Chinese property stocks keep on surging, fuelled by investment bank upgrades

The sudden surge in interest in Chinese property stocks has caught many marketeers by surprise, particularly against the backdrop of what is being described as an unprecedented government crackdown on home purchases.

Shares in China Evergrande Group, the country’s largest real estate firm by sales, have spiked more than 80 per cent in May, notching its 7th straight record close on Monday, and touching an all-time high of HK$15.78 during the intra-day trading.

Smaller rivals Country Garden and Sunac China have also soared about 30 per cent each this month, while Longfor Property and China Merchants Land have both posted 18 per cent increases during the period.

And all this at a time when down payments for second homes have just been increased from 60 per cent to 80 per cent, and a ban put on the sale of apartments built on land meant for office or retail use.

“The rally was sparked by the latest round of sector upgrades by big investment banks,” said Alex Wong, director of asset management at Ample Financial Group.

“That’s probably due to better-than-expected sales and the potential of better turnover rates in the rest of this year.”

In the first quarter, China’s property sales still soared 25 per cent year-on-year, exceeding market expectations, while investments rose 9.3 per cent on-year in value for the January-to-April period, the highest growth in two years.

Although the growth of China’s property sales slowed in April, some industry leaders still posted better than expected figures during the month.

Evergrande saw its April sales jump 64 per cent, while Country Garden’s monthly sales more than doubled from the same period a year ago.

Last week, Morgan Stanley gave its first “overweight” rating to China Evergrande, triggered by better than expected upcoming interim results and its plan to re-list in mainland China. It also anticipated a sharp fall in the company’s debt ratio in the next couple of years.

JP Morgan also maintained its “positive” views on the Chinese property sector, citing the country’s stronger-than-expected sales figures in the first few months of the year. On Monday it raised the target price for Country Garden by more than 40 per cent to HK$11.

A number of other investment banks, including Bank of America Merrill Lynch, Citi, and CICC, have issued similarly positive reports on China’s real estate sector.

Wang Lizhou, an analyst for Southwest Securities, says the rise in share prices has also been helped by increasing fund inflows to the Hong Kong market.

“Tightening financial regulations and the deleveraging of A-shares have prompted mainland money to flow into Hong Kong in pursuit of higher yields, while overseas capital also return to emerging markets for better investment returns amid a weakening US dollar,” he said.

Ken Kwong, Asia equity portfolio specialist at Eastspring Investments, however, is among others who are sceptical of the sector’s ongoing strength, saying it seems unlikely Beijing will relax existing curbs on house purchases and mortgage loans anytime soon.

Hao Hong, head of research at BOCOM International, the Hong Kong securities firm of Bank of Communications, also added: “I suggest investors exercise longer term caution. Short term, shares may continue to increase amid optimism home prices in lower-tier Chinese cities have rebounded.

“But China’s property sector is already at the peak of its cycle,” Hao said, “and there is much uncertainty surrounding the sector’s outlook.”

With additional reporting by Josh Ye