We believe the property sales in Sep will remain flattish given the uncertain economic outlook and tightening mortgage policy. We still forecast 2019 full year property sales to decline by 5%. It may be too bearish but we believe the direction is right. In general, valuation of property stocks is undemanding. On average, they are trading at 4.8x 2020E P/E or 49.2% discount to NAV. Until policy relaxation is announced, we do not find re-rating ahead. Currently, our top picks are mainly mid-size developers, including Agile (3383 HK), Shimao (813 HK) and COGO (81 HK).
- Stable property sales growth. NBS released China property market data for 8M19. National property sales amount grew 6.7% YoY (vs 6.2% in 7M19) to RMB9.54tn and sales volume declined by 0.6% YoY (vs -1.3% in 7M19) to 1,018mn sq m in 8M19. Although sales pace improved a little, we believe the credit availability is crucial to the property market, no matter it targets individual property buyers or developers. New mortgage policy linked to LPR will start on 8 Oct. Except Shanghai, mortgage rate in the majority cities does not change a lot no matter it is linked with LPR or base rate.
- Don’t expect strong sales in Sep and Oct. Our economist expects Chinese economy will be stable in 4Q19 but it is temporary. It is critical to see the negotiation results of China-US trade. Top officials of both governments will meet in Washington in Oct. We expect there will be some partial deals by year end. As a result, we believe property buyers will be more prudent unless economic outlook becomes clear. We expect China property market will not have “Golden Sep & Silver Oct” this year.
- Firm property price due to limited supply. Based on NBS property sales figures, ASP of contracted sales gained by 7.3% to RMB9,364 per sq m in 8M19. Inventories had experienced continuous decline since Mar 2017 to 498mn sq m in Aug 2019. In addition, completion also had experienced decline since Nov 2017. Therefore, we are not surprised that property price stays firm in the future. Average property price in tier-1/2/3 cities rose 4.2% YoY, 9.9% YoY and 9.9% YoY in Aug 2019, respectively, compared with 4.3%, 10.7% and 10.2% in Jul 2019.
- Developers’ cautious attitude towards market. Contracted sales of the property developers we cover decelerated to 24% in 8M19 from 50% in 2018 due to housing policy curbs, tightened funding environment in real estate, as well as high base in 2018. But hit rate on average of 67% was on track in 8M19. Net gearing ratios remained relatively stable. On average, net gearing ratio increased from 56.8% as at Dec 2018 to 58.8% as at Jun 2019. Balance sheet was manageable. Gross margin was under pressure. Gross margin of the companies under our universe on average narrowed from 34.1% in 1H18 to 32.8% in 1H19. Under price limit and increased land cost of land bank, there has been pressure on gross margin. We believe margin decline would become a trend in the sector.
