China Property Stocks Priced for Disaster are Bargain to Goldman
Bloomberg News- Developer valuations near all-time bottom reached in 2008
- Goldman Sachs, Citigroup see some developer stocks rallying
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 on Wednesday, 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.
Investors haven’t shared such optimism. State-owned China Overseas Land and China Resources Land slumped 24 percent and 22 percent, respectively, last year to rank among the biggest losers as a sell-off accelerated in the fourth quarter. Goldman Sachs has a 12-month target price of China Overseas Land at HK$31, which is 36 percent higher than the current price, while China Resources Land has buy ratings from all 33 analysts tracked by Bloomberg.
The easy availability of credit sent home values soaring as much as 62 percent last year in some large cities such as Shenzhen, spurring regulators to increase down-payment requirements and clamp down on mortgage lending. President Xi Jinping and his top economic policy makers have pledged prudent and neutral monetary policy and greater focus on deflating asset bubbles as they work to ensure stability in the lead up to a twice-a-decade Communist Party congress later this year.
Stocks of developers already reflect the realization that regulators aren’t going to ease up restrictions anytime soon.
“Every investor is aware that the existing curbs are no way to be loosened this year, so share prices have almost factored in the concern of tightening,” Xie Haoyu, Beijing-based property analyst Hua Tai Securities Co., said by phone, adding that he projects property investment to largely outperform consensus. “Now, all eyes are on whether sales and investment can beat expectation.”
Goldman Sachs’ Wang Yi wrote in a report last month that while concerns of further regulatory curbs linger, investors are overestimating the impact on developers. Even for investor-favored builders which trade above their book value, their valuation implies an “extremely low” return for years from their existing land parcels, Wang wrote.
— With assistance by Feng Cai, Amy Li, and Emma Dong
(Updates with closing share prices in third paragraph.)
China Woos Ivanka, Jared Kushner to Smooth Ties With Trump
Bloomberg News- Kushner had positive meetings with China’s envoy: official
- Ivanka visit to embassy blunts harsher Trump comments on China
Ivanka Trump: The Quiet Power Behind the President
At the Chinese Embassy in Washington last week, Ivanka Trump exited a black SUV with her daughter, Arabella, and shook the hand of Ambassador Cui Tiankai.
Ivanka and Arabella, who dressed in red for the Lunar New Year celebration on Feb. 1, were filmed listening to traditional music, admiring crafts and playing with puppets. Ivanka later posted a video of Arabella singing a song in Mandarin, further helping to quiet criticism after her father, President Donald Trump, broke with convention by not sending a personal New Year’s greeting.
Ivanka Trump attends the Chinese Embassy's New Year reception in Washington, D.C., on Feb. 1, 2017.
Photographer: Xinhua News Agency/Getty Images
Ivanka’s public meeting -- lauded in China’s press -- came after behind-the-scenes meetings between Cui and Jared Kushner, her husband and a presidential adviser. Kushner and Cui have had an extensive ongoing dialogue that has been positive, according to a White House official who asked not to be identified because the meetings were private.
As countries around the world figure out how to influence the new U.S. administration, China is going straight to the top: Trump’s immediate family. In bypassing more traditional diplomatic channels such as the State Department, China is looking to open a more direct link to help avoid a trade war or military confrontation after Trump signaled a willingness to challenge Beijing’s red lines on Taiwan and the South China Sea.
The strategy is similar to one China employed with the Bush family, according to Dennis Wilder, senior director for Asia at the National Security Council during the last Bush administration and a long-time China military analyst for the Central Intelligence Agency. Former President George H.W. Bush, who served as the top U.S. representative in Beijing in the mid-1970s, retained personal connections with Chinese leaders.
“I predict very direct communication from the White House to Zhongnanhai,” Wilder said, referring to the seat of power in Beijing. Ivanka’s embassy visit made the Chinese leadership “extremely pleased because it advanced the personal connection to President Trump and his family,” he said.
The reaction to Ivanka’s New Year’s visit in the Chinese media marked a change from largely defensive comments in response to previous Trump remarks. The Global Times, a party-run newspaper known for its nationalist tone, said Ivanka helped balance her father’s “harsh posture” and the appearance “could be invigorating to the China-U.S. relationship.”
The access Trump’s family enjoys to the president has empowered their role in decision-making as formal responsibilities in the administration remain in flux. Trump appointed Kushner as a senior adviser in the White House in January.
Bannon, Navarro
Still, Trump has plenty of others in his circle who are urging a harder line against China, including strategist Steve Bannon and trade adviser Peter Navarro, whose books include “Death by China: Confronting the Dragon -- A Global Call to Action.” Secretary of State Rex Tillerson drew a rebuke from Beijing after sayingthat the U.S. would seek to block Chinese access to disputed reefs in the South China Sea.
President Xi Jinping has responded to Trump by urging global elites to reject trade wars and protectionism, most notably in a speech to the World Economic Forum in Switzerland last month. His foreign minister, Wang Yi, repeated that message on Tuesday during a visit to Australia.
‘Irrational Statements’
“In the past four decades, there has never been a shortage of tough or sometimes even irrational statements on China-U.S. relations,” Wang told reporters in Canberra. “But such statements aside, the China-U.S. relationship has defied all kinds of difficulties and has been moving forward continuously.” China is focused on official U.S. policy, not campaign rhetoric, he added.
The family courtship is part of a broader Chinese strategy to maintain stable relations between the two powers, according to Ruan Zongze, vice president of the China Institute of International Studies, a research group run by China’s foreign ministry, and an envoy to Washington between 2007 and 2011.
In addition to official exchanges such as the recent phone call between State Councilor Yang Jiechi and U.S. National Security Adviser Mike Flynn, China is seeking “other opportunities to maintain healthy interaction,” Ruan said.
Trump and his family have also been in close touch with Chinese businesses. Trump met last month with Jack Ma, chairman of Alibaba Group Holding Ltd., to discuss creating jobs in the U.S. The New York Times reported that Kushner met with Wu Xiaohui, chairman of Anbang Group Insurance Group Co Ltd., last November to finalize a business deal.
China Hands
The Chinese government has been “testing and trying” different ways to avoid a major confrontation with the U.S. based on miscalculations, said Wang Fan, director of China Foreign Affairs University’s Institute of International Relations. Ma’s visit to Trump Tower was an example of that approach, he said.
So far, it’s unclear what impact the moves might have on Trump himself. He still hasn’t set up a call with Xi despite having called more than a dozen world leaders since his inauguration on January 20.
Even so, for China, Trump’s family may be the best hope for stable U.S. relations. Trump’s choice for ambassador to China, Terry Branstad, continues to serve as governor in Iowa, following a strict hands-off policy on China matters until after he’s confirmed by the U.S. Senate.
“At this moment, there is no obvious China point person in his cabinet,” said Wang, of the China Foreign Affairs University. “All the previous China hands have gone."
(An earlier version of this story misstated the participants on the phone call with Mike Flynn.)
— With assistance by Jennifer Jacobs, and Peter Martin
(Updates with Wang in 12th paragraph.)
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