China Property:Who can make more from an improved environment

What’s new: China announced a 25bps cut in interest rates and a 50bpscut in RRR, which should have a positive impact on the China residentialproperty market, which we believe is already on its way towards rationaladjustment and moving towards steady and sustainable growth.

    What’s the impact: The government factor has turned decidedly positivefor China property. We do not think that the direct benefit from a 25bps cutin interest rates will be significant to China residential property demand.However, we see it as another signal that government policies havecontinued to move in a positive direction for China property. We alsobelieve that the importance of government decisions is larger in Chinaproperty than it is in many other markets.

    Positive, but at a gradual and sustainable pace. Compared with the lastadministration, we think the current leaders in China have placed a lot lessemphasis on using strong administrative measures to manage Chinaresidential property demand. Instead, they have emphasised utilisingnatural market forces and developing a healthier structure for the industry.Combined with the fact that the penetration rate for private units in Chinahas increased significantly over the past years, we do not expect Chinaproperty demand to exhibit the kind of large swings that have occurred inthe past. Instead, we think China property demand would tend to be moresteady and sustainable and we see this as a healthier development.Overall, our read is that rational adjustment in the industry was alreadyunderway and industry fundamentals are improving.

    The key to China property is management and sustainable businessmodels, not contract sales. We expect the industry environment in Chinaproperty to improve, but advise investors to be very selective about PRCdevelopers. We think too many of them have been too obsessed withmerely expanding scale and contract sales and the latest resultsannouncements have clearly illustrated that this has not resulted inimproved profit and profitability for many of them.

    What we recommend: Our top picks remain COLI (688HK, HKD26.15,Buy [1]) and CR Land (1109HK, HKD21.80, Buy [1]) which are still tradingat undemanding 2016E PERs of 7.7x and 9.7x, respectively. Key risk to ourcall: A major deterioration in the outlook of the China economy.

    How we differ: We believe that the China property industry is movingtowards a new era that should present considerable profit potential tostronger players that can manage their business well.