【Sector Research】China Property Sector – Sign of recovery
- Positive sales growth in May. NBS released property market data. Contracted sales amount and area shrank by 10.6% to RMB4,627bn and 12.3% to 487mn sq m in 5M20. The decline was narrowed from 4M20 because business activities resumed in China. There were double up for sales in amount and GFA in May. Contracted sales amount and area gained by 14.0% to RMB1,441bn and 9.7% to 147mn sq m in May 2020, respectively. It seems the worst was over.
- Steady rise in property prices. NBS revealed that property prices of newly built housing increased by 2.9%, 5.4% and 4.8% YoY in the first, second and third tier cities in May 2020, respectively. Only eight out of 70 leading cities in China recorded annual decline of property price for newly built housing in the period. We believe the pent-up demand was released after COVID-19 cases declined. Furthermore, the loosening monetary policy as well as rate cut stimulated the housing demand.
- Need to catch up in 2H20. Although contracted sales were almost frozen in 1Q20, a few CMBIS rated developers posted contracted sales growth in 5M20. Yuzhou (1628 HK) recorded a 44.4% growth to RMB30.7bn in the period. Other developers, such as Evergrande (3333 HK, NR), Shimao (813 HK, BUY), Logan Property (3380 HK, BUY), China SCE (1966 HK, BUY) and Redsun Properties (1996 HK, BUY) also posted positive sales growth in 5M20. In terms of hit rate, only Evergrande performed well and accomplished 42% of full year sales target of RMB650bn. Times China (1233 HK, BUY), Sunac (1918 HK, NR) and China Aoyuan (3883 HK, BUY) achieved hit rate of 17.0%, 23.5% and 25.2% by May, respectively. They need to accelerate in 2H20 in order to fulfil the tasks.
- Market is still fragile. On the one hand, we see China property market started to recover in May. On the other hand, we are afraid the market is fragile. First, the rising COVID-19 cases has alarmed again in Beijing. There may be second-wave of epidemic. Furthermore, we are more concerned about the China economic outlook. Our economist forecasts China GDP growth to be 2.8-3.5% in 2020, which is historical low since reform. Our major concern focuses on the job market. Any substantial rise in unemployment rate would drag down housing demand immediately.
- Cautious optimistic outlook. We maintain our forecast on property sales and area decline of 5% and 10% in 2020, respectively. Our top picks include Vanke (2202 HK, BUY, TP: HK$36.69), Country Garden (2007 HK, BUY, TP: HK$14.55), China Aoyuan (3883 HK, BUY, TP: HK$15.48) and Poly Development (600048 CH, BUY, TP: RMB22.16).
