PENGYUAN INTERNATIONAL

HONG KONG, 30 Oct 2018. Pengyuan International has released one research report, which is accessible at https://www.pyrating.com/CreditResearch.



Overall policy stance on property industry remains unchanged: we expect the Chinese governments will continue its tight control policies on property industry in 2019 to avoid unwanted overheating in the industry. In our view, the governments will continue to clamp down the shadow banking financing in the industry and encourage the credit growth through more regulated financing channels. On the other hand, with property price under control and inventory came off from its peak, a further severe tightening on the industry is unlikely, in our opinion.


Residential property sales momentum likely to continue but at a slightly softer pace: residential property sales value was better than the market expected in the first nine months of 2018, with property sales value rising 16% year over year, according to National Bureau of Statistics (NBS). We expect to see residential property sales value to grow around 10-15% in the fourth quarter of 2018, and continue to grow at around 10% in 2019, with 3-4% growth in sales volume and 5-6% growth in average selling price (ASP).


Land acquisitions to slow down further and market sentiment unlikely to rebound: we expect the land acquisition activities to continue slow down noticeably in 2019, with the land sale value to grow at around low teen level over the next 12 months. With the poor market sentiment that were damped by the uncertain outlook, property developers have become more prudent in land bank replenishment.


Property funding will continue to grow at its current pace: we estimate the property funding growth for Chinese property developers to remain at 9% in 2019, driven by the solid contracted sales. The decrease in trust loans will be offset by higher bank loans, and bonds will remain as a supplementary source of funding in 2019, in our view.


Working capital efficiency has improved and is expected to continue improving: we believe the overall working capital efficiency has improved in 2018 for the China property sector due to faster property sales which has resulted in a lower inventory. We expect the working capital efficiency to continue improving, thanks to robust property sales and slower land acquisitions. However, we expect property inventory to increase slightly in 2019 as the property floor-square new start to catch up the property floor-square sold.


Leverage to decline slightly but liquidity to remain tight in 2019: the sampled property companies that we analysed have reported better profitability and higher leverage in the first half of 2018. We expect the leverage to increase in the second half of 2018 and decline slightly in 2019, thanks to slowing land acquisitions and robust property sales. Property companies’ liquidity condition, measured by cashflow adequacy ratio, has improved slightly in the first half of 2018 as many companies have already extended their short-term debt. However, we expect the liquidity for the sector to remain tight, with high refinancing requirement from bonds and syndicate loans in 2019.


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