China property bulls see silver lining behind earnings debacle

CHINA property bulls are looking past what’s likely another disastrous earnings season for the nation’s embattled developers, betting on a recovery as green shoots emerge in sales.

Sixteen of Hong Kong-listed Chinese real estate firms have so far flagged profit slumps for 2022 with the number expected to grow, according to JPMorgan Chase & Co. The wave of warnings, combined with a lack of impressive stimulus from the National People’s Congress (NPC), sent a Bloomberg gauge of developer shares deeper into a bear market.

But with most of the ugly news likely baked into share prices, some market watchers are citing an up tick in new home sales — February saw the first rise in 20 months — as a reason to be optimistic. Extensive measures since late last year to ease the sector’s liquidity crunch have also helped assuage default concerns.

“The results announcements might in fact be a clearing event,” JPMorgan analysts including Karl Chan wrote in a note earlier this month. “As sales data over the next few months will likely continue to improve, we expect the sector to see a gradual re-rating.”

Country Garden Holdings, China’s largest developer, set the grim mood for the coming season by warning of its first full-year loss in at least 16 years.

The bottom-line slump from a developer considered a safer bet underscores the toll from the Chinese government’s clampdown on excessive leverage, which triggered a wave of defaults and the worst-ever downturn in the housing market.

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JPMorgan’s analysis shows a 52 per cent slide in 2022 earnings from Hong Kong-based developers that have released preliminary figures.

A Bloomberg gauge of developers has fallen more than 20 per cent from a Jan 27 peak into oversold territory, with authorities adding to the weak sentiment by reiterating their mantra at the NPC that “houses are for living in, not for speculation”. Times China Holdings, CIFI Holdings Group and Logan Group have slumped more than 40 per cent during the period.

Nonetheless, the poor earnings “should have been well expected” and there will be more policies to support the property market, said Steven Leung, an executive director at UOB Kay Hian (Hong Kong). “This will be very important for China’s GDP to reach that 5 per cent target, and will help share prices to stabilise at current levels.”

The annual reporting season — ending Mar 31 — also brings concerns about auditor changes and earnings delays, which may trigger further trading suspensions. Some major developers including China Evergrande Group failed to report results on time last year and their shares have since been halted.

Ultimately, the sector’s full recovery will hinge on a return of home buyers’ confidence, which would require a restart of stalled property projects and the delivery of pre-sold houses.

“It’s probably not enough yet to declare a nationwide rebound for China’s property sector,” said Victoria Mio, head of Asia-Pacific equity research at Fidelity International. “But as we’ve seen in recent weeks, the post-Covid pent-up demand is real.” BLOOMBERG