Equity Research in HK and Mainland China

Li Tang

Thematic (Sector/Industry)

We have seen a shift in the property policy stance from comprehensive tightening to finetuning policy, which includes some significant local easing such as the raft of measures announced in Harbin as well restarted RMBS issuance that is expected to top up mortgage quotas.
Two recent PBOC meetings affirmed the importance of “healthy property market development” and protecting homebuyers’ rights. This means that policymakers want the property market to be not too hot (as it was late last year) and not too cold.
The backdrop is the Evergrande crisis, based on high liabilities and triggered by plummeting home sales, but also expected growth pressures as the pandemic continues and with power shortages.

We have seen a shift in the property policy stance from comprehensive tightening to finetuning policy, which includes some significant local easing such as the raft of measures announced in Harbin as well restarted RMBS issuance that is expected to top up mortgage quotas.
Two recent PBOC meetings affirmed the importance of “healthy property market development” and protecting homebuyers’ rights. This means that policymakers want the property market to be not too hot (as it was late last year) and not too cold.
The backdrop is the Evergrande crisis, based on high liabilities and triggered by plummeting home sales, but also expected growth pressures as the pandemic continues and with power shortages.

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">
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<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>
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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 analysed the earning revision of component stocks of CSI 300 in the past month.</li>
<li>We tabulated stocks with the top impact on index's EPS, stocks' EPS revision, and revenue revision.</li>
<li>We highlighted EPS revision on INDUSTRIAL BANK, YANTAI JEREH OILFIELD SERVICES, XIAMEN TUNGSTEN, KUNLUN TECH, CHONGQING ZHIFEI BIOLOGICAL PRODUCTS, GIANT NETWORK, CHINA SHENHUA ENERGY, Xinjiang Daqo.</li>
</ul>


We analysed the earning revision of component stocks of CSI 300 in the past month.
We tabulated stocks with the top impact on index's EPS, stocks' EPS revision, and revenue revision.
We highlighted EPS revision on INDUSTRIAL BANK, YANTAI JEREH OILFIELD SERVICES, XIAMEN TUNGSTEN, KUNLUN TECH, CHONGQING ZHIFEI BIOLOGICAL PRODUCTS, GIANT NETWORK, CHINA SHENHUA ENERGY, Xinjiang Daqo.


CSI 300 Index Earning Revision (Jun): INDUSTRIAL BANK, YANTAI JEREH OILFIELD SERVICES, KUNLUN TECH

<ul>
<li>We analysed the earning revision of component stocks of CSI 100 in the past month.</li>
<li>We tabulated stocks with the top impact on index's EPS, stocks' EPS revision, and revenue revision.</li>
<li>We highlighted EPS revision on POLY DEVELOPMENTS, CHINA PETROLEUM AND CHEMICAL, Longi Green, EOPTOLINK TECHNOLOGY, SATELLITE CHEMICAL, HENGLI PETROCHEMICAL, CHONGQING ZHIFEI BIOLOGICAL PRODUCTS, YUNNAN ALUMINIUM.</li>
</ul>


We analysed the earning revision of component stocks of CSI 100 in the past month.
We tabulated stocks with the top impact on index's EPS, stocks' EPS revision, and revenue revision.
We highlighted EPS revision on POLY DEVELOPMENTS, CHINA PETROLEUM AND CHEMICAL, Longi Green, EOPTOLINK TECHNOLOGY, SATELLITE CHEMICAL, HENGLI PETROCHEMICAL, CHONGQING ZHIFEI BIOLOGICAL PRODUCTS, YUNNAN ALUMINIUM.


CSI 100 Index Earning Revision (Jun): POLY DEVELOPMENTS, CHINA PETROLEUM AND CHEMICAL

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

China

Poly Real Estate Group Co., Ltd. mainly develops and sells residential homes. The company is also in the business of leasing and rental of real estates, and property management.

Poly Real Estate Group Co., Ltd (600048 CH)

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Poly Real Estate Group Co., Ltd (600048 CH)

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

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