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Too early to turn bullish
Despite attractive valuation, we think it is still too early to turn bullish on the sector as policy is likely to remain hawkish in H121 and consensus earnings downgrades could come based on margin and contract sales guidance. We prefer related industries over developers, eg, property management, shopping malls, logistics property and property completion-related sectors. We downgrade seven stocks to Neutral or Sell. Within the sector, our top picks are China Resources Land (UBS APAC Key Call) and Vanke.
Five themes for 2021
1) Amid a strong economic rebound (2021E GDP: 8.2%), we expect the policy tone to remain hawkish, especially in H121. We expect a moderate slowdown in 2021E property activities: -3%/-2% in property sales in value/GFA terms (+10%/+2% in 2020) and -5% in new starts (-2% in 2020E). 2) Under the government's proposed caps for debt/cash,debt/assets and debt/equity ratios (dubbed "three red lines" by Chinese media), we expect contract sales of the top 24 developers (in terms of 2019 contract sales) to slow from 9% in 2020E to 5% in 2021E. 3) Developers' margins could continue to decline in 2021E, which may not have been priced in by consensus earnings. 4) The completion upcycle is likely to continue in 2021-22E, despite delays in 2020. 5) The shopping mall segment should continue to shine in 2021E, as the "three red lines" would limit mall supply, and given luxury retail sales repatriation.
Potential consensus downgrades on contract sales and margin pressure
Given potentially slower contract sales in 2021E and margin pressure, we lower our earnings estimates for 2021/22 by 10%/15%; our revised earnings are 9%/16% below consensus. We downgrade Shimao (mainly due to growth deceleration), Jinmao (mainly due to margin pressure) and Evergrande (growth, leverage and margins) to Sell, and Sunac, Agile, KWG and CIFI to Neutral. Our top picks are CR Land (UBS APAC Key Call) and Vanke, both rated Buy. We lower our PTs for Vanke, Logan, Country Garden, R&F and Aoyuan by 8-10%.
Valuation
We think the market has priced in a hawkish policy outlook in 2021, but not a margin decline (due to complexity of margin estimates) and potential 2021 contract sales growth guidance downgrades (eg, Shimao). MSCI China Real Estate is trading at 5.3x 12-month forward PE on consensus earnings, 1.2SD lower than the historical average of 6.7x. Based on UBS estimates, our coverage is trading at 6x 2021E PE on average.
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