation="entities:419:1" rel="noopener">China Overseas Land &amp; Investment (688 HK)</a> , <a href="https://www.smartkarma.com/entities/gemdale-corp-a" target="_blank" data-smartkarma-citation="entities:14908:1" rel="noopener">Gemdale Corp A (600383 CH)</a> , <a href="https://www.smartkarma.com/entities/longfor-properties" target="_blank" data-smartkarma-citation="entities:8149:1" rel="noopener">Longfor Properties (960 HK)</a><a href="https://www.smartkarma.com/entities/zhongliang-holdings-group-co" target="_blank" data-smartkarma-citation="entities:28009:1" rel="noopener">Zhongliang Holdings (2772 HK)</a> , <a href="https://www.smartkarma.com/entities/seazen-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:24242:1" rel="noopener">Seazen Holdings Co., Ltd. (601155 CH)</a> , <a href="https://www.smartkarma.com/entities/greentown-china-holdings" target="_blank" data-smartkarma-citation="entities:8954:1" rel="noopener">Greentown China (3900 HK)</a> , and <a href="https://www.smartkarma.com/entities/cifi-holdings-group-co-ltd" target="_blank" data-smartkarma-citation="entities:18387:1" rel="noopener">CIFI Holdings (884 HK)</a> , who were required to send senior executives at vice president or above levels.

The China Real Estate Association (CREA) reportedly summoned 10 key developers to a discussion meeting last Friday, including China Vanke (000002 CH) , Sunac China Holdings (1918 HK) , China Overseas Land &amp; Investment (688 HK) , Gemdale Corp A (600383 CH) , Longfor Properties (960 HK)Zhongliang Holdings (2772 HK) , Seazen Holdings Co., Ltd. (601155 CH) , Greentown China (3900 HK) , and CIFI Holdings (884 HK) , who were required to send senior executives at vice president or above levels.

China Real Estate Association Summoned Key Developers as PBOC Hints Policy Finetuning

Founder of Antler Capital

Stanley Tsai, CFA

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>
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<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>
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<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>
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<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>
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<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

Asia Pac ECM and Index Rebal, Shenton Research

Ke Yan, CFA, FRM

Asia Pac ECM and Index Rebal

Asia Pac IPO & Placement Research, China Biotech

DZT Research

DZT Research is an independent Asia Pacific equity specialist. Our quantitative research covers index rebalancing flows, alongside exchange data analytics accross Asia Pacific. On the equity capital markets side, we focus on Asia Pacific ECM, especially biotech and TMT. Our lead analyst is frequently cited by international media.

Quantitative Analysis

<ul>
<li>We analyze the weekly Hong Kong Connect flows with our data engine for holding position as of June 26th.</li>
<li>The top stocks by inflows and outflows were tabulated for all market, HSCEI, mid cap and s/mid cap groups.</li>
<li>We highlight flows for Kingboard, Alibaba, Kingboard Laminates, Smic, Tencent, China Mobile, CNOOC, Pop Mart Intl, Hua Hong Semi, Knowledge Atlas.</li>
</ul>


We analyze the weekly Hong Kong Connect flows with our data engine for holding position as of June 26th.
The top stocks by inflows and outflows were tabulated for all market, HSCEI, mid cap and s/mid cap groups.
We highlight flows for Kingboard, Alibaba, Kingboard Laminates, Smic, Tencent, China Mobile, CNOOC, Pop Mart Intl, Hua Hong Semi, Knowledge Atlas.


HK Connect Flows Weekly (Jun 26th): Kingboard, Alibaba, Kingboard Laminates, Smic, Tencent, CNOOC

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation, property construction and sales activity are coming back, especially in upper-tier cities in leading city clusters as the industry is benefiting from plentiful liquidity and relaxation of residency permits fed a demand surge in June.
<ul class="" type="disc">
<li>The China Index Academy data from 100 cities showed that house prices in June rose at the fastest pace since Sep 2017.</li>
<li>Sales of China's leading property developers saw robust growth.</li>
<li>30 cities monthly sales surged to 2019 peak level.</li>
</ul>
The 2020 Government Work Report has more positive wording towards the property market this year. It called for city-level policy adjustments to promote “steady and healthy development of the real estate market”, under the principle of “houses are for living in, not speculation”. On the other hand central government still refrains from using the real estate sector as a short-term stimulus. We believe the government will continue to take a restrained approach to short-term economic stimulus both compared with other major economies and with China's 2009 stimulus. In other words, the policy goal is for the property sector to support the economy, while avoiding excessive home price rises and debt risk. As market conditions differ city to city, local governments are tasked with setting local property policy accordingly.

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation, property construction and sales activity are coming back, especially in upper-tier cities in leading city clusters as the industry is benefiting from plentiful liquidity and relaxation of residency permits fed a demand surge in June.

The China Index Academy data from 100 cities showed that house prices in June rose at the fastest pace since Sep 2017.
Sales of China's leading property developers saw robust growth.
30 cities monthly sales surged to 2019 peak level.

The 2020 Government Work Report has more positive wording towards the property market this year. It called for city-level policy adjustments to promote “steady and healthy development of the real estate market”, under the principle of “houses are for living in, not speculation”. On the other hand central government still refrains from using the real estate sector as a short-term stimulus. We believe the government will continue to take a restrained approach to short-term economic stimulus both compared with other major economies and with China's 2009 stimulus. In other words, the policy goal is for the property sector to support the economy, while avoiding excessive home price rises and debt risk. As market conditions differ city to city, local governments are tasked with setting local property policy accordingly.

China New Home Sales Turn Positive As Major Property Developers See Rising Sales in June

China has planned to renovate over 39,000 old urban residential communities nationwide this year, which was estimated to benefit about 7 million households this year, doubling last year's total, according to <a href="http://www.gov.cn/premier/2020-04/14/content_5502345.htm" target="_blank" rel="noopener">State Council Executive Meeting</a> on 14 April 2021.
Urban renovation, though large in scope, is likely to have a smaller economic impact than peak shantytown redevelopment. According to MOHURD preliminary estimates, the scope of urban renovation is about 170,000 communities/neighbourhoods nationwide with "hundreds of millions" of residents. According to the survey, the average cost of the renovation of old communities is about RMB 95,000  per unit.
The market space for urban renovation is relatively large, estimated total investment for future renovation and value-added services for old urban residential communities is more than RMB 4tn.The urban renovation has accelerated and has become an important channel to stabilise investment growth.
Table 1: Estimated total construction investment required for the renovation in 2020
<table class="table table-striped">
<colgroup> <col span="3"> <col> </colgroup>
<tbody>
<tr>
<td style="text-align: left; width: 36px;">Year</td>
<td style="width: 126px;">Total number of old communities needed to be renovated</td>
<td style="width: 176px;">Total number of old communities needed to be renovated  (units :1,0000)</td>
<td style="width: 305.333px;">The estimate of total investment required for the future renovation of existing old communities (Units: 100m)</td>
</tr>
<tr>
<td style="text-align: left; width: 36px;">2019</td>
<td style="text-align: left; width: 126px;">19,000</td>
<td style="text-align: left; width: 176px;">352</td>
<td style="text-align: left; width: 305.333px;">3,344</td>
</tr>
<tr>
<td style="width: 36px;">2020</td>
<td style="width: 126px;">39,000</td>
<td style="width: 176px;">700</td>
<td style="width: 305.333px;">6,650</td>
</tr>
</tbody>
</table>
We believe sectors that stand to benefit moderately include building materials, construction and redecoration services. The listed developers with property management subsidiary  such as <a href="https://www.smartkarma.com/entities/china-vanke-co-ltd" target="_blank" data-smartkarma-citation="entities:26076:1" rel="noopener">China Vanke (000002 CH)</a>, <a href="https://www.smartkarma.com/entities/country-garden-holdings-co" target="_blank" data-smartkarma-citation="entities:5225:1" rel="noopener">Country Garden Holdings Co (2007 HK)</a><a href="https://www.smartkarma.com/entities/greentown-china-holdings" target="_blank" data-smartkarma-citation="entities:8954:1" rel="noopener">Greentown China (3900 HK)</a><a href="https://www.smartkarma.com/entities/greentown-china-holdings" target="_blank" data-smartkarma-citation="entities:8954:1" rel="noopener"></a>are more likely to benefit from urban renovation projects as central govenrment will take more steps to boost old community-based elderly care, childcare and household services, including greater policy incentives in taxes and fee cuts. In addition,the advantages for developers to participate in old community renovation with excellent architectural design and product quality, and the ability to provide funds and reduce renovation cost.
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/128/645/original/image_17500825721587306613435.png?1587306615" class="editor-image img-responsive" data-smartkarma-image-id="128645"></figure>

China has planned to renovate over 39,000 old urban residential communities nationwide this year, which was estimated to benefit about 7 million households this year, doubling last year's total, according to State Council Executive Meeting on 14 April 2021.
Urban renovation, though large in scope, is likely to have a smaller economic impact than peak shantytown redevelopment. According to MOHURD preliminary estimates, the scope of urban renovation is about 170,000 communities/neighbourhoods nationwide with "hundreds of millions" of residents. According to the survey, the average cost of the renovation of old communities is about RMB 95,000  per unit.
The market space for urban renovation is relatively large, estimated total investment for future renovation and value-added services for old urban residential communities is more than RMB 4tn.The urban renovation has accelerated and has become an important channel to stabilise investment growth.
Table 1: Estimated total construction investment required for the renovation in 2020

   


Year
Total number of old communities needed to be renovated
Total number of old communities needed to be renovated  (units :1,0000)
The estimate of total investment required for the future renovation of existing old communities (Units: 100m)


2019
19,000
352
3,344


2020
39,000
700
6,650



We believe sectors that stand to benefit moderately include building materials, construction and redecoration services. The listed developers with property management subsidiary  such as China Vanke (000002 CH), Country Garden Holdings Co (2007 HK)Greentown China (3900 HK)are more likely to benefit from urban renovation projects as central govenrment will take more steps to boost old community-based elderly care, childcare and household services, including greater policy incentives in taxes and fee cuts. In addition,the advantages for developers to participate in old community renovation with excellent architectural design and product quality, and the ability to provide funds and reduce renovation cost.


China Real Estate :State Council Strength Urban Renovation as the New Stimulus Option

China

Greentown China Holdings Ltd. is a leading property developer and integrated living service provider in China, specializing in premium residential properties, hotel operations, property investment, and project management. The company also offers design, architectural decoration, and construction material sales. It was founded in January 1995 and is headquartered in Hangzhou, Zhejiang, China.

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Greentown China (3900 HK)

China Real Estate Association Summoned Key Developers as PBOC Hints Policy Finetuning

We see a short-term opportunity to buy high-quality, low leveraged developers in advance of further calibrated policy support.

Li Tang

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

HK Connect Flows Weekly (Jun 26th): Kingboard, Alibaba, Kingboard Laminates, Smic, Tencent, CNOOC

We analyzed southbound Hong Kong connect flows in the past week and highlighted flows for Kingboard (148 HK), Alibaba (9988 HK), Kingboard...

Ke Yan, CFA, FRM

China New Home Sales Turn Positive As Major Property Developers See Rising Sales in June

Since the end of June, the A-share and H-Share real estate sectors have surged after a prolonged period of stability. In line with our expectation,...

Li Tang

China Real Estate :State Council Strength Urban Renovation as the New Stimulus Option

China has planned to renovate over 39,000 old urban residential communities nationwide this year, which was estimated to benefit about 7 million...

Li Tang

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