Chinese developers priced for disaster are bargain to Goldman, Citi

China’s property developers are in far better shape than their rock-bottom stock valuations would have you believe. So say top analysts from firms including Goldman Sachs Group Inc. and Citigroup Inc.

As curbs to cool property prices have pushed equity values down near record lows, Goldman Sachs said the market is pricing in a “deep downturn” and that investors are too pessimistic on expected income, especially from some leading developers. Citigroup cites the investment appeal of large developers as the industry enters an era of “mega consolidation.” And China International Capital Corp. said builder stocks may surge more than 20 percent in the first quarter as “palpably better-than-expected” home sales act as a catalyst.

A Bloomberg Intelligence index tracking 22 mainland developers listed in Hong Kong surged 5.7 percent yesterday, the biggest increase in more than 11 months. Country Garden Holdings Co. soared 9 percent, the largest gain since April 13, 2015. China Resources Land Ltd. advanced almost 7 percent in its largest move since December 2015.

Despite an overhang from further government restrictions, some property stocks “are just way too cheap,” said Alan Jin, a property analyst at Mizuho Securities Asia Ltd. in Hong Kong, who has upgraded China Overseas Land & Investment and Guangzhou R&F Properties Co. to buy ratings. “Now that valuations are near distressed levels, there may be a sector-wide rally lasting three to four months,” he said.

Chinese regulators in March started embarking on a series of restrictions as they sought to rein in frenzied demand for homes, sending developer shares down last year by the most since 2011. The Bloomberg Intelligence real estate index plunged 11 percent in 2016 and through Tuesday was trading at 0.6 times book value, near an all-time bottom in 2008, when China’s property market had its biggest downturn in a decade.

Yet, despite valuations near a historical trough, contracted sales at leading developers are expected to jump another 15 percent this year from a record 2016, thanks to their strategic positioning in metro areas and stable home prices even with tightening, according Citigroup analysts. Morgan Stanley analysts earlier this week upgraded the property sector to “attractive,” citing low valuations and a tight supply of land that will support home prices.

The nation’s top three builders by sales had a strong start to the year. China Evergrande Group, China Vanke Co. and Country Garden Holdings saw contracted sales jumping 90 percent, 274 percent and 75 percent in January, respectively, according to private data provider China Real Estate Information Corp.

Citigroup is among at least 12 brokerages that have upgraded Chinese property stocks traded in Hong Kong this year. Analysts led by Hong Kong-based Oscar Choi wrote last month that 2017 will be a “watershed” year for the industry as some of the largest developers increase market share. China Resources Land and Sunac China Holdings Ltd. are among Citigroup’s top picks.

Downside risk for share prices is limited, unless the financial performance and liquidity for the whole sector deteriorates quickly, said Philip Tse, a Hong Kong-
based property analyst at ICBC International Research Ltd. Bloomberg