Tougher economic outlook
The economic environment within which the China property sector operates has
changed in 2008, for the worse. Softening investment and exports will likely be a
drag on income and consumption growth, slowing any recovery in the currently
consolidating property market.
􀂄 More home price falls in September/October sales season
Challenging affordability and weak sentiment, coupled with a flurry of project
launches by cash-strapped developers in the September/October sales season, could
result in further price declines. High-end housing may not be immune due to low
rental yields and a stronger US dollar.
􀂄 Sector still faces high 2009 earnings risk
We estimate that for every 5% decline in price, developer NAVs and earnings
would come down 6-7% and 6-17%, respectively. Given a likely further decline in
selling prices, we think consensus 2009 earnings estimates could face further
downgrades.
􀂄 Initiate coverage of CMP and Gemdale with Sell, and Poly with Neutral
We initiate coverage of China Merchants Properties (CMP) with a Sell rating
because we believe it missed out on the key stage of property development growth.
We initiate coverage of Gemdale with a Sell rating because of its rapid expansion
without due attention to cost control, in our view. We initiate coverage of Poly
Real Estate Group (Poly) with a Neutral rating owing to its strong fundamentals
and good execution ability but fair valuation.