• Opportunities from tighter credit
• Real estate still a bastion of the economy
• Limited impact from trade tensions

Market Consolidation Still Afoot

Looking at the latest numbers from the National Bureau of Statistics (NBS), the sales value growth of commercial buildings in Aug18 slowed to 15.2% YoY, easing off from the 17.1% and 22.0% YoY growth registered in Jun18 and Jul18, respectively. Looking more broadly at 8M18, the sales value growth was at 16.4% YoY, which was notably lower than the 34.9% YoY growth achieved by the listed developers that we track. This is unsurprising, as we continue to expect that the bigger (listed) players will grow at the expense of the smaller (unlisted) ones.

Interestingly, based on our channel checks, we understand that a number of public land auctions have either failed or have seen significantly fewer bids, as small developers face tighter credit constraints. In 2H18, as auction prices become more palatable, we believe land banking opportunities, through such an avenue, should now present themselves to the developers under our coverage.

Big Sector Crackdown Coming? Just a Moment…

Destocking remains apparent, with inventory down 13.6% YoY on a 8M18 basis. Separately, implied average selling prices (ASP) continue to remain on the ascent, growing 10.1% YoY. In our opinion, while a large-scale roll-back of the current restrictive housing policies would be unlikely, we could see selective policy adjustments on a city-by-city basis.

A sharp drop in ASP would, in our opinion, be negative towards buyer sentiment, thereby putting a dampener on new starts and consequently, reducing real estate investments. Given the broader macro concerns, we believe that the central government would want to avoid such a scenario.

As for the much talked-about tax laws, we note that in the Standing Committee of the 13th National People’s Congress’ (NPC) 5-year legislative plan, the real estate tax law has been listed as one of the 69 Class I projects which are planned to be submitted for deliberation. We would not rush to conclude that the property tax law is a done deal, as this was also listed as a Class I project under the Standing Committee of the 12th NPC.

Trade War Impact Overblown

We think that concerns stemming from the RMB depreciation are probably overdone. Based on our estimates, we think that a 5% RMB depreciation against the USD should result in a 0.4% - 1.2% drop in blended FY18F/FY19F earnings arising from an increase in interest servicing burden, excluding any FX losses, for the HK-listed developers under coverage.

The sector is trading at 5.0x forward P/E based on Bloomberg consensus, near the troughs of 2011 and 2014 which had headwinds (declining housing prices, supply glut) that are absent in this cycle. We continue to reiterate our top picks of KWG Group (1813 HK) [BUY, HK$12.50] and Longfor Properties (960 HK) [BUY, HK$26.17].

Source: OCBC Research - 19 Sept 2018