China Property:Site visit –Tangshan market surprises on the upside;Tianjin is in line

    We visited 11 projects by Sunac, Risesun, Evergrande, Country Garden
andVanke in Tianjin/Tangshan, and met with their local sales managers.
Tianjinmarket is largely in line with our expectation that sales began
to slow downamid strict HPR policy and a rise in down-payments. Prices
have been upsignificantly but have stabilized since March 2017. However,
Tangshan marketsurprised on the upside in that ASP has been up 15% y-y
with healthyinventory level (~10 months). The accumulated inventory
since 2013 has beenlargely digested since 4Q16. Local sales teams expect
that supply and demandshould be balanced going forward with mild price
appreciation.

    Tianjin market in line: tightening slows sales but prices remain
resilient so far.

    Amid policy tightening, we expect property sales to slow further in
2H. Unlikethe first half, we expect increasing divergence among
developers’ sales growthdue to different strategies and execution. We
suggest investors accumulatequality names with strong execution (strong
sales ahead even with marketslowdown), including Vanke, Longfor, CIFI,
Logan and Future Land. We useNAV for existing projects in our stock
valuations. The sector is trading at 7.6×12-month forward P/E and 33%
discount to NAV. Risks include furthercredit/policy tightening.

    Recommendation and risks.

    After the market rally last year, Tianjin announced policy
tightening in 4Q16and increased down-payment ratios to 30-40% in 1Q17
from 20% for firsthomebuyers. Mortgage rate is now up to a 0-10% premium
(vs. 15% discountbefore) to benchmark rate. Overall sales slowed in 5M17
with 31% y-y decline,but ASP remains resilient at 23% y-y growth, based
on Soufun data. Given thelow inventory, local sales generally don’t
expect a price drop for the remainderof the year.

    Tangshan market surprised on the upside – low inventory and 15% ASP
growth.

    Tangshan property market is usually viewed as over-supplied with
highinventory and stagnant prices. However, the inventory has now
declined toabout 10 months with supply shortage. Land prices soared
after inventorycleared since 4Q16. Property prices have been up 15% y-y
but have justreturned to 2012/13 levels. Large developers (e.g.,
Vanke/Evergrande) acquiredunfinished projects from local developers last
year and have sold a big portionof these inventories quickly to recoup
the capital, which further proved theirstrong execution and brand
premium over local developers. Government hasapplied its HPR policy
since end-March 2017 to cool down the market (banksalso increased
down-payment ratio to 30% with benchmark mortgage rate),but local sales
remain confident on mild price appreciation for their nextlaunches,
which they attribute to relatively lower prices compared tocomparable
cities. Investment from non-locals is not the major demand, butdid boost
the market and help to clear inventory before the tightening
(marketerupted last October after government announced a fast-speed
train betweenBeijing and Tangshan with minimum 35-minute travel time).
We expect abalanced supply and demand going forward, considering limited
land supply.

Sales slow amid tightening; market is short of supply at low inventory
level.