ChinaPropertySectorSlowergrowthbutbetterqualityRealEstate|ThemeFigure1:MorebalancedbusinessmodelbetterappreciatedbytheinvestorsSource:theBLOOMBERGPROFESSIONALTMservice,CreditSuisseestimates■Slowergrowthbutbetterquality.Weraiseournationalpropertysalesestimatesby11%/9%for2019/20Eonstronger-than-expecteddemandinlower-tiercitiesandamorestabilisedpolicyenvironment.WhilethesalesCAGRofourcovereddeveloperswilllikelymoderatefromahighbaseto16%over2018-21E,themomentumissatisfactoryagainstthemarket’slowexpectation.Moreimportantly,weexpectgrowthqualitytoimprove(i.e.,loweroperationrisk+lowergearing+moretransparentB/S).ThemorebalanceddevelopmentofLongforandCRLhasbeenwellrewardedbyahighervaluationpremium.Weexpectmoredeveloperstofollowsuit,andtheimprovinggrowthqualitywillsupportare-ratingforthesenames.■Remainpositiveonsalesgrowthprospects.Withafour-yearlandbankduration,webelievedevelopers’currentsaleableresourcesaresufficienttodrivesatisfactorysalesgrowth,evenwiththeregulator’sstrictcontrolsonfinancing.Nevertheless,wedoseemoreoperationaldivergenceamongdevelopersasexecutioncapability/capitalutilisationefficiencywillcountmore.■Sufficientbuffertosmooththemarginsqueeze.WeestimateanembeddedGPMof27.0%forthedevelopers’currentlandbankonaflattishhomepricetrend(vs31.9%bookedin1H19).Meanwhile,as77%ofourpropertydevelopmentrevenueestimatefor2H19-2020hasalreadybeensecuredasatendofJun-2019witha29%embeddedgrossmargin,wearecomfortablewithourmarginestimateof30.3%/28.9%forFY19/20EandearningsCAGRof17%overFY18-21E.■Improvingqualitymeritsarerating.LongforandCRLoutperformedsinceend-2017onmorebalancedgrowth(i.e.,stableearningsgrowth+strongB/S).Lookingahead,wepreferdevelopersthathavehigherpotentialforoperationalimprovementwithamoreattractivevaluation.WepreferCOLI,Sunac,CIFI,andKWG.Inparticular,webelieveKWG’accelerationindeliveryfrom2H19willwelladdressmarket’sconcernsonitsearningsgrowthquality,andstronger-than-peers’salesmomentumonitslandbankedgewilldriveafurtherrerating.WeupgradeCountryGardent...
