China Properties May Shine Despite Government Controls

Gene Linn  |

Facing rebounding inflation and a dangerously expanding property market bubble, Chinese authorities on March 1 raised down payment requirements and interest rates on a wide range of home purchases. That was just the start of on-going nationwide and local efforts to slow property price rises. Property stocks would seem to be unlikely candidates to be a sector leading China stocks out of two-month-long consolidation.

However, the positives for Chinese property developers outweigh the negatives of efforts to retrain property prices, according to Eric Yuen, head of research at Guoco Capital.

One positive was the fact that 2012 results for property companies from the just-concluding corporate earnings season generally met or exceeded expectations, Yuen told Equities. Big developers also spent late 2012 and early 2013 raising funds on equity and debt markets to significantly improve their debt-to-equity ratios.

At about the same time, stocks in the property sector began to consolidate in early January, about a month before the market as a whole. That has two good results for investors, Yuen said. One is that the sector will likely rebound from the slump ahead of most stocks, and the other is that properties boast attractive valuations, about 8X pE with dividends of 3-4%.

Yuen also maintains that government attempts to curb property prices rises will not greatly damage stocks in the sector. For one thing property prices are already at a high level after increases in the first month of 2013 with a slowdown in February not having much of a negative impact.

“If there is a sharp decline in prices it would hurt stocks, but I don’t think that will happen,” Yuen said. “There may be no reason to be bearish.”
Yuen likes the big players in the market, including Country Garden (CTRYY). The company reported two weeks ago that 2012 profits rose 24%, and its stock soared 16.3% that week. Other favorites are Longfor (LGFRY) and Shimao (SHMAY). End


Hong Kong Blue Chips: -165, -0.7, to 22,300, 3-28-13, Hang Seng Index. Market closed 3-29-13 and 4-1-13

Chinese Stocks in Hong Kong: -137, -1.2%, to 10,896, 3-28-13, HSCE Index. Market closed 3-29-13 and 4-1-13

Shanghai Stocks: -2, -0.1%, to 2,234, 4-1-13, Shanghai Composite Index.

Chinese Stocks in the U.S.: -2.9, 369.8, 3-29-13, Bank of New York Mellon, ADR Index-China

Quotable: "Trading volume is expected to stay subdued next week, as the week would be shorten by the Easter holiday (Monday) and the Ching Ming Festival (Thursday). Market focus would turn to the US March payrolls report due on Friday, to see if the recovery in the US jobs market could sustain. For next week, the Hang Seng Index is expected to trade near 22,000- 22,400." BEA Securities. 3-29-13

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