China Developers’ Top Lines and Earnings To Improve Amid Demand Recovery

We are transferring coverage of China’s state-owned developers: China Overseas Land & Investment 00688, China Resources Land 01109, and China Jinmao 00817. While we maintain our fair value estimates of HKD 31 for COLI and HKD 43 for CR Land, we lower our fair value estimate for Jinmao to HKD 1.90 from HKD 2.40 due to more conservative estimates on gross margins through 2027. Amid recovering homebuyer confidence, we believe the property development revenue of the three developers will post a meaningful rebound in the next few years, leading to pickups in earnings off low bases in 2022. Also, we think large state-owned developers such as COLI and CR Land will fare better than peers in sales thanks to landbank replenishment in higher-tier cities, strong operating efficiency, and robust funding status. In our view, all three developers are undervalued as the market’s negative sentiment is unwarranted given improvement in their financial performances. Our top pick for the sector remains COLI.

With resuming site visits and stabilizing housing prices, year-to-April contracted sales of the top 100 Chinese developers saw an uptick of 9.3% versus the same period in 2022, as per industry data provider CRIC. COLI and CR Land bested most peers by posting over 70% year-on-year sales growth, followed by Jinmao, with 40% growth. While we expect the outperformance to continue through the rest of 2023, we caution that the sector outlook will be clouded by slowing economic expansion, coupled with the continuing population decline in China. That said, we foresee the three developers accelerating inventory turnover, as their well-located products would retain traction among first-time and upgrading homebuyers. For landbank, we believe the three developers would step up acquisitions in higher-tier cities through open market auctions and diversified channels, such as through Jinmao’s city operation model.