FY15 preview: Low earnings visibility for most private developers

Deutsche Bank Markets Research Asia China Property Property Industry China Property Date 18 February 2016 Industry Update FY15 preview: Low earnings visibility for most private developers Low earnings visibility for FY15 presents headwinds for private developers ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Tony Tsang Research Analyst (+852 ) 2203 6256 tony.tsang@db.com Foo Leung Research Assistant (+852 ) 2203 6239 foo.leung@db.com Top picks COLI (0688.HK),HKD22.60 Buy China Resources Land (1109.HK),HKD18.38 Buy Joy City Property (0207.HK),HKD1.01 Buy China Jinmao (0817.HK),HKD1.90 Buy Poly Real Estate (600048.SS),CNY9.07 Buy Source: Deutsche Bank Companies Featured COLI (0688.HK),HKD22.60 Buy China Resources Land (1109.HK),HKD18.38 Buy Joy City Property (0207.HK),HKD1.01 Buy China Jinmao (0817.HK),HKD1.90 Buy Poly Real Estate (600048.SS),CNY9.07 Buy CSCEC (601668.SS),CNY5.37 Buy Greentown China (3900.HK),HKD6.25 Buy Sino Ocean (3377.HK),HKD3.80 Buy Evergrande (3333.HK),HKD4.91 Sell Sunac (1918.HK),HKD4.68 Sell Shimao Property (0813.HK),HKD10.12 Sell Agile Property (3383.HK),HKD3.73 Sell Country Garden Holdings (2007.HK),HKD2.97 Sell Yuexiu Property (0123.HK),HKD1.09 Sell Yanlord Land (YNLG.SI),SGD1.06 Sell Gemdale Corp (600383.SS),CNY14.85 Sell China Vanke (000002.SZ),CNY24.43 Sell China Vanke (2202.HK),HKD16.28 Sell Source: Deutsche Bank The FY15 results season for Chinese developers is starting soon (with KWG reporting on Feb 19). While we expect solid and stable earnings growth for state-owned leaders like COLI and CR Land, we see relatively low earnings visibility for most private developers due to 1) slow contracted sales growth (negative for some developers) in 2015; 2) continued margin pressure as the rise in contracted ASPs still lags behind increases in land costs in recent years; and 3) RMB depreciation leading to FX losses for those that booked FX gains directly into P&L in the past (instead of reserve on balance sheet). This could lead to share price headwinds for private developers in the near term. Weak 2015 contracted sales growth leading to weaker top lines in FY15/6 P&L In 2015, the 25 listed developers that we track achieved average contracted sales value growth of 16% YoY and contracted GFA growth of 15% YoY. However, 11 of the 25 developers achieved relatively slow or negative YoY growth in full-year contracted sales: Country Garden (+9%), Sunac (+4%), Wanda (+2%), CCRE (+1%), Sino Ocean (+1%), Agile (flat), R&F (flat), KWG (-1%), Shimao (-5%), Greentown (-9%), CC Land (-12%). The lack of contracted sales growth for these developers in 2015 will likely lead to a lack of or declines in revenue recognition in the P&L for FY15/16. Also, on our analysis, among the listed developers, the average YoY growth rate in contracted ASP was only 2.3% (after we adjusted for the smaller developers having significant changes in geographical mixes), well below the YoY growth in land prices in recent years, highlighting continued downward pressure on gross margins. RMB depreciation also presents potential for negative surprises in P&L COLI, CR Land, Vanke and COGO have exchange reserves to offset initial RMB depreciation, hence their P&L should take relatively smaller hits (at least in the initial phase of depreciation). However, most other developers (the majority being private developers) chose to book their unrealized FX gains in P&L in the past when RMB was appreciating and so do not have Exchange Reserve on the balance sheet. With RMB depreciating, the FX translation losses will directly hit their P&L. As a reference, developers with higher gearing and a higher amount of non-RMB debt face a bigger hit to their P&L when RMB depreciates; on our analysis, these developers include Evergrande, Yuexiu, Sunac, Sino Ocean, CCRE, Agile, Greentown, Shimao and KWG. More focus on supply-side reform means significant demand stimulus unlikely While we expect more policy relaxation by the government on the property market (e.g. potential tax incentives, in addition to market-expected interest rate and RRR cuts), we expect the government to focus more on supply-side reform (like cutting land