China Property:Accelerating consolidation amid slower market in 2018

Deutsche Bank Markets Research Asia China Property Property Industry China Property Date 1 February 2018 Recommendation Change Accelerating consolidation amid slower market in 2018 Accelerating consolidation amid slower physical market ________________________________________________________________________________________________________________ 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) 083/04/2017. Jeffrey Gao, CFA Research Analyst (+852 ) 2203 6256 jeffrey.gao@db.com Jason Ching, CFA Research Analyst (+852 ) 2203 6205 jason.ching@db.com Stephen Cheung, CFA Research Analyst (+852 ) 2203 6182 stephen-a.cheung@db.com Foo Leung Research Associate (+852 ) 2203 6239 foo.leung@db.com Key Changes Company Target Price Rating 3383.HK 9.40 to 16.08(HKD) Hold to Buy 3883.HK 7.00 to 8.40(HKD) - 0817.HK 3.81 to 5.63(HKD) - 1966.HK 4.57 to 5.23(HKD) - 0884.HK 4.82 to 7.99(HKD) - 0688.HK 30.63 to 34.91(HKD) - 2007.HK 18.12 to 19.93(HKD) - 1109.HK 27.11 to 37.01(HKD) - 3333.HK 26.55 to 30.11(HKD) - 1030.HK 8.26 to 8.88(HKD) - 600383.SS 10.06 to 13.10(CNY) - 3900.HK 9.13 to 14.09(HKD) - 2777.HK 19.69 to 25.92(HKD) - 1813.HK 12.88 to 15.48(HKD) - 3380.HK 10.95 to 13.15(HKD) - 0960.HK 23.17 to 30.29(HKD) - 600823.SS 4.55 to 5.20(CNY) - 0813.HK 19.10 to 27.58(HKD) - 3377.HK 5.27 to 6.83(HKD) Buy to Hold 1918.HK 46.00 to 46.52(HKD) - 2202.HK 41.38 to 45.24(HKD) - 000002.SZ 34.53 to 37.65(CNY) - Source: Deutsche Bank For 2018, we expect a slower physical market after record high property sales (including retail and office spaces) of 1.7bn sqm last year. We expect marginal policy relaxation with relatively tighter credit in 2018 versus that of 2017. However, we remain constructive on listed developers in view of the accelerating market consolidation. With diversified financing channels, rich saleable resources and strong execution, we estimate listed developers will deliver strong sales growth of >35% in 2018F. We like developers with rich land bank/resources in high-tier cites and high-growth national players with strong execution in low-tier markets. Physical market might slow in 2018F – sales volume to decrease by 5% We are relatively conservative on the physical market in 2018. We expect: 1) national property sales volume to decline by ~5% y-y due to high base (+7.7% y-y in 2017) and tight credit (average first-home mortgage rate increased to 5.4% at end-2017 from 4.5% in 2016/higher borrowing cost for developers); 2) property prices to grow moderately due to stringent price control but low inventory levels (11/9/11 months in T1/2/3 cities), and hence, resulting in low single-digit decline for national property sales value; and 3) REI to continue to grow at 5-7% on further land sales recovery, and improving new starts. Accelerating market consolidation; sales of listcos to grow >35% in 2018F We think market consolidation will continue to be the key trend in 2018. We expect the top-20 developers will have >50% market share of primary property sales by 2020F (vs. 32.5% in 2017) due to their: 1) superior financing channels (average financing cost lowered to 5.3% in 1H17 from 7-8.5% in 2012-2015); 2) more competitiveness in the primary land market and M&As (land acquisition of major developers increased 132% by volume on average in 2017); and 3) better execution and brand equity. Low-tier market players might continue to outperform in sales growth While we agree that overall sales volume in low-tier cities could retreat from high base in 2018, we think listed low-tier markets players will continue to outperform in sales (vs. T1/2 focused players) as we see less competition in this fragmented market. Dominant players like Country Garden can easily gain market share in T3/4 cities. On the contrary, competition in T1 and high T2 markets will remain fierce and it will be difficult for major players to gain market share, despite high-tier markets recovering gradually from low base. We favor high-growth national players and strong regional names with rich saleable resources Overall, we remain positive on the sector on a 12-month horizon, given listed developers’ strong sales growth of >35% in 2018 and earnings CAGR of >25% for FY17-19F. We change our NAV discount applied to the sector/stocks to reflect the positive growth prospects and improving balance sheets. We expect more divergence in l