Much of the speculation around the future of China’s property sector was negated by remarks made at the annual Central Economic Work Conference in December. The government made it clear that policy support would continue through 2010 as part of efforts to encourage the urbanization that underpins much of China’s growth.
Powered by sustained demand from first-generation owner-occupiers and white-collar couples climbing the property ladder, the housing sector has produced a host of ambitious, often regionally focused developers. From this pool, a number of genuine national players have emerged, firms able to operate in the first-tier cities as well as across second-tier hubs in the Pearl River Delta region, up the Yangtze and beyond.
China Overseas Land & Investment (COLI, 0688.HK) has, with support from its parent, China State Construction Engineering Corp, followed the ebb and flow of the real estate sector over 25 years. It continues to impress analysts.
Citi, which has a "buy" rating on the stock, considers COLI to be a safe bet based on its target-beating sales performance, clean balance sheet and ability to secure plots of land at reasonable cost.
"We believe that among the major developers in China, COLI has the best management and human resources network to develop its ever-growing and diversifying land bank, and to tap investment opportunities stemming from ongoing industry consolidation," Citi analyst Tony Tsang wrote in a recent report.
As of October, COLI had already booked US$7.3 billion in contracted sales – not only meeting its target for 2009, but also covering 82% of the company’s estimated property sales revenue for 2010. COLI’s November 2009 sales were up 10.3% year-on-year to US$320 million.
Macquarie Research, which has an "outperform" rating on COLI, said that the developer ranks top among its peers, scoring well in almost all areas – cash flow and financial position in particular. "We like developers such as COLI because of their national footprint. They are big names nationwide and they are state-owned and have good access to funding," said Macquarie’s Chris Cheng.
COLI reported its net gearing was 16% at the end of June, and Macquarie expected this to increase to 29% by the end of 2009. This is low compared with the historical leveraging excesses of developers such as Guangzhou R&F (2777.HK) and Greentown (3900.HK).
However, David Ng at RBS in Hong Kong, who also has a "buy" rating on COLI, issued a note of caution about the developer’s land-banking aspirations. Previous house estimates show that COLI would have to lay down US$1.4 billion this year to support 20% revenue growth going into 2011-2012, limiting long-term visibility, he said.
Visibility is also impaired by policy risks. Despite positive signals from Beijing about the near-term fate of the property market, fears of a bubble in the housing sector, and the possible response to it, are growing. Wang Shi, founder of China Vanke (000002.SZ), one of the country’s biggest home builders, caused consternation in December when he said there were indeed bubbles in some first-tier cities.
Developers with diversified land banks and a strong product mix (residential, commercial, mixed-use), low leveraging, disciplined land purchases and parent support are more likely to withstand any potential headwinds than smaller, more aggressive firms that depend on hastily flipping deals to keep cash flowing.
Macquarie’s Cheng cites just such a strong foundation for his positive outlook on COLI and other big-name mainstays.
"COLI, China Resources Land (1109.HK), Sino Ocean (3377.HK) and Shimao (0813.HK) [have] strong balance sheets and high exposure to second-tier cities where we continue to see strong growth, and where the market is … more immune from government policy that targets speculators," he said.