Biggest developers in Hong Kong and China best placed to withstand rise in rates
Hong Kong conditions are attractive but yuan weakness dictates selective and long term China strategy
The property sector is under the spotlight as monetary policy shifts and the yuan slides, and analysts are banking on big names to maintain profitability.
Local developers have outperformed their mainland counterparts in recent weeks as it emerges the Hong Kong Monetary Authority may not immediately follow a US increase in interest rates, Jefferies analysts say.
Hong Kong’s ability to delay or even resist a mild rate hike was established in August when the unexpected yuan devaluation spurred asset reallocation and a surge in demand for Hong Kong dollars.
The aggregate balance in the banking system is up 78 per cent year to date, and the current loan to deposit ratio of 78.4 per cent compares favourably to 85.3 per cent during the last rate hike cycle, Jefferies says.
Even if developer margins are eroded by falling home prices, as many predict, Jefferies says the strong dollar and continuing low rates should drive sales – positioning the likes of Cheung Kong Property Holdings and Sun Hung Kai Property, which have flats launching soon, to lock in earnings.
“We believe this is a major top-down catalyst to attract buy flow into Hong Kong property stocks that have been oversold,” said Jefferies equity analyst Venant Chiang.
But for China’s developers, which are highly leveraged and carry significant proportions of US dollar denominated debt, yuan devaluation is bad news, notwithstanding official support for the sector.
“Based on recent meetings, most investors are not fully comfortable with the bullish view on China property that is related to policy stimulus,” Chiang said.
The onshore yuan is down 3.8 per cent in the second half of 2015, while the offshore yuan has dropped 4.9 per cent. The consensus says the yuan will come under further pressure as rising US rates trigger mainland capital outflows.
Jefferies calculates that a further 5 per cent devaluation will jeopardise 21 per cent of major developers’ net profits. It will also decrease net asset values by 6.5 per cent and increase net gearing by 6 percentage points, on average.
Decreased equity reserves are also pushing up gearing, but the negatives are partly offset by relaxation in the domestic bond market, which has seen over 200 billion yuan in new property bonds issued this year and pushed average borrowing costs down by 1 to 2 percentage points.
However, Chiang points out those funds can’t be repatriated to repay overseas debt – including the US$30 billion in offshore bonds due to expire between 2016 and 2018.
Jefferies recommends holding Hong Kong stocks of large established players China Overseas Land and Investment, China Resources Land, Greentown China Holdings, China Jinmao and Shenzhen Investment.
Daiwa analysts also take a long view, favouring China Overseas Land and Investment and China Resources Land which have achieved 92 and 100 per cent of their yearly sales targets, respectively.
“We believe that the China property industry is moving towards a new era that should present profit potential to stronger players that can manage the business well,” said Daiwa analyst Jonas Kan.