Company Reports

We view the recent favorable measures for the China real estate sector, including the scrapping of buying curbs in wealthy cities and the unwinding of the mortgage rates floor, as encouraging to homebuyers and investors. That said, we caution that potential buyers may remain on the sidelines amid falling home prices, and policy tailwinds will likely require a longer time to translate into a pickup in home sales. Additionally, although the CNY 500 billion in loans—backed by a relending facility from China’s central bank—to local state-owned enterprises for converting completed but unsold properties to affordable units should help clear excess inventory, execution risks remain, in our view. While the policy-induced rally has reflected the market sentiment shift, we maintain the valuations of stocks under our coverage, given industry fundamentals that are still weak. Despite a more demanding sector valuation, we think shares of state-owned developers such as China Overseas Land & Investment and China Resources Land remain attractive. We continue to prefer both names, given their more resilient contracted sales and better financial strength.

We reduce our fair value estimate for China Vanke to CNY 9.00 per A-share (HKD 10.00 per H-share) from CNY 13.50 (HKD 15.00) following its underwhelming first-quarter 2024 results. While the firm only posted a 10% year-on-year revenue decline, we are more surprised by the CNY 300,000 million net loss, largely attributable to suppressed gross margins of properties delivered. As Vanke struggled to lift its contracted sales value, with a more than 40% decline in first-quarter 2024 versus the same period last year, we lower our five-year revenue compound annual growth rate assumption to 1.5% from 2.7%. For margins, Vanke’s property development business had gross margin contraction of 670 basis points to 10.5% in the first quarter, which we expect to edge up through 2024 with an improving mix shift to wealthy cities. That said, we are more downbeat on Vanke’s long-run profitability amid negative buyers’ sentiment and cut our 2024-28 gross margin forecast by 180-330 basis points, leading to our midcycle gross margin dropping to 14.0% from 15.8%. Consequently, our 2024-28 EPS forecasts are down by 20%-37%, which accounts for the 33% reduction in our valuation. While China Vanke’s A-shares are trading in 4-star territory, we prefer state-owned peers such as China Overseas Land & Investment, which have more valuation upside.

As one of the primary developers in China focusing on middle- to high-end properties, China Vanke experienced an more than-20% revenue CAGR from 2014-19 as the market boomed. Property development remains the largest contributor to Vanke revenue with an over-80% mix, but the housing demand slowdown and price decline since 2021 have weighed on sales. We expect the downsizing to persist for Vanke in the short run as sales in lower-tier cities continue to underperform. Looking beyond the near-term headwind, an uptick in homebuyers’ confidence, revival of landbank acquisition, and easing home purchase restrictions will lead to sales rebound for Vanke, in our view. As delivery of housing projects will likely require a multiyear cycle, we think Vanke’s property development will resume a single-digit top-line growth starting in 2026.

We cut our fair value estimate for no-moat China Vanke to CNY 13.50 per A-share (HKD 15.00 per H-share) from CNY 21.00 (HKD 23.90) as it delivered disappointing 2023 results due to subdued bookings and margins for its property development business. Given sluggish home sales for the year to February 2024, we expect muted top-line growth for Vanke’s residential projects in 2024-25. As we also foresee slower home price upticks, we lower our gross margin forecasts through 2028, with our midcycle estimate down to 15.8% from 22.6%. As such, our five-year operating profit compound annual growth rate for Vanke drops to 5.9% from 8.4%. We also lift our weighted average cost of capital assumption to 10.4% from 9.6%.

As one of the primary developers in China focusing on middle- to high-end properties, China Vanke experienced an more than-20% revenue CAGR from 2014-19 as the market boomed. Property development remains the largest contributor to Vanke revenue with an over-80% mix, but the housing demand slowdown and price decline since 2021 have weighed on sales. We expect the downsizing to persist for Vanke in the short run as sales in lower-tier cities continue to underperform. Looking beyond the near-term headwind, an uptick in homebuyers’ confidence, revival of landbank acquisition, and easing home purchase restrictions will lead to sales rebound for Vanke, in our view. As delivery of housing projects will likely require a multiyear cycle, we think Vanke’s property development will resume more meaningful growth starting in 2026.

We published our inaugural China real estate industry pulse for the first quarter of 2024 with the view that housing demand should gradually recover through 2026, supported by ongoing policy tailwinds. While new home sales in China remained sluggish in 2023, the nationwide average price was steadier due to a continuing mix shift to wealthier regions with more resilient prices. Moreover, we like the ramping-up of supportive measures since the second half of 2023 and expect further easing in buying restrictions and mortgage rate cuts in large cities. While share price performances could remain volatile in the near term, we see an improving risk/reward profile at the current valuation as the market may be missing key developers' improving sales outlooks. As such, we prefer top state-owned builders, China Overseas Land & Investment and China Resources Land, as both have seen better sales growth, higher asset quality, and healthier gearing ratios versus their peers.

No-moat China Vanke reported an underwhelming 32% year-on-year revenue drop for the third quarter of 2023, mostly due to a 37% decline in real estate development income. We think slower-than-expected delivery progress, coupled with deteriorating housing sales, led to the slump in Vanke’s bookings. Gross margins for the development business also dipped to 18.5% year-to-September from 20.7% for the same period last year, which we largely ascribe to subdued home prices. That said, strong inventory correction continued in the third quarter, and we credit Vanke for effectively offloading unsold units. As such, we reduce our top-line growth and margin forecasts but expect a faster inventory turnover for 2023, translating to an unchanged fair value estimate of CNY 21.00, or HKD 23.90, per share. We continue to like Vanke’s resilient landbank reserve and sufficient liquidity. The company’s current 0.3 times price/book ratio remains the lowest since 2019, which presents buying opportunities for investors looking beyond the downcycle, in our view.

As one of the primary developers in China focusing on middle- to high-end properties, China Vanke experienced an more than-20% revenue CAGR from 2014-19 as the market boomed. Property development remains the largest contributor to Vanke revenue with an over-80% mix, but the housing demand slowdown and price decline since 2021 have weighed on sales. We expect the downsizing to persist for Vanke in the short run as sales in lower-tier cities continue to underperform. Looking beyond the near-term headwind, an uptick in homebuyers’ confidence, revival of landbank acquisition, and easing home purchase restrictions will lead to sales rebound for Vanke, in our view. As delivery of housing projects will likely require a multiyear cycle, we think Vanke’s property development will resume meaningful growth starting in 2026.

As one of the primary developers in China focusing on middle- to high-end properties, China Vanke experienced an more than-20% revenue CAGR from 2014-19 as the market boomed. Property development remains the largest contributor to Vanke revenue with an over-80% mix, but the housing demand slowdown and price decline since 2021 have weighed on sales. We expect the downsizing to persist for Vanke in the short run as sales in lower-tier cities continue to underperform. Looking beyond the near-term headwind, an uptick in homebuyers’ confidence, revival of landbank acquisition, and easing home purchase restrictions will lead to sales rebound for Vanke, in our view. As delivery of housing projects will likely require a multiyear cycle, we think Vanke’s property development will resume meaningful growth starting in 2026.

We keep our fair value estimates for China Resources Land, or CRL, at HKD 43.00, and China Vanke at CNY 21.00 (HKD 23.90) per share, but lower China Jinmao's to HKD 1.50 from HKD 1.90, mainly on a lower gross margin forecast for 2023. All three developers saw first-half 2023 top-line year-on-year declines in property development, which we think were mainly due to slower inventory clearance and a lingering downcycle for project completion. This was partially offset by robust growth in recurring income from investment properties, driven by recovery in retail sales, and foot traffic. Also, the three developers’ key commercial projects saw margin improvement as occupancy and rental rates rose. Although we expect property development earnings to be sluggish in 2023, demand rebound under policy tailwinds should translate into better margins over the next few years. While these three developers and China Overseas Land & Investment, or COLI, which reported earlier, are trading at 4-stars currently, we like CRL and COLI best, given their presence in wealthy cities and outstanding financial strength.

The Hong Kong market experienced a solid rally following the July 24 Politburo meeting, with the real estate stocks rebounding from recent losses. We believe signs of government support are positive but we would have liked to see more in addressing excess property inventory. We believe more details will emerge along with ongoing policy adjustments, but for the time being, our view remains that China’s real estate activity will recover gradually through 2025. As a result, we think risks remain in the sector with negative news likely to continue regarding possible defaults. There was no explicit language in the messages regarding financial support for the real estate developers. As such, we continue to prefer buying China Overseas Land & Investment over others given financial strength and an attractive project pipeline in Tier 1 and Tier 2 cities.

We reinitiate coverage on China Vanke with a no-moat rating and a fair value estimate of CNY 21, or HKD 23.90, indicating a 2023 price/book ratio of 0.6 times. This trends below its prepandemic trading range as we modeled a slowing housing sales growth coupled with tempered improvement in asset turnover for the next five years. That said, our valuation suggests an over-40% upside to the A-share price as of May 29, 2023, as we believe that the gradual rebound in profit margins has not been fully priced in. With the resumption of homebuying activity in China and the rising mix of higher-margin investment property income, we foresee that Vanke’s profitability will continue to recover, with operating margins rising to 18.3% in 2027 from 15.1% in 2022. Despite the recent weakness in sales, we expect Vanke’s focus on acquiring landbank in wealthy cities and well-delivered products will help revive its sales growth in 2024.

As one of the primary developers in China focusing on middle- to high-end properties, China Vanke experienced an more than-20% revenue CAGR from 2014-19 as the market boomed. Property development remains the largest contributor to Vanke revenue with an over-80% mix, but the housing demand slowdown and price decline since 2021 have weighed on sales. We expect the downsizing to persist for Vanke in the short run as sales in lower-tier cities continue to underperform. Looking beyond the near-term headwind, an uptick in homebuyers’ confidence, revival of landbank acquisition, and easing home purchase restrictions will lead to sales rebound for Vanke, in our view. As delivery of housing projects will likely require a multiyear cycle, we think Vanke’s property development will resume meaningful growth starting in 2026.

We are dropping coverage of China Vanke. We provide broad coverage of more than 1,500 companies globally and periodically adjust our coverage according to investor interest and staffing.

We have been slightly more optimistic about China Vanke’s 2020 income, so the company’s third-quarter results fell short of our estimates, but they are largely within Capital IQ consensus on an annualized basis. As such, the share price reaction is muted. The top line and earnings accounted for 52% and 44% of our full-year estimate, respectively, slightly lower run rates compared with previous years.

After a decade of breakneck growth, a slowing Chinese economy and subdued demand will weigh on the real estate sector. Favourable capital market conditions or supportive government policies are likely to have only a temporary and limited effect. For the sector as a whole, contract sales growth will slow or even decline. Excess capacity and inventory buildup will constrain significant price growth. Slower contract sales limit the cheapest source of funding for real estate developers, and smaller developers will face increasing liquidity constraints, prompting them to exit the sector. Further, the ongoing reform initiatives for state-owned enterprises will push many SOEs to dispose of noncore real estate operations or establish partnerships with leading developers.

China Vanke reported interim 2020 results in line with our estimate. Revenue and net profit were CNY 146 billion and CNY 12.5 billion, respectively, up 5% and 6% year on year. Earnings per share came in at CNY 1.11, up 5% year on year, due to slight dilution of China H-share placement during the period. The company declared no dividend for the interim, which is the norm for the company. The interim top line and earnings accounted for 32% and 28% of our full-year estimate, respectively, in line with the pace seen in past years. With a robust book of sold units but not booked at the end of the period, and on-track completion of one third to full year target, we expect the company to meet our full-year projection. Overall, during the period, the company logged in-line results and average contract sales relative to peers. However, we believe the steady operational platform and strong balance sheet put the company in a unique position to capitalize its long-term investments and focus on value creation in a variety of non-development property businesses. We retain our fair value estimate of HKD 38 (CNY 30) and our no-moat rating. The H-shares are currently undervalued.

China Vanke announced a share placement for its H-shares. Under the placement agreement, the company will issue 315.6 million new H-shares at HKD 25.00 per share. The placement price is at a discount of 4.76% to the latest closing price. The company will use the proceeds, totaling HKD 7.9 billion, to repay offshore debt financing. While the issuance price is at a relatively low price point, the company believes the share placement increases liquidity for H-shares, making the shares more attractive to offshore institutional investors. We maintain our fair value estimate of HKD 38/CNY 30 and the company’s no-moat rating.

China Vanke reported in line first-quarter results. Revenue and attributable net income were CNY 47.8 billion and CNY 1.2 billion, respectively, down 1% and up 11% year on year. Gross margin for the quarter was at 31% versus 35% a year ago, but in line with our projected margin of 32% for full-year 2020. EPS came to CNY 0.111, up 9% year on year. Revenue and net profit for the quarter accounted for 10% and 3% of our full-year target, respectively, similar to the run rate seen in prior years. The growth in attributable net profit despite the top line decrease was due to a lower share of minority interest, which fell from two thirds to one half of the earnings. As first-quarter net income typically only accounts for a small percentage of full-year earnings, especially for this year because of the impact of COVID-19, we retain our fair value estimate of HKD 38/CNY 30 and our no-moat rating. The shares are undervalued at this point.