China property stocks’ 30% correction overdone

KUALA LUMPUR: The more than 30% decline in China property stocks over the past couple weeks is overdone, says CIMB Equities Research.

In its report issued on Friday, Sept 23, it said that in its view, “the market correction is overdone as it has taken the sector’s RNAV discount, P/BV and P/E to 2008 trough levels”.

It pointed out the market appears to be factoring in a financial distress scenario and a hard landing for China property sector.

“We think the valuations are unjustified as the major listed companies under our coverage are unlikely to go bust given their cash reserves which should enable them to ride through these tough times,” it said.

CIMB Research said although the China property sector was under pressure in near-term due to uncertain global economy outlook and on-shore credit tightening, the distressed level valuations offer good values for long-term investors.

To recap, it said the sector’s average 67% discount to RNAV was similar to the discount seen during 2008. By assuming a hard landing scenario with 30% average selling price (ASP) fall in primary cities and 20% decline in secondary cities (vs its base case assumption of 10% price decline), the sector valuation at average 62% discount is only slightly higher than that in 2008 troughs.

CIMB Research also said the current sector average FY11 P/BV of 0.8 times was even lower than the 2008 trough level of 0.9 times. The comparison with 2008 trough valuations indicate that COLI, CRL, Evergrande, Poly HK, Shimao and Sino-Ocean should trade above their current prices. However, the comparison shows that there may be more downside risk for Guangzhou R&F, Agile, KWG and SOHO China.

It advised investors to stick to developers with solid financials. Its forecasts of developers’ operating

cash flows in 2H11 showed that Greentown, Sino-Ocean, Poly HK and CRL were likely to see negative operating cash flow in 2H11.

It also noted the low short-term debt coverage of Greentown and Glorious.

“Investors should stick to developers with solid financials and strong debt payment capability, i.e. COLI which is our top pick, CRL, KWG, Agile, COGO and SOHO China,” it said.