As Covid-19 fades in China, homebuyers rush back in, boosting outlook of developers’ stocks
China’s home sales continue to rebound, sending developers’ stocks soaring over July 2 and July 3 and prompting analysts to urge investors to take a fresh look at the sector now that the country appears to have put the worst of the coronavirus pandemic firmly behind it.
Data from China Real Estate Information Corporation (CRIC) last week showed 30 major developers tracked by Jefferies beating market expectations for home sales in June, posting on average a 18% jump y-o-y in what was the fourth consecutive month of gains. Several analysts fired off upbeat calls on the sector’s outlook in the second half of the year, particularly among its mid cap players.
Hong Kong-listed shares rallied on CRIC data and sales figures reported by some developers in Hong Kong stock exchange filings, as well as new analysts’ forecasts.
China Aoyuan Group, a mid cap getting attention partly because of its focus on the booming Greater Bay Area, shot up more than 17% over the two days. It saw its m-o-m contracted sales jump 72%, and y-o-y sales grow 15%, it said in a stock filing.
Leading developers rallied as well: China Evergrande soared 29% over the two days, after reporting its contracted sales for June shot up 51.3% y-o-y, while its contracted sales grew 47.5% in the first half compared to the same six-month period the year before.
Country Garden Holdings ran up 9%, even though its y-o-y contracted sales in June were up only about 2% in June, according to Jefferies calculations, while China Vanke jumped 10% on a 16% m-o-m rise in contract sales.
Shares of Chinese developers still have room to rise, some analysts say, after being battered during the coronavirus pandemic that was first reported in January and led to a free fall in sales.
These analysts predict residential sales will continue to be strong through the second half of the year, boosted by strong demand for flats, falling mortgage rates now at 33-month lows, loosened buying restrictions, and ample supply that had been put on hold during the pandemic’s peak in the country.
“Looking into [the second half of 2020], we expect 20% y-o-y sales growth for leading developers,” wrote Credit Suisse analysts Jianping Chen and Summer Wang. “The strong sales growth momentum should drive the sector’s rally.”
Its top picks are China Overseas Land Investment (COLI), China Resources Land, Shimao Group Holdings, CIFI Holdings Group, and China Overseas Grand Oceans (COGO), all of which have buy ratings.
However, Daiwa Capital Markets remains neutral on the overall sector, warning of uncertainties in the second half of the year after the strong recovery in home sales and construction in the second quarter.
Pent-up demand from virus-wary prospective buyers was a one-off, analysts Cynthia Chan and Jonas Kan conclude, predicting housing demand will slow down. And local government policies making buying easier have largely been in smaller cities that will have less impact on overall nationwide home sales, they say.
Meanwhile, home-price caps and price discounts could hurt the average selling price for Chinese developers, which are in a hurry to catch up on year-long goals in the second half, several analysts noted.
Despite risks, the Daiwa Capital Markets analysts suggest investors selectively buy. Their favourites are Shimao, CIFI, and KWG Group Holdings, among mid to large caps, and CR Land and Longfor, among large caps.
“Unlike some in the market, we believe that China property constitutes an important way for investors to get China exposure and expect the sector will grow in importance to global investors over time,” Chan and Kan wrote.
A key yardstick often used for real estate companies suggests China property stocks are cheap: the sector trades at an attractive 45% discount to its net asset value — its total value of assets minus its liabilities — per share (NAV), according to Jefferies’ tracking of 30 major developers.
Jefferies expects the second quarter momentum to continue, predicting a 25% average y-o-y sales growth for the 30 Chinese developers it monitors, and is bullish on mid caps, which it expects to outperform.
Catalysts ahead in the second half include likely further steps by the People’s Bank of China to make credit cheaper, and decent, above market-expected earnings growth in the first half — an average 10% — Jefferies analysts Stephen Cheung and Calvin Leung predict.
“We remain bullish and suggest accumulating quality mid caps,” the analysts wrote in a new note.
Their top picks are mid caps China Aoyuan (NAV discount 64%), KWG (NAV discount 45%) and CIFI (NAV discount 46%).
Meanwhile, price discounts by developers — on top of local governments’ price caps and looser restrictions on who can buy — have led to an arbitrage opportunity for speculators that plays to developers’ favour.
Second- hand homes are now selling at a premium to new homes, and speculators are buying new flats with the plan to sell them in the second- hand market once the calendar has ticked past lock- in resell restrictions, says Bloomberg Intelligence analyst Kristy Hung.
“Arbitrage opportunities are set to boost developers’ sell-through of new home projects in Shenzhen, Nanjing, Hangzhou, Chengdu, Suzhou, Wuxi and Xi’an, as regulators’ home price caps squeeze first-hand home prices at significantly lower levels than second-hand homes,” Hung explained in a new note.
“Tens of thousands of buyers are flooding developers’ apartment showcases in these cities to compete for hundreds of units, in the hope of offloading them to the second-hand market for quick profit in three to five years as the resale lock-up period ends,” Hung added. “Firsthome buyers are also vying for these units, given the discounts versus the second-hand market.”
Of course, local governments — operating under President Xi Jinping’s dictum that “houses are for living in, not speculation”— could lengthen the lock-up periods or take other policy steps that could cool down sales to steer investment into other parts of an economy still digging its way out of the damaging pandemic and trade war with the US. Such possible policy moves could be a drag on developers’ stocks, analysts said.