Analysts debunk poor valuations of developers

Saleswomen promote a property at a housing fair in Haikou, Hainan province. Xu Ersheng / For China Daily

China's property developers are in far better shape than their rock-bottom stock valuations would have you believe. So say top analysts from firms including Goldman Sachs Group Inc and Citigroup Inc.

As curbs to cool real estate prices have pushed equity values down to near record lows, Goldman Sachs said the market is pricing in a "deep downturn" and that investors are too pessimistic on expected income, especially from some leading developers. Citigroup cites the investment appeal of large developers as the industry enters an era of "mega consolidation".

And China Investment Capital Corp said builder stocks may surge by more than 20 percent in the first quarter as "palpably better-than-expected" home sales act as a catalyst.

A Bloomberg Intelligence index tracking 22 mainland developers listed in Hong Kong surged by 3.7 percent on Wednesday, the biggest increase in more than 11 months. Country Garden Holdings Co soared by 8 percent, the largest intraday gain since May 4, 2015. China Resources Land Ltd advanced 6.2 percent in its largest move since March.

Despite an overhang from further government restrictions, some property stocks "are just way too cheap," said Alan Jin, a property analyst at Mizuho Securities Asia Ltd in Hong Kong, who has upgraded China Overseas Land & Investment Ltd and Guangzhou R&F Properties Co Ltd to buy ratings.

"Now that valuations are near distressed levels, there may be a sector-wide rally lasting three to four months," he said.

Chinese regulators in March started embarking on a series of restrictions as they sought to rein in frenzied demand for homes, sending developer shares down last year. The Bloomberg Intelligence real estate index plunged by 11 percent in 2016 and through Feb 7 was trading at 0.6x book value, near an all-time bottom in 2008, when China's property market had its biggest downturn in a decade.

Yet, despite valuations near a historical trough, contracted sales at leading developers are expected to jump by another 15 percent this year from a record 2016, thanks to their strategic positioning in metro areas and stable home prices, according to Citigroup analysts.

Morgan Stanley analysts earlier this week upgraded the property sector to "attractive," citing low valuations and a tight supply of land that will support home prices.

The nation's top three builders by sales had a strong start to the year. China Evergrande Group, China Vanke Co Ltd and Country Garden Holdings Co Ltd saw contracted sales jumping by 90 percent, 274 percent and 75 percent in January respectively, according to private data provider China Real Estate Information Corp.

Citigroup is among at least 12 brokerages that have upgraded mainland property stocks traded in Hong Kong this year. Analysts led by Hong Kong-based Oscar Choi wrote last month that 2017 will be a "watershed" year for the industry as some of the largest developers increase market share. China Resources Land Ltd and Sunac China Holdings Ltd are among Citigroup's top picks.

Downside risk for share prices is limited, unless the financial performance and liquidity for the whole sector deteriorates quickly, said Philip Tse, a Hong Kong-based property analyst at ICBC International Research Ltd.

Investors haven't shared such optimism. China Overseas Land and China Resources Land slumped by 24 percent and 22 percent respectively last year to rank among the biggest losers as a selloff accelerated in the fourth quarter. Goldman Sachs has a 12-month target price of China Overseas Land at HK$31 ($4), which is 36 percent higher than the current price, while China Resources Land has buy ratings from all 33 analysts tracked by Bloomberg.

The easy availability of credit sent home values soaring by as much as 62 percent last year in some large cities such as Shenzhen, spurring regulators to increase down-payment requirements and clamp down on mortgage lending.

Bloomberg