• Indications of regulatory support
• Sustainable and moderate growth the best for all
• 4.8x forward P/E

A More Accommodative Stance by Regulators

The share prices of Chinese developers witnessed a strong rally yesterday, with Hong Kong-listed names under our coverage jumping 4.0% - 8.3%. Following a meeting held by the Political Bureau of the Communist Party of China (CPC) Central Committee, we note that references to problems in the property market and curbs of rising home prices that were previously floated in the July meeting were conspicuously absent this time around.

We see this as a continuation of recent developments demonstrating the government’s willingness to accommodate certain adjustments to prevent a significant correction in the property market. Such adjustments involve easier credit conditions (e.g. lower mortgage rate in selected cities) as well as the reported relaxation of price-caps in certain areas within the Guangzhou province.

Sales Moderating, Not Collapsing

From the Sep18 figures released by the National Bureau of Statistics (NBS), residential sales grew 11.0% YoY, slowing from the 24.8% and 17.8% YoY growth registered in Jul18 and Aug18, respectively.

For the first time since May18, residential sales volume fell 0.8% YoY, though residential average selling prices (ASP) grew at 11.9% YoY.

We believe a mix of uncertain macro conditions and a slew of negative newsflow pertaining to property (e.g. potential cancellation of pre-sales system, property tax) have made buyers more cautious in their purchases. Looking into 2019, we believe that sales growth should moderate, as the tightening of the shantytown redevelopment scheme would likely dampen demand in tier-3 and 4 cities.

Still, we believe that even if the weaker buying sentiment were to persist, ASPs should not see a drastic drop, as continued destocking as well as a slowing of growth in new starts should help to keep inventory levels in check.

All considered, we think that the above conditions should remove any impetus for the authorities to introduce more draconian measures in the near term. Given the sector’s contribution to GDP as well as the softer Oct18 PMIs, a collapse in the property market is probably a highly undesirable outcome for the Chinese authorities.

Valuations Attractive

Turning to the Hong Kong-listed names under our coverage, business has been brisk despite concerns around the sector, with Sep18 sales growing between 28.6% - 102.5% YoY.

Given that the sector is trading close to trough valuations (Bloomberg consensus blended forward P/E of 4.8x), as well as indications of greater regulatory support, we think that this is an opportune time for investors to gain incremental exposure to the sector.

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 - 2 Nov 2018