Discounted valuation presents buying
opportunities: We believe 2011 is going to be another
challenging year for developers – but current valuations
suggest the negatives we could foresee for the next 12
months may be in the price already. The group is now
trading at an average discount of 48% to our forward
NAV estimates, or 1 SD below the historical average
discount of 25%. In our view, a 2008-type capitulation in
stock prices is unlikely to recur against a completely
different macro backdrop. Considering the generally
limited downside risk from here, we see buying
opportunities for selected Chinese property stocks.
Maintain a neutral view on physical market,
projecting a 15% price decline for 2011: Based on our
proprietary supply analysis, residential supply may
outpace demand in 2011. We project an average
residential price decline of 15% across all cities
(replacing the price differentiation by city tiers). This
reflects the evenly spread incremental supply across
regions, as well as the significant catch-up in property
price growth in lower tier cities in the past 12 months.
Industry view still In-Line, but we upgrade individual
stocks on valuation and better-than-expected
execution: We are upgrading COLI, CR Land and
Longfor to OW, and keep Vanke, R&F, Shimao and
KWG as our top picks. Valuation aside, we are not going
overly bearish on the stocks for three reasons: 1) Good
earnings visibility with 70% of 2011e revenue secured;
2) market shares expanded quickly from 12% in 2009 to
17% in 11M10; and 3) financial muscle, with average net
gearing of 50% by end-2010. Separately, we downgrade
Country Garden and Central China to UW for their
weaker pricing power, and potentially more direct
competition with social housing on peripheral exposure.
Key risks: Upside risk could arise as exit from tighter
policies fuels demand for property. Downside risk would
stem from further tightening measures and/or a
prolonged downward spiral in prices and volume.