China Property:Weak sales as expected;REI growth expanded with stronger land sales

REI growth expanded to 8.1% yoy after shrinking for four consecutive months.

    YTD REI for 9M17 was up 8.1% yoy (vs. 7.9% in 8M17) and YTD residential REIwas up 10.4% yoy (vs. 10.1% in 8M17). We attribute this to: 1) higher landsales value at 65% yoy in Sep (vs. 43% in 8M17) and volume at 26% yoy in Sep(vs. 10% in 8M17), but 2) slower new starts at 1.4% yoy in Sep (vs. 7.6% in8M17). Given higher land sales value, low inventory, but tighter credit, wecontinue to expect 5% new starts and high single-digit REI growth for 2017.

    First yoy drop in sales volume due to high base; market consolidation continues.

    Property sales growth slowed further in Sep, with volume down 1.5% yoy (vs.

    +4.3% in Aug, YTD +10.3%) to 175mn sqm (the first monthly yoy decline in2017) and sales value up 1.6% yoy (vs. +6.4% in Aug, YTD +14.6%) toRMB1.4trn. Due to a high base, Sep sales seemed weak but were still betterthan previous years (e.g., RMB870bn/830bn and 132k/135k sqm in 2015/2013).

    We expect sales growth to recover slightly in late Oct/Nov, given a lower baseand more new launches post the 19th NPC meetings, at which curbing policy(e.g., property tax) has not yet been mentioned. However, sales of largedevelopers remain decent (Sep sales were up 19%, vs. 46% YTD). Also, themarket share of the top-20 developers expanded to 33% in 9M16 (vs. 25% in2016). We believe big developers will continue to outperform.

    Strong land sales YTD but still far below previous years.

    YTD land area sold increased 12.2% yoy in Sep (vs. +10.1% in 8M17) and YTDland sales value expanded 46% yoy (vs. 43% in 8M17), implying continuedland price increases. YTD land sales have been strong, reaching 167mn sqm,but are still far below previous years (240mn/252mn sqm in 9M14/9M13).

    Given this, coupled with slower growth on new starts (+6.8% yoy in 9M17, vs.

    +7.6% in 8M17), we believe inventory is unlikely to pick up in the short term(9/7/11 months in T1/2/3 cities based on our estimates).

    Recommendations and risks.

    We expect sales volume to moderate further in 4Q17, due to strict policytightening and a high base. Unlike in 1H17, we expect more divergence indevelopers’ sales growth, due to different strategies and execution. Wesuggest investors accumulate developers with a strong execution record,including Vanke, Country Garden, Longfor, KWG, CIFI and Future Land. Wevalue stocks using NAV for existing projects. Key risks are further credit/policytightening.