Citi expects Chinese property developers’ H1 core earnings to drop 32% on year, back to levels in H1 of 2014

 

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Chinese real estate stocks’ core earnings are expected to drop by 32% year over year in the first half, back to the level in the first half of 2014 and 2015, as balance sheet performance continues to regress amid the lack of sales, said Citi Research in a note. 

The industry’s net debt ratio may rise to 76%, compared with 74% at the end of last year, with debt roughly stabilizing under moderate investments such as land bidding, it said.

The share price of mainland homebuilders briefly rebounded in June, driven by policy expectations, but resumed the declines in July and the third quarter remains challenging for the sector, with liquidity concerns resurfacing, it said.

Until there is further policy clarity, the broker would continue to select stocks in the sector on a limited basis, favoring companies with modest balance sheet expansion, sufficient land bank last year and this year, and market share expansion.

Investors have somewhat absorbed the weak sales in July and August, which resulted from seasonal factors and tighter liquidity, but there are still some concerns such as more restructurings of real estate companies, first-half earnings results, weak macro data, and a stronger US dollar, it said.

The broker’s top industry picks are China Resources Land, Greentown Management, Yuexiu Property, Beike and Longfor Group.