Founder of Antler Capital

Stanley Tsai, CFA

Thematic (Sector/Industry)

<p>For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).</p>
<p><strong>The Debt-Fueled Supercycle. </strong>The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.</p>
<p><strong>The Inventory Drawdown. </strong>Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.</p>
<p><strong>The Insatiable Demand. </strong>The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.</p>
<p><strong>The Aggressive Developers. </strong>The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.</p>
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 746px;"><strong>Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)</strong></td>
</tr>
<tr>
<td style="width: 746px;">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/215/144/original/image_45072834061624549646155.png?1624549646" class="editor-image img-responsive" data-smartkarma-image-id="215144"></figure>
<p>Source: National Bureau of Statistics, Our analysis</p>
</td>
</tr>
</tbody>
</table>
<p><strong>Related Insights</strong></p>
<ul>
<li>
<a href="https://www.smartkarma.com/insights/china-financials-silver-linings-playbook" target="_blank" data-smartkarma-citation="insights:53013" rel="noopener">China Financials: Silver Linings Playbook</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/glut-and-famine-we-might-see-snow-in-china-this-summer" target="_blank" data-smartkarma-citation="insights:52840" rel="noopener">Glut and Famine: We Might See Snow in China This Summer</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-operation-twist-the-deposit-version" target="_blank" data-smartkarma-citation="insights:53435" rel="noopener">China Macro: Operation Twist | The Deposit Version</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-consumers-remain-on-the-sidelines-as-their-home-equity-grows" target="_blank" data-smartkarma-citation="insights:53210" rel="noopener">China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-ppi-peaks-while-cpi-eases-tightening-fears" target="_blank" data-smartkarma-citation="insights:52778" rel="noopener">China Macro: PPI Peaks, while CPI Eases Tightening Fears</a> </li>
<li>
<a href="https://www.smartkarma.com/insights/china-macro-exports-disappoint-but-it-s-still-early-in-the-game" target="_blank" data-smartkarma-citation="insights:52728" rel="noopener">China Macro: Exports Disappoint, but It's Still Early in the Game</a> </li>
</ul>

For all the roller coaster rides the sector has taken investors on over the years, the Chinese property developers have been unsettlingly consistent in one regard. The CNY1tn fixed asset investment (FAI) homebuilders coughed up in May continued a two-decades long secular trend that may make or break China's still fragile recovery (Exhibit 1).
The Debt-Fueled Supercycle. The sector has seen its share of excesses and corrections, exemplified by the post-GFC FAI expansion and subsequent retrenchment. Covid might have driven up construction costs, but the enthusiasm of would-be homeowners has shown no signs of abating. Just as the developers are working overtime to deleverage their balance sheets, household debt is piling up and may approach alarming levels over the next five years if mortgage growth doesn't decelerate quickly enough.
The Inventory Drawdown. Behind the headline FAI number is a more nuanced picture of inventory reductions and landbank replenishment. Housing starts slowed in May and dipped below project completions on a 12-month rolling basis. This affords cash-strapped property firms an opportunity to rebuild their cashflows, while deploying cash to projects in hand.
The Insatiable Demand. The 0.5% m/m or 5% y/y rise in home prices last month may appear benign in other settings. In the context of China's already exorbitant base, recent data points are a cause for concern. Among the largest cities across the country, those in the Greater Bay Area stand out as outliers, with valuations skyrocketing in spite of the latest round of lockdowns.
The Aggressive Developers. The increasingly bullish undertones of sell-side notes that have landed on our desks are centered around the inventory drawdown / cashflow rebuild story of the perceived higher-quality names in the space. We are not buyers of that story just yet and our work suggests that many developers have been acquiring land at a more aggressive rate than they had planned at the beginning of the year. Regulators are already keeping a close eye on recent transactions and we think we should too.



Exhibit 1: Monthly Housing FAI | 3M Moving Avg (CNY bn)




Source: National Bureau of Statistics, Our analysis




Related Insights


China Financials: Silver Linings Playbook 

Glut and Famine: We Might See Snow in China This Summer 

China Macro: Operation Twist | The Deposit Version 

China Macro: Consumers Remain on the Sidelines, as Their Home Equity Grows 

China Macro: PPI Peaks, while CPI Eases Tightening Fears 

China Macro: Exports Disappoint, but It's Still Early in the Game 


China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

Equity Bottom-Up

<div>
<p><a href="https://www.smartkarma.com/entities/yuexiu-services-group-limited" target="_blank" data-smartkarma-citation="entities:33482:1" rel="noopener">Yuexiu Services Group (6626 HK)</a> ("YSG") is the latest property management service company to list in Hong Kong. The Offer Price range is HK$4.88-HK$6.52/share. The Offer Price will be announced on the 25 June.</p>
</div>
<div>
<p>YSG is the spin-off of <a href="https://www.smartkarma.com/entities/yuexiu-property-co-ltd" target="_blank" data-smartkarma-citation="entities:18097:1" rel="noopener">Yuexiu Property (123 HK)</a>, which will own 68.9% in YSG after the IPO, down from 91.9% currently, before over-allotment.</p>
</div>
<div>
<p>YSG will raise HK$2.1bn (US$0.27bn), before over-allotment, at the mid-price of the IPO range.  </p>
</div>
<div>
<p>On an FY20 PER metric, YSG is pitched at a small premium to a basket of peers, and generally exceeds similar-sized property management companies.</p>
</div>
<div>
<p>More below the fold. </p>
</div>


Yuexiu Services Group (6626 HK) ("YSG") is the latest property management service company to list in Hong Kong. The Offer Price range is HK$4.88-HK$6.52/share. The Offer Price will be announced on the 25 June.


YSG is the spin-off of Yuexiu Property (123 HK), which will own 68.9% in YSG after the IPO, down from 91.9% currently, before over-allotment.


YSG will raise HK$2.1bn (US$0.27bn), before over-allotment, at the mid-price of the IPO range.  


On an FY20 PER metric, YSG is pitched at a small premium to a basket of peers, and generally exceeds similar-sized property management companies.


More below the fold. 


Yuexiu Services (6626 HK): This Looks Fully Priced

IPOs and Catalysts/Events, Global Equity Research Ltd

Arun George

IPOs and Catalysts/Events

Uncompromised, Independent, Conflict-Free Research

Global Equity Research Ltd

Global Equity Research was started in 2017 by a group of experienced research professionals. It was founded on a passionate belief in the importance and the need for uncompromised, independent, conflict-free research. We aim to provide differentiated and actionable primary and bottom up fundamental research.

Equity Capital Markets

Huijing Holdings Co Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/huijing-holdings-co-ltd" target="_blank" data-smartkarma-citation="entities:28683:1" rel="noopener">Huijing Holdings Co Ltd (9968 HK)</a> is a Chinese residential and commercial real estate developer with a focus on Guangdong Province. It has launched a Hong Kong IPO to raise net proceeds of HK$1,564 million ($200 million) at the mid-point of the price range. </p><div class="content-highlight"><p>As investors have a plethora of options to gain exposure to the China property sector, IPO hopefuls need to bring something new to the table to grab mindshare. Overall, we believe that Huijing’s fundamentals fail to excite and are average at best compared to peers.</p></div>

Huijing Holdings Co Ltd (9968 HK) is a Chinese residential and commercial real estate developer with a focus on Guangdong Province. It has launched a Hong Kong IPO to raise net proceeds of HK$1,564 million ($200 million) at the mid-point of the price range. As investors have a plethora of options to gain exposure to the China property sector, IPO hopefuls need to bring something new to the table to grab mindshare. Overall, we believe that Huijing’s fundamentals fail to excite and are average at best compared to peers.

APAC IPOs & Placements

Zhen Zhou, Toh

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

Redsun Properties Group Ltd / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/27245" target="_blank" data-smartkarma-citation="entities:27245:1">Redsun Properties Group Ltd (1996 HK)</a> (RSP) is looking to raise up to US$370m in its upcoming IPO. Proceeds will be mainly used to fund the construction costs of properties under development, repay borrowings, and general working capital.</p><p>Over the years, RSP has been making numerous transactions with these related parties. Just to Redsun Materials City alone, it guaranteed a loan amount of RMB3.5bn and has even pledged the group's prepaid land lease payment, properties under development, and even completed properties.</p><p>In this insight, we will look at the company's overall financial performance, its properties under development, related party transactions and compare its valuations with other Hong Kong-listed China property developers. Last, but not least, we will run the deal through our ECM framework.</p>

Redsun Properties Group Ltd (1996 HK) (RSP) is looking to raise up to US$370m in its upcoming IPO. Proceeds will be mainly used to fund the construction costs of properties under development, repay borrowings, and general working capital.Over the years, RSP has been making numerous transactions with these related parties. Just to Redsun Materials City alone, it guaranteed a loan amount of RMB3.5bn and has even pledged the group's prepaid land lease payment, properties under development, and even completed properties.In this insight, we will look at the company's overall financial performance, its properties under development, related party transactions and compare its valuations with other Hong Kong-listed China property developers. Last, but not least, we will run the deal through our ECM framework.

Redsun Properties IPO Review - Deserves a Discount to Peers for Its Related Party Transactions

Zhenro Properties Group  / Equity Capital Markets

<p><a href="https://www.smartkarma.com/entities/26178" target="_blank" data-smartkarma-citation="entities:26178:1">Zhenro Properties Group Ltd (6158 HK)</a> is looking to raise approximately US$500 - 600m in its upcoming IPO. Proceeds raised will be mainly used to fund constructions costs of ongoing development projects and repay bank loan.</p><p> In this insight, we will look at the company's land bank, property under development and unsold property, compare the company to Hong Kong-listed real estate developers. We will also run the deal through our ECM framework.</p>

Zhenro Properties Group Ltd (6158 HK) is looking to raise approximately US$500 - 600m in its upcoming IPO. Proceeds raised will be mainly used to fund constructions costs of ongoing development projects and repay bank loan. In this insight, we will look at the company's land bank, property under development and unsold property, compare the company to Hong Kong-listed real estate developers. We will also run the deal through our ECM framework.

Zhenro Property IPO Review - An Aspiring Small Property Developer

China

Yuexiu Property Company Ltd., through its subsidiaries, develops, manages and invests in properties. The Company also invests in a Real Estate Investment Trusts.

Price Gauge
52-week Range	0.00 - 0.00
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Yuexiu Property (123 HK)

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Housing FAI in May continued a secular trend that may make or break China's recovery. Inventory drawdowns may afford developers some breathing...

Stanley Tsai, CFA

Yuexiu Services (6626 HK): This Looks Fully Priced

There are numerous choices in this space. I don't see a compelling investment thesis to go long YSG, especially against larger, and more liquid...

David Blennerhassett

Huijing Holdings IPO Initiation: Ho-Hum

Huijing Holdings Co Ltd (9968 HK) is a Chinese residential and commercial real estate developer with a focus on Guangdong Province. It has launched...

Arun George

Zhenro Property IPO Review - An Aspiring Small Property Developer

Zhenro Properties Group Ltd (6158 HK) is looking to raise approximately US$500 - 600m in its upcoming IPO. Proceeds raised will be mainly used to...

Zhen Zhou, Toh

Price Gauge

52-week Range

Market Cap (USDm)

P/E

Dividend (Yield)

China Properties: Like Clockwork, Real Estate Investments Haven't Skipped a Beat

Housing FAI in May continued a secular trend that may make or break China's recovery. Inventory drawdowns may afford developers some breathing...

Stanley Tsai, CFA

Yuexiu Services (6626 HK): This Looks Fully Priced

There are numerous choices in this space. I don't see a compelling investment thesis to go long YSG, especially against larger, and more liquid...

David Blennerhassett

Huijing Holdings IPO Initiation: Ho-Hum

Huijing Holdings Co Ltd (9968 HK) is a Chinese residential and commercial real estate developer with a focus on Guangdong Province. It has launched...

Arun George

Redsun Properties IPO Review - Deserves a Discount to Peers for Its Related Party Transactions

Redsun Properties Group Ltd (1996 HK) (RSP) is looking to raise up to US$370m in its upcoming IPO. Proceeds will be mainly used to fund the...

Zhen Zhou, Toh

Zhenro Property IPO Review - An Aspiring Small Property Developer

Zhenro Properties Group Ltd (6158 HK) is looking to raise approximately US$500 - 600m in its upcoming IPO. Proceeds raised will be mainly used to...

Zhen Zhou, Toh