More challenging 2016：relaxations positive but earnings visibility low

Deutsche Bank Markets Research Asia China Property Property Industry China Property Date 1 December 2015 Industry Update More challenging 2016: relaxations positive but earnings visibility low Policy relaxations likely hindering structural adjustments in property 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) 124/04/2015. Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Top picks COLI (0688.HK),HKD25.45 Buy China Resources Land (1109.HK),HKD20.85 Buy Joy City Property (0207.HK),HKD1.14 Buy Greentown China (3900.HK),HKD7.80 Buy China Jinmao (0817.HK),HKD2.35 Buy Source: Deutsche Bank Companies Featured COLI (0688.HK),HKD25.45 Buy China Resources Land (1109.HK),HKD20.85 Buy Joy City Property (0207.HK),HKD1.14 Buy Greentown China (3900.HK),HKD7.80 Buy China Jinmao (0817.HK),HKD2.35 Buy Sino Ocean (3377.HK),HKD4.29 Buy Evergrande (3333.HK),HKD6.35 Sell Agile Property (3383.HK),HKD4.23 Sell Country Garden Holdings (2007.HK),HKD2.89 Sell Shimao Property (0813.HK),HKD12.92 Sell Sunac (1918.HK),HKD5.04 Sell Yuexiu Property (0123.HK),HKD1.30 Sell Yanlord Land (YNLG.SI),SGD1.03 Sell Gemdale Corp (600383.SS),CNY12.99 Sell Source: Deutsche Bank Two consecutive years of decline in land sales while construction starts have led to a healthy adjustment (like improving demand-supply balance) in the China property market but resulted in weaker real estate FAI, hurting GDP growth. We expect further policy relaxation in next six months to boost FAI, which presents positive trading catalysts for China property stocks. However, such relaxations could stimulate aggressive landbanking and borrowing behavior among Chinese developers, leading to sharp land price increases (i.e., faster than home price growth), resulting in greater margin squeeze, slower organic NAV and earnings growth, and higher net gearing for the developers. We expect divergent property market performances in different cities in 2016 Overall, we expect nationwide commodity residential home price changes in 2016 to be in the range of -3.1% to +5.4%, and sales volume to be in the range of -1% to +5%. For Tier-1 cities, we expect home price growth of 0-20% and sales volume growth of -5%-0%. For Tier-2 cities, we expect home price growth of -10%-+20% and volume growth of 0-5%, while for Tier-3/4 cities, we expect home price growth of -10% to +5%, and sales volume growth of 0-5%. In particular, among the different types of cities, we expect: 1) Tier-1 cities: Shanghai and Beijing to see better ASP growth, Guangzhou to be stable while Shenzhen could see ASP declines; 2) Tier-2 cities: Nanjing, Hangzhou, Ningbo, Hefei, Xiamen, Nanchang, Zhengzhou to see higher ASP growth, while Wuxi, Haikou, Sanya, Chongqing, Xi'an, Yantai should see ASP declines due to high absolute levels of inventory and/or high inventory periods; 3) Tier-3/4 cities: Nanning, Guiyang, Kunming, Yinchuan, Tangshan, Yangzhou, Xuzhou, Luoyang, Yichang, Yueyang, Changde and Luzhou to show relatively more favorable ASP movements, while Hohhot, Lanzhou, Xining, Urumqi, Qinhuangdao, Baotou, Jinzhou, Mudanjiang, Wenzhou, Bengbu, Quanzhou, Ganzhou, Huizhou, Zhanjiang, Shaoguan, Guilin, Beihai, Nanchong, Zunyi and Dali should see higher ASP declines. Poor earnings visibility set to remain a key issue for private developers in 2016 In 2015 YTD, a larger number of developers recorded YoY declines or low YoY growths in contracted sales, with low sale target hit-rates, which suggested high risks of missing 2015 sales target. With continued downward pressure on margins (given a lack of meaningful contracted ASP growth for the listed developers and sharp rises in land prices since 2012), we see continued weak earnings prospects for most private developers in the upcoming FY15 and 1H16 results seasons in March and August 2016. With land prices rising faster than home prices (e.g., land prices now make up 90% of ASP in T-1 cities), we see continued weak earnings prospects in 2016-17 for most listed developers. Buy state-owned developers; Sell private developers into any policy strength Given more supportive policies, on top of COLI and CR Land, we re