Real estate - brief review - Impact of rate cuts on property developers

> Event：
>
> The PBoC decided to cut the benchmark one-year yuan lending rate by 0.27
> ppts starting from Sep. 16, 2008. Other lending rates were cut accordingly.
> The benchmark deposit rates were kept unchanged. From Sep. 25, 2008, except
> China's five biggest lenders and the Postal Savings Bank, domestic financial
> institutions have their RRR cut by 1 ppt and that in the Sichuan
> earthquake-hit areas will have the rate slashed by 2 ppts.
>
> Comment:
>
>  A substantive positive for property sector. As the CPI eased and
> worries over economic growth were mounting, the central bank started to
> adjust its monetary policies. It is the first time that the central bank has
> cut the lending rates in six years and it is also the first time the RRR has
> been reduced. Although the monetary policies were targeting the overall
> economic scenario, they would also benefit industries that depend heavily on
> capital such as the property sector.
>
>  The lower interest rates can help bring down the costs of capital for
> developers. In the short term, the impact of one-time rate cut will likely
> be limited. But the market will certainly expect capital costs for
> developers to continue to drop in the future. For home buyers, the rate drop
> will ease the burden of interest expense. As property developers generally
> face big capital pressure currently, the rate reduction and the RRR drop
> will give a strong boost to the real estate industry.
>
>  Liu Mingkang, chairman of the China Banking Regulatory Commission, has
> said that the banking regulator would meet the reasonable credit demand from
> property developers and bolster the healthy development of the industry. We
> said at that time that the credit policies for the property market would
> likely be adjusted in 2H. We have estimated that the credit-policy changes
> were likely to occur on the consumption side rather on the developers' side.
> Under the backdrop of slack sales of new houses, slashing the lending and
> RRR will be active in spurring turnover.
>
>  The governments in Henan Province and Xi'an, Changsha, Xiamen and
> Shenyang have pushed forward policies to shore up the sector through bank
> loans, transaction duties and fees as well as government fiscal subsidies to
> encourage people to purchase houses. We believe these policies have been
> recognized by the central government. It's wise to adopt different policies
> to help property markets in different areas and we expect more provincial
> governments to unveil stimulus polices.
>
>  Valuation-wise, property chips have already fallen in the area that
> features investment value. The key developers tracked by us have an average
> P/E ratio of less than 10 times and an average P/B ratio of less than 2
> times. Shares of China Merchants Property Development Co and Gemdale Corp
> are traded at a more than 40 percent discount to their NAV per share. We
> believe that if the credit policies are loosened, property chips will stage
> a rebound. Whether their shares can maintain strong momentum depends on the
> further policy changes and recovery of confidence in the property market.

 Recommendation: We suggest investors boosting exposures to leading
property developers in different niche markets. We give the "BUY" ratings to
Poly Real Estate Group Co, Gemdale Corp, China Merchants Property
Development Co, China Vanke Co, Risesun Real Estate Development Co,
Citychamp Dartong Co, Huafa Industrial Co, Shanghai Lujiazui Finance & Trade
Zone Development Co, Shanghai Jinqiao Export Processing Zone Development Co
and Shanghai Zhangjiang Hi-tech Park Development Co. We will closely track
the transition volume and credit polices for the property markets to decide
whether to raise our rating on the industry from "NEUTRAL" to "OUTPERFORM".
Risks include the potential lackluster sales in the property market.