We think the share price correction provides a good entry point as market is over-concerned on 1) Further tightening? The announced property loan cap is actually better than market expectation of 30% and is in line with “Three red line” so the impact is limited. Moreover, property policy has turned neutral with more cities relaxing citizenship policy to provide support. 2) Property demand decline? We think 2021 property sales remains resilient (2% and 8% YoY in GFA and value) due to wealth effect and high saving ratio in 2020. We expect major developers to deliver 11% YoY sales growth in 2021 with higher sales gross margin. Currently the valuation is at historically low (4.8x 21E P/E, 6.5% dividend yield) Top picks: CR Land (1109 HK), Shimao (813 HK) and KWG (1813 HK). Catalyst: Better-than-expected sales and stable policy in 1Q.
- Loan cap has limited impact on property financing: We think the property share price over corrected on the new rule of property loan concentration for China banks (details below) as it has limited impact. This is because 1) the announced threshold for all property-related loan is actually 30.3% of total existing (blended), higher than the market-expected 30% back in 2018. 2) Currently the total share of property and mortgage loan were 28.7% and 19.6% as of 1H20 and it implies there is still room for growth compared to the cap of 30.3% and 23%. 3) Under “Three red lines” policy, the overall property loan growth would be limited to <10% YoY growth on average, lower than our forecasted RMB loan growth of 11% in 2021. This implies the ratio is unlikely to go up. 4) Offshore channel would give some buffer together with RMB appreciation and relatively attractive funding rate (eg. Shimao just issued 10Y bond at 3.45% on 4 Jan).
- While property policy has turned neutral from tightening: Following a neutral tone of Political bureau meeting in Dec (to ensure a healthy property market), number of regions have relaxed its citizenship policy to attract more people inflow in 4Q20 such as Shandong province, Wuxi, Suzhou, Fuzhou, Chongqing, and Guangzhou.
- Major developers can achieve 10% sales YoY growth in 2021 together with sales margin recovery: We expect 2021 property sales to grow 2% and 8% in GFA and value with the help of wealth effect and high saving ratio in 2020. Sales growth of major developers may slow down to 10% in 2021 from 15% in 2020 due to “Three red lines” policy (sales growth is usually in line with loan growth). However according to our model, the sales margin would recover this year on improving sales price and cooling land market. So it implies sales profits would grow double digits in 2021 which could be better than 2020. Among our coverage, KWG/Shimao would probably stand out and deliver 20%/15% sales growth in 2021E.
- Rental income to pick up on consumption recovery: With 2021 being the consumption year after the epidemic and high-saving ratio in 2020, we think it would benefit shopping malls to accelerate rental income growth. CR Land and Longfor (960 HK) are the two major shopping mall runners. Based on the monthly data, the rental income of both companies has seen sharp recovery. With record number of 10 new malls by both developers in 2021E, we expect the rental income to make a higher contribution of total gross profit level at 15-20% by 2022E and thus support the valuation upcycle.
