Hong Kong/China Property - Sales steel up, prices peel of (Sept 7, 2010)

Sales volumes picking up
Keeping sector a NEUTRAL. Last week, housing sales saw improvements in most major cities with sales volume in 19 cities rising 6.9% wow or 46% as compared with the trough in May. Judging from developers’ presales schedules, we believe that sales will stay at high levels in the coming months.

However, prices are expected to see further correction of around 10-15%, particularly for new projects, as current prices are still 3.7-56.1% higher than prices in 4Q09. We retain our earnings and RNAV estimates as they already factor in the potential price correction. The government’s tightening measures will continue to place an overhang on the sector in the short term.

We retain our NEUTRAL recommendation on the sector and our OUTPERFORM calls for our top picks, Shimao and COLI.

Sales update
Continuous improvement in sales volume… Based on the Soufun’s property sales statistics, 21 out of 35 surveyed Chinese cities showed wow increase in transacted areas last week, ranging from 0.36% to 143.7%. The best performers among the major cities were Heifei, Tianjin and Xiamen with transacted volume jumping 26-34% wow (see Figure 2).

Sales in most of the major cities rebounded from their troughs in May/Jun. Judging from the 19 major cities on our radar screen, a total of 3.37m sq m was transacted last week, an increase of 46% as compared with the average weekly transactions of only 2.3m sq m in May 2010 but 29.4% below the average weekly transactions of around 4.77m sq m in  Q09.

As we move towards the traditional peak season in Sep/Oct with an increase in supply, overall sales volume is expected to stay at high levels in the coming weeks.

…but prices heading south. While transacted prices dropped wow in 19 cities out of the 35 surveyed cities, prices in most of these cities were still 3.7-56.1% higher than in 4Q09.

This suggests that the government will not relax its tightening policies in the coming quarter so as to achieve further price correction. As most of the developers will speed up their  presales activities in the forthcoming traditional peak season, developers are likely to employ more aggressive pricing and marketing strategies, particularly for new projects.

We expect  another price correction of 10-15% from the current level.

Valuation and recommendation
Staying NEUTRAL on the sector. The sustained rebound in property sales from the trough is encouraging but overheating concerns remain unabated as overall property prices  stayed high in most cities.
The government is not expected to reverse its tightening measures at this juncture.

In view of further price correction and continuous tightening from the government, we expect developers’ share prices to stay rangebound even though transaction volumes are picking up. Shimao and COLI are our top picks to ride sector developments for their appealing valuations and stronger execution capabilities.