Property sector has achieved 12% YTD return (vs. HSI 4%) on higher-than-expected sales/guidance and historical-low valuation. This is in line with our view that 1Q would be the best quarter to chip in. In the near term, we expect momentum to continue as some big names are due to report earnings and also money from internet may flight to quality developers. Investors may chase Shimao and Vanke A. Looking forward to 2Q, the sector may face volatility due to 1) policy tone during standing bureau meeting in April. 2) Sales growth may slow down on higher base. We suggest investors to stay on the retail names such as CR Land/KWG.
- 2020 earnings so far – mixed messages. So far developers reported a single-digit earnings growth mainly dragged by falling GP margin. Top line still rose 15% YoY despite some delay in completion. Quality names such as KWG and Longfor delivered 25%/20% earnings growth while Country Garden and Times saw 19%/9% decline in the core earnings.
- 2021E sales guidance – 11% YoY sales growth: Facing the “three red line” pressure and policy uncertainty, most of developers set a conservative 2021E sales target of around 10% YoY sales growth. In particular, KWG and Longfor targeted for 20%/15% sales growth in 2021E, higher than the industry average. We think there could be a market-wide sales beat as 1) Company assumed a lower sell-through rate in 2021, which seems conservative compared to the strong sales so far. 2) March sales momentum remained elevated based on our channel check. We estimated 1H21E sales growth may reach >30% YoY and this would set a good foundation for the full-year sales beat.
- 2021 a year of shopping malls: During 2020 results, Longfor guided to open 11 malls (up from 10) and management also shared that 2M21 SSSG recorded 13% YoY. We think this would have a positive read-across towards CR Land. Also, 2021 would be the recent peak year of mall opening which may see 23% YoY in number of malls and this could also boost rental.
- 2021E earnings guidance – double digits growth: While some developers faced the completion delay in 2020 due to COVID-19, management is confident to speed up the GFA completion this year to boost >10% revenue YoY growth. GPM would stay relatively stable, as 2020 was likely the bottom due to the high-cost land acquisition in 2017/2018. Therefore, the core earnings may rebound to double digits growth in 2021E.
- Balance sheet improvement to yellow category lowered the industry risk: most of developers have improved the balance sheet and made through yellow category. Liability/Asset ratio was still the pending one but we think it could be solved as quickly as by this year for some such as KWG and Agile. We think this would generally lower the downside risks for the industry.
- Developers’ view on the market: In general, management thinks the recent policies would make the property market more healthy which implies 1) the national sales could still grow in the mid term and may exceed RMB18tn this year (>4% YoY). 2) Gross margin may gradually recover from current 20-23%. As for the land reform, most developers have a neutral-to-positive view because on a negative side, the concentrated land supply in batches may increase cash/finance costs in a non-smooth way and it may not really lower the land prices much given almost all top 30 developers aim for Tier 1-2 cities.
