China stock market

Chinese property developers’ stocks could gain as much as 40 per cent this year, Nomura says

Increased profitability and market share are behind the possible gains for companies like China Vanke and Evergrande, even though overall sales could fall, the investment bank says

PUBLISHED : Tuesday, 06 February, 2018, 4:23pm
UPDATED : Tuesday, 06 February, 2018, 11:07pm

Shares in Chinese property developers listed in Hong Kong, including major players China Vanke and Evergrande, have room to rise as much as 40 per cent this year, driven by better profitability and increased market share, even though overall sales are likely to decline, according to investment bank Nomura.

National sales volume is expected to fall 5 per cent this year, but big developers can weather sales falls more easily because they can tap bank loans and capital market, meaning they can beat and acquire weaker peers more easily.

“The big ones have advantages in all fronts, financing, land acquisition and talent. The market consolidation since 2016 will only be furthered this year,” said Elly Chen, Nomura’s chief China property analyst, in a Monday conference call.

“When we look at the Hong Kong-listed Chinese developers rated by us, we see a 40 per cent growth prospect for their earnings per share, which means at least a 40 per cent stock price rise if no change in price earnings ratios and no big volatility in the overall stock market,” she said.

Aside from Vanke and Evergrande, companies in Nomura’s coverage include Cifi Holdings, China Resources Land, Country Garden Holdings and Sunac China Holdings.

The comments came after the Hang Seng Mainland Properties Index retreated in the past week from a historic high last Monday. It nearly doubled in 2017 because of a strong recovery in P/E ratios as well as rises in earnings per share and as money from mainland Chinese investors flooded in.

These factors could replay this year, but there is much less room for the growth of P/E ratios, Chen said.

Separately, Alan Jin, head of property research at Mizuho Securities Asia, said he saw a likely boost for developers’ stocks in March from expected good earnings results, but after that he saw no major developments supporting further price advances.

He said liquidity is a deciding factor for stock prices, in most cases even more important than fundamentals.

“Normally we say an 8 to 10 times P/E is a reasonable range [for Chinese property developers]. But if there is ample liquidity even 12 to 15 times P/E is not surprising,” he said.

Many developers have projected earnings growth for 2018 in their guidance to investors, and good dividend payouts have given cause for optimism, said CIMB property analyst Raymond Cheng.

He said while stocks like Agile, Cifi and KWG Property have further room to gain, a few such as Sunac and Country Garden may have become too expensive.