Are China’s property stocks the gems to buy as prices dip below book values?

Mainland Chinese property developers are joining the list of the China-traded companies whose share prices are at big discounts to their book values.

The number of such real-estate stocks on the Shanghai and Shenzhen exchanges has more than doubled to 12 from only five at the start of the year, according to data compiled by Bloomberg and Great Wisdom, making the sector – except banking – one that boasts of the most bargain companies among industry groups.

While shares of these developers including Cinda Real Estate and Hubei Fuxing Science and Technology are up for grabs at prices below their net asset values, they are hardly the bargains for investment banks like UBS Group. Concerns of the industry’s difficulty to access funding in the bond market amid the recent wave of corporate defaults and weakened home sales have mounted, which could weigh on the stocks’ valuations.

“We have voiced our caution on materials and developers,” said Gao Ting, a strategist at UBS in Shanghai. “Bucking the overall deleveraging trend, the property sector’s net gearing ratio substantially increased in recent years. We think the sector faces a troublesome combination of more limited access to credit as well as higher funding costs, while sales momentum continues to weaken.”

Traders agreed. A gauge of property stocks on the Shanghai bourse has declined 6.8 per cent this year, underperforming the 4.6 per cent slide on the large-cap benchmark CSI 300 Index.

Cinda Real Estate was the cheapest among publicly-traded developers, with the stock trading at a 26 per cent discount to its book value. Its shares have declined 18 per cent this year. Hubei Fuxing and Shanghai Shimao, which is owned by tycoon Hui Wing-mau, followed with the second and third-biggest declines respectively and trading at a minimal 21 per cent discount.

Investor sentiment towards property stocks has soured as defaults on corporate bonds increased 20 per cent from a year earlier to more than 15 billion yuan (US$2.3 billion) in 2018 after Beijing tightened funding access with stricter rules to control the nation’s asset management business.

Fears have flared up that the defaults will extend to the property industry, whose debt-to-asset ratio is almost 50 per cent above the average level of all mainland-listed companies. Debts account for 31 per cent of listed developers’ assets, above the average 21 per cent level for the broader market, according to Bloomberg data.

Is the day of reckoning coming for China’s corporate bond market?

“This round of the correction on property stocks is largely because the funding access is narrowing and the debt rollover is getting difficult,” said Chen Cong, an analyst at Citic Securities.

Still, brokerages including Huachuang Securities remain bullish on big developers, pointing out that tightened liquidity may actually benefit leading players as it allows them to gain more market share. The argument seemed to have worked for China Vanke, the nation’s largest developer by market value. The stock now trades at 2.2 times its book value.

Rebounds in home prices in second-tier cities such as Chongqing and Chengdu are also adding to the risk of investing in property stocks, quashing any hopes that Chinese policymakers would loosen controls to help sales should they slow.

“Looking forward, we will hardly see that policies will be eased,” said Zhang Yu, an analyst at China International Capital Corp. “Developers will face a peak of debt repayments and re-financing is getting increasingly difficult.”