To The Moon

Property stocks used to be a prime track in the stock market.

• Relying on the expansion of real estate companies, property stocks have good growth potential.
• Thanks to the high stickiness of residential properties, property stocks have an excellent moat.

With both growth and monopoly, property used to be the most popular sector in Hong Kong stocks.

However, this sector plummeted due to debt defaults by highly leveraged real estate companies since the second half of 2021.

As of December 21 this year, the property sector fell as much as 31% during the year, ranking the last among HKEX's three-tier sector.

$ZHENRO SERVICES(06958)$, $JIAYUAN SER(01153)$ and other local property stocks fell by more than 80% during the year. The industry's leading property sector, $CG SERVICES(06098)$ also fell by 60% during the year.

The main reasons for the decline of property stocks this year

1. The property parent company defaulted on its debt and its property development projects were halted. The growth of property companies from related parties has stagnated.

2. Frequent related transactions between the real estate parent company and its property subsidiaries. There are many cases of parent companies misappropriating funds from subsidiaries, raising market concerns about financial independence.

3. The overall weakness of Hong Kong stocks, with the Hang Seng Index falling back to the level of 10 years ago.

The factors for the property stock selloff have been lifted

In November, the regulator issued 3 good news:

1. A number of banks signed up with real estate companies to provide financing support, providing trillions of credit to "relatively healthy real estate companies".

2. National Association of Financial Market Institutional Investors released information that

Under the support and guidance of the People's Bank of China, the Association continues to promote and expand the private enterprise bond financing tools to support private enterprises, including real estate enterprises, to issue debt financing.

3. The CSRC decided to adjust and optimize 5 measures in equity financing for real estate enterprises, including resuming M&A restructuring and ancillary financing for real estate listed companies.

Real estate stocks' debt default risk was lifted and share prices soared. Property stocks benefited from the parent sector.

After the three major policies, on December 15, Vice Premier Liu He delivered a written message pointing out that

Real estate is a pillar of the national economy. In response to the current downside risks, we have introduced some policies and are considering new initiatives to try to improve the industry's asset and liability position and guide market expectations and confidence to rebound.

The property sector is expected to see a reversal. Considering that the current mortgage rates are at a near 10-year low and that the pandemic policies that caused the decline in property sales are beginning to turn.

Property sector: State-owned enterprises vs. private enterprises

State-owned enterprises do not have the risk of debt default, and real estate parent companies can also expand with strong financial strength through mergers and acquisitions in the industry's downward cycle.

Among private property stocks, some parent companies already ran into financial problems. For example, $EVERGRANDE(03333)$ and $SUNAC(01918)$ are still under suspension and their property stocks are facing challenges in growth.

The property parent companies that have not run into problems so far are expected to have a much lower risk of default with government support.

Although the association between private property stocks and property parent companies remains large. However, with the separate listing of property companies, the proportion of managed area from third parties is gradually increasing.

According to statistics from Everbright Securities, t

he percentage of area under management from third parties for state-owned property stocks increased to 54.2% in the first half of this year

while the percentage of area under management from third parties for private property companies reached 66.2%.

$GREENTOWN SER(02869)$ , $A-LIVING(03319)$ and $CIFI ES SERVICE(01995)$ have more than 80% of area under management from third parties. They have a weak reliance on related parties and a strong ability to develop independently.

Bottom Line

Looking ahead to 2023, property sales are expected to recover; projects of parent companies are expected to accelerate delivery. 

Property stocks with strong third-party expansion capabilities and state-owned enterprises will be welcome by capital.

Property stocks have rebounded sharply, with $CG SERVICES(06098)$ once jumping 249%.

However, in terms of valuation, the P/E ratio is still only 12x. Compared with the 73.5% revenue growth, the valuation is still not high:

In addition to $CG SERVICES(06098)$, the revenue growth rate of leading property stocks such as $CHINA OVS PPT(02669)$ , $CHINA RES MIXC(01209)$ and $ONEWO(02602)$ is still above 30%.

However, their P/E quartile is at the low end of the last 4 years ($ONEWO(02602)$ just went public and has a higher valuation quartile).

Property stocks are expected to be the favorite of capital again in 2023.