Brokerages increasingly optimistic about sector they say is undervalued
SHANGHAI: UBS AG and JPMorgan Chase & Co turned positive on Chinese property stocks, saying the plunge in share prices this year has made them cheap and concern over tighter credit has been overstated.
"Concerns over policy tightening have impacted sector performance recently, while the sector's valuation has largely been ignored," wrote Zhang Haiyun, a Shanghai-based analyst at UBS, said in a report on Tuesday. UBS, Switzerland's largest bank by assets, upgraded its view on the industry to "positive" from "neutral".
Potential buyers look at a model of a property project at a housing fair in Yichang, Hubei province. [CHINA DAILY]
UBS and JPMorgan Chase join brokerages including Credit Suisse Group AG and BofA-Merrill Lynch Research in growing more optimistic on China's property developers, the worst-performing industry group on the Shanghai Composite Index this year.
Property stocks on the Shanghai Composite have declined an average 3.6 percent in the past six months, compared with a 14 percent gain in the benchmark gauge. The industry trades at 27 times earnings, compared with last year's high of 43 times in July.
Share prices of developers have declined on concern government measures to rein in property price increases will hurt earnings. Premier Wen Jiabao last week reiterated a pledge to curb home purchases for speculative purposes, after home prices climbed the most in 21 months in January.
The "shock of policy measures was largely priced in while more positive news emerged", JPMorgan Chase analysts led by Lucia Kwong wrote in a report on Monday.
The central bank last month ordered lenders to set aside more deposits as reserves for the second time in a month. Housing Minister Jiang Weixin said in January that the government will limit credit for second-home purchases.
BofA-Merrill Lynch Research strategist David Cui said in a Feb 26 note that the "market has misjudged the impact of government's crackdown on the property market", adding it liked developers for their valuation.
UBS said current share prices imply a drop in average selling prices of between 18 and 61 percent. "We do not believe China home prices will fall more than 20 percent in 2010," UBS' Zhang said.
He raised the stock ratings of Hong Kong-traded Country Garden Holdings Co, Guangzhou R&F Properties Co and Glorious Property Holdings Ltd to "buy" from "neutral".
Chinese home prices surged 9.5 percent in January, the most in 21 months. The China Banking Regulatory Commission told banks the same month to "strictly" follow property lending policies.
Credit Suisse Group AG strategist Sakthi Siva said in a note on Tuesday that Chinese property stocks are "worth looking at" as they trade at a 7 percent discount to the region, compared with a 36 percent premium in June 2009.
Vanke rallies
The Hang Seng Composite Property & Construction Index, which includes mainland real estate developers traded in Hong Kong, declined 4.3 percent this year, the third-worst performing industry group.
Goldman Sachs Group Inc cut its share-price estimates on Chinese developers by as much as 32 percent last month, citing increased uncertainty from government tightening measures.
China Vanke Co, the country's largest property developer by market value, said on Monday 2009 profit rose 32 percent after sales increased. The shares gained 1.8 percent to close at 9.61 yuan ($1.41) on Tuesday.
China's home prices are likely to stabilize this year following 2009's gains, Shirley Xiao, executive vice-president of Vanke, said at a briefing in Hong Kong on Monday.
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