The haves and have notsShort term, roll the dice; medium term, value emergesThe day-to-day share price movements of the China developers are very difficult topredict. What we can say though (over a more-sensible 6–18 month time frame) isthat there is value emerging – but only amongst the ‘haves’ of the sector. Thesedevelopers pass our four-step stress test (and rank highly in our three-step rankingprocess). They ‘have’ minimal to no insolvency risk, are trading at a 30–80%discount to NAV, a 6–16x FY09E PER (EPS freshly revised down) and down to 1xbook value. They include: China Overseas Land, China Resources Land NWCL,Shui On Land and SPG Land. The ‘have nots’ will find cash hard to come by, haveunfavourable geographical exposure, looked stretched under our stress test andare not cheap given freshly revised down numbers. Our survey of ~40 unlisteddevelopers (in 11 cities) showed that most of them expect the recovery of theChina property market to take more than 12 months, with 85% of those surveyedplanning to slow down construction activities, if they have not already done so.Demand fall-off underestimated; 2009 looks challengingRecent data points have been poor and the news flow could get worse before itgets better. Generally, oversupply is not the issue; rather, it is the rapid decline insales or take up that has been the problem. We expect 2009 completions todecrease by 30% YoY nationally as developers slow down construction, moreclosely matching the expected ~20–30% YoY reduction in take up. About <10% of2009 completions have been presold, and with demand weak, developers will lookto conserve cash. Inventory levels nationally by end-2009 will be at 23% of 2009takeup. Our new price-growth assumptions for 2009 are typically -10% to -15%,following the projected price decline of a -15% to -25% for 2008.A lot can be done with US$1.8trChina cannot afford to have a weak property market. As the external sectorslows down, it is relying on property and related industries to keep GDP growthat >9% in 2009. Paul Cavey sees Beijing utilising some of its massive build-up offoreign-exchange reserves (US$1.8tr) to stimulate the market via more RRRcuts, interest-rate cuts and, if that does not work, property-specific measures.Short-term cautious; medium-term OverweightData points will continue to be soft in the short term, putting continued pressureon the sector. In the medium term, there is money to be made in this sector asvaluations reach trough levels.]
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