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20080325-Goldman Sachs-China Real Estate Developers
Eyeing potential industry consolidators
Strong execution and balance sheet – well positioned
China’s two largest listed developers, Vanke (000002.SZ/200002.SZ, Neutral)
and COLI (0688.HK, Buy), reported their 2007 annual results last week, which
were broadly in line with our and market expectations. In our view, both
companies demonstrated strong execution and skillful cash flow management
during their aggressive geographic and volume expansion in 2007.
Near-term headwinds – opportunity for industry leaders
Both companies indicated the recent property market weakness has had a
limited impact on their project sales as shown by their ytd sales; in addition,
both companies said that their funding needs are still well supported by
banks. They remain optimistic about long-term property price trends in
China and believe the present correction is rational and healthy. They further
believe government credit tightening will force out some overly leveraged
developers from the industry that have poor execution, which could help
them increase market share and solidify their leading positions. In addition,
both developers are positive about the central government’s plan to accelerate
the establishment of an economic housing system in China and expect less
policy intervention in the private sector once the system is fully in place.
Positive implications for the sector
We expect similarly positive news flow when remaining listed developers
announce their results, including: (1) significant yoy ASP increase and
margin expansion; (2) higher 2008 revenue lock-in ratio as of 1Q08 yoy (for
both Vanke and COLI: >40% this year vs. 30%-35% in 1Q07); and (3) current
sales progress of listed names less affected by weak sentiment compared
with the industry avg given their brand equity and product quality. We think
this will provide a cushion to developers’ 2008E earnings growth delivery.
Undemanding valuations, particularly for potential consolidators
We think the sector (excl. A-shares and Singapore-listed stocks) is trading at
a very attractive level, with average discounts of 58% and 34% to our
estimated base-case and ex-growth end-2008E NAVs, respectively. We think
valuations are particularly undemanding for those companies with strong
balance sheets and solid execution capabilities, whose earnings and NAV
growth should be less affected and which we view as likely industry
consolidators, namely, our Buy-rated names: Sino-Ocean (3377.HK, on
Conviction List), COLI, KWG (1813.HK), Agile (3383.HK) and SOHO (0410.HK).
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