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China Property
Demand uptrend to continue;
upgrade to Neutral
Danny Bao, CFA
Research Analyst
(86) 21 3896 2839
danny.bao@db.com
Ling Xu
Research Analyst
(86) 21 3896 2834
ling.xu@db.com
Defensive shift to proven leaders with strong B/S and commercial plays
We believe government policies to tame inflation will lead to a restrictive lending
environment for developers. The policy regime will facilitate accelerating industry
consolidation driven by rising capital requirement. We expect leading players with
financial resources and construction capacity to capture more market share. In
addition, investment properties in large metropolitan cities should yield positive
rental reversions. As such, investors should switch to these protective names and
avoid over-leveraged developers and landlords.
Deutsche Bank AG/Hong Kong
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Investors should consider this report as only a single factor in making their investment decision.
Independent, third-party research (IR) on certain companies covered by DBSI's research is available to customers of
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request that a copy of the IR be sent to them.
DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1
Industry Strategy
Top picks
COLI (0688.HK),HKD16.40 Buy
China Vanke (200002.SZ),HKD18.70 Buy
Franshion (0817.HK),HKD3.30 Buy
RREEF CCT (0625.HK),HKD3.73 Buy
Guangzhou R&F (2777.HK),HKD22.30 Hold
Companies featured
COLI (0688.HK),HKD16.40 Buy
2007A 2008E 2009E
P/E (x) 23.1 21.6 15.0
EV/EBITDA (x) 14.6 10.9 7.1
Price/book (x) 4.7 3.7 3.1
China Vanke (200002.SZ),HKD18.70 Buy
2007A 2008E 2009E
P/E(x) 22.9 15.0 11.4
EV/EBITDA(x) 14.0 8.2 6.3
Price/book(x) 4.6 3.3 2.7
Franshion (0817.HK),HKD3.30 Buy
2006A 2007E 2008E
P/E(x) – 29.0 15.3
EV/EBITDA(x) – 21.4 2.8
Price/book(x) 0.0 1.9 1.7
RREEF CCT (0625.HK),HKD3.73 Buy
2007A 2008E 2009E
P/E(x) 51.7 17.7 15.3
EV/EBITDA(x) 27.1 12.0 11.1
Price/book(x) 0.7 0.7 0.7
Guangzhou R&F (2777.HK),HKD22.30 Hold
2007A 2008E 2009E
P/E(x) 26.2 16.3 13.0
EV/EBITDA(x) 19.4 11.4 10.6
Price/book(x) 6.9 4.2 3.5
Related recent research Date
Upcycle will resume in 2008
Danny Bao, CFA 07 Dec 2007
Year-end defensive strategy
Danny Bao, CFA 12 Nov 2007
Valuation matters
Danny Bao, CFA 12 Jul 2007
Upcoming events Date
DB Asia & Australia Property Conference
Hong Kong 28-29 May 2008
Site visits
Zhuhai/Macau 30 May 2008
Global Markets Research Company
Aggressive tightening measures to tame rising inflation
Our Chief Economist for China, Jun Ma, expects monetary policy to remain tight
for the coming months due to strong inflationary pressures and the government's
commitment to fight inflation. We expect bank lending to developers to be
restrained in the short term. Recent government land policy to require full
payment of land-use rights also increases capital intensity. We believe consumer
mortgage lending will also be monitored closely by the central bank. Preferential
treatment will likely be given to first time buyers of small homes. Credit restraint
on consumer mortgages may help ease ordinary housing demand driven by strong
urbanization trend. Deterioration of China’s property prices is unlikely, due to
current supply shortage, in our view. However, developers with stretched balance
sheets may not survive the crunch; those with fast asset turnover model to
accelerate cash conversion will prosper from the credit squeeze.
“Cash is king” for developers; investment properties will shine in large cities
Balance sheet position and cash flow are more important for developers than
before. Government policies on the property sector require developers to
significantly increase completion of affordable housing. Therefore, it is sensible for
developers to ramp up completion and pre-sale without price hikes, in our view.
We also re-arranged our five key factors to help investors identify long-term
industry winners. China’s secular urbanization uptrend and reorientation towards a
domestic consumption driven economy will drive rental demand and reversion
rates in metropolitan cities such as Shanghai and Beijing. We are positive towards
the future outlook of the investment properties rental market in large cities.
Our top picks: COLI, Vanke B, Franshion and RREEF CCT
We consider both PER multiple and NAV to be important valuation metrics for
China property companies. For REIT, we use DDM and comparable yield as the
valuation metrics. We believe Vanke B (TP, HK$26.50) and COLI (TP, HK$19.70)
will capture more market share in residential development market. Our TPs
suggest 42% and 20% upside, respectively. Franshion (TP, HK$4.20) and RREEF
CCT (TP, HK$4.50) will benefit from positive rent reversions in Tier-l cities. Our TPs
suggest 27% and 21% potential upside, respectively. Key risks: 1) significant
deterioration of property prices in China, 2) prolonged government policy
measures, and 3) upside risk for R&F is substantial improvement in its completion
slippages.
Table of Contents
Investment thesis .............................................................................. 3
Outlook ....................................................................................................................................3
Valuation ..................................................................................................................................3
Risks ........................................................................................................................................3
Inflation at risk................................................................................... 4
Historical sector downgrade .....................................................................................................4
Tightening measures to continue..............................................................................................5
Lending to developer ................................................................................................................6
Lending to consumers ..............................................................................................................6
Credit crunch to developers ............................................................. 7
Contraction of developer loans .................................................................................................7
Land cost pressures to ease for developers.............................................................................9
Cash flow is crucial for developers .........................................................................................10
Growth deceleration ....................................................................... 12
Supply shortage remains in the short term.............................................................................12
Managed growth for consumer mortgage..............................................................................12
Affordability still intact for overall China ..................................................................................13
Increasing Housing Fund penetration will boost affordability .................................................14
Demand and ASP remain resilient with some regional weakness ..........................................15
Investment properties..................................................................... 16
Positive rental reversions........................................................................................................16
Large metropolitan cities remain the focus.............................................................................16
Investment strategy ........................................................................ 18
Five factors re-arranged for stock selection ............................................................................18
Buy leaders with track-record and strong B/S.........................................................................18
Avoid highly leveraged developers and landlords ...................................................................18
Buy commercial play at reasonable price................................................................................18
Valuation framework ...............................................................................................................19
China Vanke ..................................................................................... 21
COLI .................................................................................................. 33
Guangzhou R&F............................................................................... 42
Franshion.......................................................................................... 52
RREEF CCT ....................................................................................... 59
Appendix A....................................................................................... 66
Housing affordability ...............................................................................................................66
Beijing ....................................................................................................................................66
Shanghai ................................................................................................................................67
Tianjin.....................................................................................................................................67
Chongqing..............................................................................................................................68
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