Comments on the real estate industry: the risk of real estate enterprises is valued, and the short-term supply side urgently needs liquidity support

Events

On March 16, 2022, the financial stability and Development Commission of the State Council held a special meeting to study the current economic situation and capital market issues. The meeting was presided over by Liu He, member of the Political Bureau of the CPC Central Committee, vice premier of the State Council and director of the finance committee, and comrades in charge of relevant departments attended the meeting. The meeting proposed that "as for real estate enterprises, we should timely study and put forward effective risk prevention and resolution response plans, and put forward supporting measures for the transformation to a new development model."

Commentary

The government released confidence and the risk of real estate enterprises was valued. The statement on real estate at the special meeting of the financial stability and Development Committee of the State Council today shows that the current government has realized the existence of risks in the real estate industry and intends to introduce response plans in terms of "prevention" and "resolution", highlighting the high importance it attaches to it. At present, the fundamentals of the real estate industry are not optimistic. At the operational level, commercial housing sales are still in a downward trend. The sales area of 30 large and medium-sized cities from March 1 to 15, 2022 decreased by 48% year-on-year, which was expanded compared with the decrease of - 27% in February. In terms of financing, in addition to some state-owned enterprises, the domestic and foreign financing channels of most real estate enterprises have not been fully restored, and most real estate enterprises still face great debt cashing pressure. The above difficulties are superimposed, and the risks involved are not only the debt default risk of real estate enterprises themselves, but also the trend of credit risk spreading in the industry. For example, the debt default of a real estate enterprise will lead to the early redemption of the debts of other real estate enterprises by financial institutions. In addition, if some large and medium-sized real estate enterprises continue to storm, it will not only have a greater impact on the national sales market, but also further affect the enterprises upstream and downstream of the industrial chain on a large scale, which may be a great drag on achieving the GDP growth target of 5.5% this year.

We believe that the prevention and resolution of risks in the current real estate industry need to work together on the demand side and the supply side. ① The stabilization and recovery of sales is the most effective way to prevent the risks of most real estate enterprises, and maintain the judgment that the relaxation on the demand side will increase. The improvement of sales can improve the cash flow status of real estate enterprises and their confidence in future development, and promote the recovery of the real estate industry to a virtuous cycle of "sales recovery - improvement of cash flow of real estate enterprises - reduction of discounts / delivery on schedule - recovery of market confidence - stable sales - land acquisition / recovery of new construction - normal push sales". We still believe that more and more intensive demand side relaxation policies will be introduced in the future, and the "urban implementation policies" will be used more flexibly. On the premise of relatively stable house prices, some high-energy cities may liberalize restrictions on purchase, sale and price in stages. ② The epidemic affects the time and effect of the relaxation policy, and the short-term supply side urgently needs to increase support. Recently, the national epidemic has begun to worsen, and epidemic prevention measures have been stepped up one after another. From March 1 to 15 this year, a total of 13000 people were newly diagnosed, 3.8 times that of February. The current priority of epidemic prevention work is high, which affects the speed of policies in other fields to a certain extent, and inevitably affects the effect of real estate relaxation policies, which is also one of the reasons why sales have not stabilized. The recent epidemic situation in Shanghai, Zhejiang, Shenzhen and other places is relatively serious. It is expected that the sales of the Pearl River Delta and the Yangtze River Delta will be affected in the future. Therefore, the short-term and faster supply side policies need to increase support, such as the real landing of pre-sale regulatory capital adjustment at the implementation level. In addition, we expect that some real estate enterprises and large real estate enterprises may need to inject liquidity directly to survive the crisis. After today's special meeting of the financial commission of the State Council, the CSRC also held a meeting to study and deploy the implementation. The CSRC said it would "improve the bond financing support mechanism for private enterprises and promote the development of venture capital." We expect that the financing tools of listed real estate enterprises are expected to increase in the future.

The company is optimistic about the high-quality performance of the property management company as scheduled. The turbulence of real estate always inevitably affects the property industry, and the property sector has also ushered in a large adjustment today. However, from the published Yingxi and annual report, the performance of most property companies has been achieved as scheduled. Property management companies such as country garden services, Jinke services, Jianye new life and ocean services have issued profit forecasts. It is expected that the growth rate of net profit attributable to the parent company in 2021 will not be less than 50%, 70%, 40% and 65% respectively. Property management companies such as poly property and Yuexiu services have officially released their performance. The year-on-year growth rate of net profit attributable to the parent company in 2021 is 26% and 81% respectively.

Investment advice

The continuous introduction of subsequent real estate relaxation policies is a high probability event, but short-term sales have not stabilized, superimposed the impact of the epidemic, or some real estate enterprises are still facing difficulties in debt payment. Considering the conservatism and excess return, we are optimistic about the real estate enterprises whose sales can achieve contrarian growth last year and this year, such as Greentown China, China Construction Development International, Hangzhou Binjiang Real Estate Group Co.Ltd(002244) . In addition, we are also optimistic about the property management companies with strong operation ability, such as country garden service and Jinke service, which are probably able to survive the current round of crisis.

Risk tips

The implementation effect of the existing real estate improvement policies is less than expected; Demand side easing is less than expected

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