Chinese property stocks surge on strong profit outlooks
Country Garden, nation’s third largest homebuilder, closes at a three-year high. Beijing Capital Land, KWG Property, Sunac China, Longfor Properties, all rise more than 7 per cent
Chinese property stocks surged in Hong Kong on Wednesday on bullish profit prospects and a valuation gap.
Big brokerages including Morgan Stanley have highlighted this week that the market has under-appreciated the earnings secured by developers, and the sector should be re-rated.
Country Garden, the nation’s third largest homebuilder, led the gains. Its stock jumped nearly 10 per cent on to close the day at a three-year high of HK$5.16. Guangzhou-based R&F Properties also shot up 10 per cent to hit a three-month high of HK$11.02.
Other major developers including Beijing Capital Land, KWG Property, Sunac China, Shimao Property Holdings, Longfor Properties, also rose more than 7 per cent. On average, 22 mainland developers listed in Hong Kong tracked by Bloomberg’s Intelligence index surged 5.7 per cent on Wednesday, the biggest increase in more than 11 months.
Mainland Chinese developers’ valuations were hit hard last year after a number of cities rolled out tightening measures to cool the housing market.
The MSCI China Real Estate Index fell 18 per cent in 2016, versus a 1 per cent drop for the MSCI China Index.
Morgan Stanley believes investors overreacted, given industry valuations are now close to the 2014 trough when nationwide tightening measures were applied, compared with this time only city-oriented curbs.
“We expect the strong contract sales and average selling prices trend in 2016 to boost revenue and margins in 2017,” Morgan Stanley analysts led by John Lam said in a latest report, upgrading the sector to “Attractive.”
Many developers saw their contracted sales reach record highs in 2016. Country Garden, for instance, recorded sales of over 300 billion yuan, more than double the level a year earlier.
“Major developers’ sales number in January continue to be strong,” said Raymond Cheng, a property analyst at CIMB Securities.
The nation’s largest homebuilder, China Evergrande, saw its contracted sales jump 75 per cent year on year last month. China Vanke’s January sales recorded 88 per cent growth, while Country Garden is expected to see its sales quadruple from a year earlier.
CIMB said the better-than-expected home sales in a tightening market act as a catalyst.
It is also a time for investors to rediscover the promising fundamentals of the sector, given the strong profit and dividend return, said Cheng, who expects an average 10 per cent 2016 net gain for the sector due to be announced in March this year.
China Investment Capital Corp said builder stocks may surge more than 20 per cent in the first quarter, citing the fact they are trading at a 44 per cent discount to expected 2017 net asset value.
“From 2014 to 2017, leading developers’ valuations have been largely flat but home prices have doubled. There should be a revaluation. The only question is when,” said Liu Feifan, a property analyst with Guotai Junan Securities.