Too early to turn bullish

Despite attractive valuations, we think it is too early to turn bullish on the sector as we believe 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 Beijing Capital Development (BCDC) from Neutral to Sell and Financial Street (FS) from Buy to Neutral. Within the sector, our top picks are China Vanke and Jinke Property.

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 2021 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 our covered names to slow from 18% in 2019 to 2%/8% in 2020/21E. 3) Developers' margins could continue to decline in 2021E, which we think may not be priced in by consensus earnings. 4) The completion upcycle looks 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 7%/6%; our revised earnings are 7%/8% below consensus. We downgrade BCDC from Neutral to Sell and FS from Buy to Neutral (mainly due to growth deceleration, leverage and margins pressure). Our top picks are Vanke and Jinke, both rated Buy. We lower our price target for China Fortune Land Development (CFLD) by 39% and raise our price target for Seazen by 20%.

Valuation

We think the market has priced in a hawkish policy outlook in 2021, but not a margin decline (due to the complexity of margin estimates) or potential 2021 contract sales growth guidance downgrades. Based on UBS-S estimates, our coverage is trading at 5.4x 2021E PE on average.