AMTD Research - 15 May 2018

A Battle for Survival

Intensified market consolidation & battle for resources

Survivors in the elimination game

We recommend names with strong access to acquiring lands from M&A, urban redevelopment projects and shanty housing redevelopment, rather than developers only with land acquisition from auction market. SOE will have absolute advantage in this elimination game: low funding cost, access to land resource and shanty housing redevelopment experience. Our top pick is CR Lands: CR Lands has low funding cost at only 4.16% in 2017, its multi-channel of land acquisition is irreproducible competitiveness and its foreseeable growth of booking profit is a plus.

Home price cap continues

Tightening on property market comes to the harshest moment: introducing lock-up period for commercial housing; lottery system for home buyers; home price cap and more allocation for rental housing. We believe Central Government’s ultimate goal is to establish a dual-track market: public housing and commercial housing markets. Long-term rental housing is also a way to increase housing supplies. However, according to our observation of current long-term rental housing projects, some issues must be solved: 1) low return rate and long pay-back period, 2) high cost of land premium; 3) relatively high rental for singles. We believe it will take time to solve these issues. In the meanwhile, the government will curb home price to lower expectation of home price rocketing.

Shanty housing redevelopment is a stimulus of domestic demand

We believe the shanty housing redevelopment is a stimulus of domestic demand, while stabilization is still the top priority in Central Government. However, it is not reasonable to sustain stimulus for long time and we expect that stimulus will exit in future. According to 2018 redevelopment plan, 5.8 million units of shanty house will be redeveloped. If we assume the cash compensation rate to be around 60% in 2018 and average GFA sold per unit is 84 sq.m, cash compensation will digest 294 million sq.m of residential property in 2018. We believe cash compensation will flat or increase, as destocking continues. In 2018-2020, we believe the redeveloped units will gradually decline from 5.8 million units to 5 million units in 2019 and 4.2 million units in 2020.

We expect home price cap will exist in next 3 years, profit margin will be affected

We expect home price cap will exist in next 3 years, therefore, developers will shift their focus to sell more volume rather than holding inventories for better price. Developers’ margin will be affected. Inventories flatted in 1Q18. Only inventories in 2nd titer cities declined 8.1% YoY; inventories in 1st tier and 3rd tier cities flatted and increased by 0.9% and 0.5% YoY. Although inventory level is still at the lowest point of last 3 years, we believe the inventory level will rebound, as slower sales growth in 1Q18, up 2.5% YoY and 11.4% YoY in terms of GFA sold and sales, respectively, compared with yoy growth of 16.9% and 22.7% in 1Q17. It also indicates that sales growth is mainly contributed by surge of home price, not increase in GFA sold.

Top 20’s expansion is ongoing with rapid market consolidation

Top 20-50 companies are targeting 30-50% CAGR on contracted sales in next 3 years. All top 50 are targeting RMB 100bn of contracted sales in next 2 years. The property market is not growing but keener competition is among players. All top 100 developers are targeting to maintain their ranking in order to obtain low-cost funding and replenish land plots for sustainability. On the other hand, market consolidation is much faster than before. In 2017, Top 20 has taken 32.5% of total home sales, while Top 100 has taken 62.1% of total home sales. In first 3 months of 2018, consolidation has accelerated: Top 20’s market share has improved to 47.0% and Top 100’s market share has improved to 76.2%. We believe top 20 will meet their target as schedule, thanks to sufficient saleable resource and national wide exposure.

A battle for land resourcing

Developers have prepared for market consolidation and sales scale battle in next 3 years. Sales scale is a key criterion for bank loan application and land auction. Developers must boost their scales to survive in keen competition in future. We can see banks have set higher and more criteria for developers to obtain loans: sales scale and Top 100 sales ranking are the must. If developers want to boost sales, land resource is the key for developer’s survival.