China: Real Estate Developers
Upgrade sector to Neutral on valuation: Sell CRL; Buy Yanlord, SZI
Cutting 2009 price forecasts, developers' earnings & NAV estimates
We estimate the inventory level in major cities will continue to rise in 1H2009,
as will the pressure on property prices and developers’ cash flows. We lower
our 2009 property price projection to a drop of 10%-15% from the end-08 level
vs. a 5%-10% decline previously. Correspondingly, we lower our end-09E NAV
estimates by 11% on average and our 2008E/2009E/2010E underlying net profit
forecasts by an average 8%/9%/14% for our coverage group.
Upgrade to Neutral; watch for policy, next selling season, M&A
Though we remain cautious on the physical market outlook, we upgrade our
sector coverage view to Neutral as we believe the valuation has largely
priced in further property price decline in 2009. That said, we believe cash
flow pressure is unlikely to ease substantially for developers in the
next 2-3 quarters. In order to reflect the divergent financial stresses and
thus downside risk to valuations, we introduce a “Distressed valuation”
(DV) methodology for our coverage group as a reality check. We think
developers with a larger funding gap should trade close to DV to reflect the
likely deeper discount for “emergent” asset disposals. We set our TP
discounts to NAV at 20%-50% to reflect the varying financial pressures on
our coverage group in 2009, and revise our TPs by +49% to -(42%).
Key things we will watch are new policy stimulus, property sales
in the next selling season (March-June 2009) and M&A.
Government may move more aggressively on the policy front to revive
transaction volume. We believe a 40%-50% yoy volume bounce in the next
selling season is necessary to crystallize late-2009 stabilization (i.e. bring
down months’ inventory to 12-18), and in turn ease liquidity for the
industry. We believe M&A could provide visibility of a support level
valuation and potentially push stock valuations higher.
Top picks: Buy Yanlord, Shenzhen Inv.; Sell China Resources Land
We downgrade CRL (1109.HK) to Sell (add to Conviction List) from Neutral on
deteriorating financial position and premium valuation to peers. We upgrade
Yanlord (YNLG. SI) and SZI (0604.HK) to Buy from Neutral for attractive
valuation and healthy financial position. We retain our Sell rating on R&F
(2777.HK), Poly Real Estate (600048.SS) and CMP A (000024. SZ). Key risks:
upside: faster- and stronger-than-expected volume recovery amid government
policy stimulus; downside: prolonged slowdown of China’s economy.

Table of contents
Comparative valuation table; summary of target price changes 3
Investment summary: Range trade more likely than one-way down 5
Industry outlook: Affordability might need to come below historical median level to clear inventory 6
Developers: Cash flow pressure, write-downs and deteriorating IRR 12
Developers with stronger balance sheets are still our preference 18
Appendix 22
Disclosures 48