China: Real Estate Developers
Survey implies substantial downside risk; D/G sector to Cautious
Downgrade coverage view to Cautious
We see increasing downside risk to developers’ earnings and NAVs due to the
persistent macro overhang, developers’ stretched financial positions, and weak
demand sentiment vs. crowded supply. Further, our recent proprietary
homebuyer survey in 12 major cities in China suggests a 10%-20%
price cut or more from current levels would be necessary to stimulate
demand. Such a price cut expectation is at least 5%-15% more than our previous
base-case assumption. We therefore make the following revisions to the sector:
(1) we cut our price growth assumption by another 5% (to down 15%-20% from
Dec-07 level on average); and (2) we further reduce our new land acquisition
projection by capping the end-2008E net debt to equity ratio to 70%.
Despite these downward revisions, we believe prevailing risks in the sector could
depress buyer sentiment further and push the level of price decline towards that
expected by the 1,239 respondents to our proprietary homebuyer survey.
Therefore, we downgrade our coverage view on the China property
sector to Cautious from Attractive and widen the sector average NAV
discount in our TPs to 30% from 20% (range is set at 20%-50% for individual
companies) to capture the further downside risk to property prices, developers’
earnings and NAVs. Meanwhile, we roll out our 2010E earnings forecasts for our
coverage group and revise our underlying earnings estimates by -42% to +162%
for 2008E and -50% to +29% for 2009E, post the developers’ 2007 annual results.
Given these adjustments we cut our sector-wide 12m target prices by
13%-45%, implying 3% avg. downside potential.
Downgrade R&F to Sell; COLI, Sino-Ocean & SOHO to Neutral
We downgrade COLI (688.HK), Sino-Ocean (3377.HK) and SOHO (410. HK) to
Neutral from Buy; R&F (2777.HK) to Sell from Neutral, and add this to our
Conviction Sell list. We believe COLI’s valuation already fully reflects our positive
view on its fundamentals. The implied upside for our new Sino-Ocean target
price is not high enough to justify a Buy rating. We remove the Tiananmen South
project from our potential NAV calculation for SOHO; with the Beijing Olympic
games only a few months away, management has yet to deliver on its promise of
eight months ago to transfer the project to the listco. As the A-share listing seems
to be further delayed, we think a slowdown in construction pace is a better option
for R&F to quickly relieve itself of cash flow pressures which will likely lead to
more earnings disappointment. Key risks: Faster and stronger-than-expected
transaction volume recovery in the coming months; less inflationary pressure,
allowing the government to relax some tightening measures.

[此贴子已经被作者于2008-5-16 23:08:41编辑过]