US$292b opinion gap behind volatility in China property stocks

Hong Kong

NOTHING divides analysts in Asia quite like the outlook for Chinese property companies - and that is turning their shares into some of the region's most volatile investments.

The split between optimists, who tend to focus on surging home sales, and pessimists, who worry about high debt burdens, has rarely been so big: Chinese developers now have three of the five widest share-price target ranges among Asian companies with a market value exceeding US$1 billion. If you believe the most bullish analysts, China's major listed property firms will be worth US$596 billion in a year. Listen to the bears, and you get a forecast of US$304 billion.

It is no wonder the stocks have been so turbulent. Sunac China Holdings Ltd and Future Land Development Holdings Ltd, which have the two widest price-target gaps in Asia, both recorded bigger fluctuations than 98 per cent of the region's large-cap stocks over the past 200 days. In just the last six months, Sunac has posted three peak-to-trough swings of at least 20 per cent.

While the gyrations have made it more difficult for market observers to assess the health of one of the global economy's most important sectors, they have also provided plenty of trading opportunities to anyone with a strong opinion about where China's real estate industry is headed.

"Both bulls and bears have a fairly big say," said Lee Wee Liat, an analyst at BNP Paribas SA in Hong Kong who sides with the optimists on large developers including Sunac and Country Garden Holdings Co. "Such a big division makes property stocks very volatile." He cited several reasons for his upbeat outlook: soaring land values; buoyant demand for homes in China's third- and fourth-tier cities; an industry consolidation that favours the largest players; and a unique pre-sale system in China that lets developers reap cash before finishing construction.

Those tailwinds helped spur big gains in Chinese property stocks last year, and they have also shown up in annual reports that the companies have released over the past few weeks. The four largest Chinese developers by sales increased net income by more than 150 per cent on average in 2017.

The results have not been strong enough to sway bears, who say that developers have taken on too much leverage to weather rising borrowing costs and government curbs on property speculation. China's real estate industry has some of the country's highest net debt-to-equity readings, with Sunac's ratio exceeding 200 per cent, according to Citigroup Inc.

If regulators prioritise recent efforts to restrain home-price gains, boost funding costs for heavily-indebted companies and steer real estate firms towards less-profitable rental housing, the pessimists are likely to prevail. But if the government loosens property curbs to backstop economic growth in the face of a potential trade war with the US, developers could soar. BLOOMBERG