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
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<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>
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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

Global Special Situations & Strategy, SR Services Ltd

David Lepper

Global Special Situations & Strategy

SR Services Ltd

SR Services provides Strategic Knowledge and Solutions services for Family Offices and Corporate Business. 

We deliver this via advisory services, strategic planning, opportunity analysis/sourcing, as well as solution implementation. 

Whilst, we create intellectual discipline and operational leverage for your projects or daily activities, our ultimate objective is to empower whilst enhancing your decision making. 

Strategic Knowledge and Solutions

<ul>
<li>
Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( <a href="https://www.smartkarma.com/insights/notes-from-the-silk-road-small-mid-cap-screening-for-zulu-warriors" target="_blank" data-smartkarma-citation="insights:20886">Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors</a>). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November. 
</li>
<li>
<li>
The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.</li>
<li>
The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.</li>
<li>
Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.</li>
<li>
Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.</li>
<li>
Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.</li>
</ul>



Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors). As Q3 unfolded, this eventuated with a +7.5% reversal in favour of value stocks, only to see growth resume dominance in October and November. 



The optimal value/growth style dynamic: We feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield (via our amended Zulu Screen) should provide some healthy medium to long term returns for investors.

The Screen’s Risk: The Zulu Screen relies on analyst estimates. When market sentiment is weak and forecasts are not amended in a timely manner, the screen is susceptible to mis-selection.

Q2 2018 screening list succumbed to volatile markets: This was seen in our May screen with our list posting on average a 30% decline in share price, relative to the broader Asia-Pacific Ex-Japan declining 13.6% and the Asia Pacific index by 11.8%.

Are there reasons for the underperformance? 10 of the 19 stocks in the May screen were from Hong Kong, which saw the Hang Seng Index (HIS) decline 16% over the same period. The decrease seems due to concern over trade wars and doubts about the China economy. Our key approach to stock selection is to take a medium-to-long-term view as well as focus on quality ranked stocks relative to their peers. This is highlighted via the average stock rank of the group declining only 15.8% from 89.6 to 75.5 points.

Our Q1 2019 screen selected only 9 stocks. Of the 9 stocks identified, the average PEG Ratio was 0.4x, the price to FCF yield was 11% and ROCE was 25%. Stocks were selected from Australia, New Zealand, India, Korea, Japan, Hong Kong, Taiwan and Singapore. Cowell Fashion Company from Korea was the only remaining stock from our May screening.


Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)

Singapore and emerging market real estate

Royston Foo

Top Singapore property news this week that you need to know.<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/056/477/original/Stirling-Residences-crop.original.jpg?1530415507" class="editor-image img-responsive" data-smartkarma-image-id="56477"></figure><div class="content-caption">Stirling Residences - Opened for preview last weekend</div>Government Land Sales<a href="https://www.businesstimes.com.sg/real-estate/four-residential-sites-released-under-h1-2018-gls-programme" target="_blank">28th Jun 2018 - Four residential sites released under H1 2018 GLS programme</a><a href="https://www.businesstimes.com.sg/real-estate/singapore-government-keeps-pace-in-residential-land-supply-for-h2-2018" target="_blank">27th Jun 2018 - Singapore government keeps pace in residential land supply for H2 2018</a>Royston Foo: Supply of private housing from GLS sites for 2018 2H remains relatively unchanged from the supply in 2018 1H. A total of 6 sites have been put up in the Confirm List, yielding an estimated…

Top Singapore property news this week that you need to know.Stirling Residences - Opened for preview last weekendGovernment Land Sales28th Jun 2018 - Four residential sites released under H1 2018 GLS programme27th Jun 2018 - Singapore government keeps pace in residential land supply for H2 2018Royston Foo: Supply of private housing from GLS sites for 2018 2H remains relatively unchanged from the supply in 2018 1H. A total of 6 sites have been put up in the Confirm List, yielding an estimated…

Singapore Property Weekly Recap (23rd Jun to 29th Jun)

<ul><li>The Value/Growth style dynamic: Globally, it seems growth stocks as an investment style have been dominant since Q3-2012, which has not helped the value orientated small-mid cap Investor. Whilst there is an argument to say the value/growth style dynamic may reverse shortly in Asia-Pacific – ex-Japan, we feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield – via our amended Zulu Screen – would still provide some good returns for investors.</li><li>The Risk to this screen: When market sentiment is weak and forecasts not amended in a timely manner, the screen can be susceptible to selecting quality names.</li><li>Our screen selected 19 stocks among small-mid cap names in Australia, Korea, Japan, Hong Kong, Taiwan, Singapore and India. </li><li>Of the 19 stocks identified: the average PEG Ratio was 0.46x, the Price to FCF yield was 7.2% and ROCE was 26.3%.</li><li>The Top 3 by stocks by overall ranking are all from Hong Kong: China Resources Holdings, Tianneng Power International and Longking Holdings, with Korea, Australia and Japan offering up the core value. Missing were candidates from Singapore, India and Taiwan.</li></ul>

The Value/Growth style dynamic: Globally, it seems growth stocks as an investment style have been dominant since Q3-2012, which has not helped the value orientated small-mid cap Investor. Whilst there is an argument to say the value/growth style dynamic may reverse shortly in Asia-Pacific – ex-Japan, we feel exposure to growth at a reasonable price (GARP) coupled with a healthy FCF yield – via our amended Zulu Screen – would still provide some good returns for investors.The Risk to this screen: When market sentiment is weak and forecasts not amended in a timely manner, the screen can be susceptible to selecting quality names.Our screen selected 19 stocks among small-mid cap names in Australia, Korea, Japan, Hong Kong, Taiwan, Singapore and India. Of the 19 stocks identified: the average PEG Ratio was 0.46x, the Price to FCF yield was 7.2% and ROCE was 26.3%.The Top 3 by stocks by overall ranking are all from Hong Kong: China Resources Holdings, Tianneng Power International and Longking Holdings, with Korea, Australia and Japan offering up the core value. Missing were candidates from Singapore, India and Taiwan.

Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors

Deciphering real estate markets globally., Rems Advisors

TAN Kok Keong

Deciphering real estate markets globally.

Rems Advisors

The frenzy in the Singapore property market continues to gather pace. The latest government land tender at Stirling Road has attracted a top bid of S$1 billion or S$1,050 per square feet per plot ratio. This is the largest quantum ever for a residential site. <figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/026/309/original/Stirling%20tender%202.PNG?1495104978" class="editor-image img-responsive" data-smartkarma-image-id="26309"></figure>At this bid price, the developer is looking at an eventual launch price of more than $1800-1900 per square feet. This is roughly in line with prices of existing launch in its vicinity. <ol><li>While the headline quantum is astronomical, it is a…</li></ol>

The frenzy in the Singapore property market continues to gather pace. The latest government land tender at Stirling Road has attracted a top bid of S$1 billion or S$1,050 per square feet per plot ratio. This is the largest quantum ever for a residential site. At this bid price, the developer is looking at an eventual launch price of more than $1800-1900 per square feet. This is roughly in line with prices of existing launch in its vicinity. While the headline quantum is astronomical, it is a…

Breaking! Record S$1 Billion Bid for Residential Land

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Logan Property Holdings (3380 HK)

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

Screening the Silk Road: Q1-2019 Small-Mid Cap GARP (Zulu Warrior Screening)

Value made a comeback, but growth remains core: In May 2018, we examined the divide between value and growth stocks, ( Notes from the Silk...

David Lepper

Singapore Property Weekly Recap (23rd Jun to 29th Jun)

Top Singapore property news this week that you need to know.Government Land Sales28th Jun 2018 - Four residential sites released under H1 2018 GLS...

Royston Foo

Notes from the Silk Road: Small-Mid Cap Screening for Zulu Warriors

The Value/Growth style dynamic: Globally, it seems growth stocks as an investment style have been dominant since Q3-2012, which has not helped...

David Lepper

Breaking! Record S$1 Billion Bid for Residential Land

The frenzy in the Singapore property market continues to gather pace. The latest government land tender at Stirling Road has attracted a top bid of...

TAN Kok Keong

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