Top analysts question fundamentals behind China’s property shares surge
With developers taking four spots in the 10 top gainers list on country’s flagship stock index this year, analysts from Shenwan Hongyuan Group and Hationg Securities both agree investors are being over-optimistic
China’s top-two ranked analysts remain cautious about the sustainability of currently high-flying property stocks, after an uptick in home sales in first-tier cities and an easing of restrictions on house purchases in a small city sent values surging.
With developers taking four spots in the 10 top gainers list on the country’s flagship stock index, the CSI 300, this year, analysts from Shenwan Hongyuan Group and Hationg Securities both agree investors are probably being over-optimistic about the outlook for developers’ profit margins, which are under pressure, and while most major cities are likely to continue with measures already implemented, to rein in home prices.
The spark for the latest rally in mainland-listed developer this year came from an announcement last Friday by the local Housing Authority in Lanzhou – a second-tier city in China’s northwest – that it is to scrap restrictions on the number of homes each family can buy in some districts of the city.
Lanzhou’s relaxation, however, is an pretty isolated case and far from a clear signal that any other of the 50 cities across the county with similar measures in place to cool the property market will follow suit, according to Li Hong, an analyst at Shenwan Hongyuan.
Of the main names in the mainland property sector, for instance, shares in Shanghai-listed Greenland Holdings, China Fortune Land Development and Gemdale have all gained at least 26 per cent in value this year.
“Lanzhou is the worst [performer] in terms of economic fundamentals and the probability is small that the rest of the cities will ease in their tightening,” said Li. “The market has overreacted to expectations of further policy easing.”
Li added that developers’ margins may also be squeezed in 2018, as ongoing financial deleveraging raises their funding costs and local governments keeps caps on prices of newly built homes.
Haitong and Shenwan Hongyuan took the top two spots last year in New Fortune magazine’s rankings of Chinese equity strategy researchers.
But both Greenland and Gemdale actually underperformed the country’s benchmark share index last year, the former’s shares dropping 16 per cent and Gemdale by 2.6 per cent, compared with a 22 per cent gain on the CSI 300.
China Fortune Land gained 31 per cent last year, but most of its gains were made in March and April when the Hebei province-based developer surged on the news that officials planned to create a new economic zone in the province.
The stocks were dumped by investors over the rest the year, with the share price down 31 per cent by the year end from its April high.
A rebound in home sales in big cities also added impetus to property stocks this year. Declines in housing sales in the first- and second-tier cities narrowed to 3.7 per cent in December from 17 per cent a month earlier, according to China International Capital Corp.
The brokerage estimates sales in big cities to increase 10 per cent in early 2018, while those in smaller ones will probably drop 10 per cent because of the higher base last year.
Xun Yugen, Haitong’s strategist, called the sharp upturn in property stocks more of a quick sector rotation as some investors took advantage of a temporary drop in capital costs to ramp up shares at the start of the year.
“It has nothing to do with fundamentals – it’s mainly been policy or events-driven,” he said.