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A US$292 billion difference of opinion roils China property stocks

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

[HONG KONG] Nothing divides analysts in Asia quite like the outlook for Chinese property companies, and that's 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 $1 billion. If you believe the most bullish analysts, China's major listed property firms will be worth $596 billion in a year. Listen to the bears, and you get a forecast of $304 billion.

It's 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 percent 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 percent.

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've also provided plenty of trading opportunities to anyone with a strong opinion about where China's real estate industry is headed.

Market voices on:

"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." Lee 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 favors 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've 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 percent on average in 2017, according to data compiled by Bloomberg.

The results haven't been strong enough to sway bears, who say 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 percent, according to Citigroup Inc.

Beijing Factor Whether the bulls or bears ultimately prove right may depend on the Chinese government's policy prescription for the real estate industry, which is far from clear.

If regulators prioritize recent efforts to restrain home-price gains, boost funding costs for heavily-indebted companies and steer real estate firms toward 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 U.S., developers could soar.

As long as the policy outlook stays hazy, the industry's wild ride is likely to continue, according to CLSA Ltd. analyst Nicole Wong.

"This is no normal market," she said. "The rules of the game have been changing constantly. At what valuations should these stocks trade? That's anybody's call."