China’s cautious property giants may be rewarded

HONG KONG, Sept 8 (Reuters Breakingviews) - China’s developers are ready to turn a corner. Yu Liang told investors last week that the property market in the world’s second-largest economy was “oversold”. The chair of $22 billion China Vanke (000002.SZ) is worth listening to. He has steered the homebuilder clear of a growing debt crisis in the sector - and “survival” was the prescient headline topic of the company’s annual internal meeting in 2018 not long before the market soured.

Some of his optimism is warranted. The mood is improving since the government announced a raft of measures aimed at shoring up home sales, which include lifting various homebuying curbs in large cities. The Hang Seng Mainland Properties Index rose 6% this week, and shares of Country Garden (2007.HK), which has narrowly averted a default, and Sunac China (1918.HK) soared more than 20% and 160%. Part of the rebound was down to short covering. There are also hopes that officials will continue to roll out support. A state-owned newspaper added to expectations on Wednesday by calling for more Chinese cities to lift homebuying bans: an editorial in the Securities Times argued earlier restrictions designed to stem speculative buying had achieved their goal.

Vanke is also well positioned to benefit from any recovery, especially if homebuyers become picky about which developers they deal with. The company has superior access to financing because it is backed by strong state entities including Shenzhen Metro Group, a legacy of the developer’s successful defense against a hostile takeover in 2015. Vanke also has been relatively prudent. Its total liabilities stood at 1.35 trillion yuan ($184 billion) last year, only 5% higher than in 2018. Evergrande’s (3333.HK) liabilities ballooned 55% to 2.44 trillion yuan over the same period and it is battling to win creditor support for a restructuring.

Vanke’s caution paid off. Two years after Yu’s 2018 warning, President Xi Jinping introduced strict borrowing curbs on the industry. The depth of any recovery will now depend on how much Xi is willing to go easy on his own war against leverage in the economy. On a multiple of nearly 8 times its 12-month forward earnings, Vanke trades slightly above its five-year average, LSEG data show, and doesn’t look cheap. But as its rivals fight for survival, the developer at least looks like it has staying power.

CONTEXT NEWS

China’s property market is “oversold at this stage” and the market will return to a track of “healthy development” if favourable policies continue to be implemented, China Vanke Chair Yu Liang said on Aug. 31 in an earnings presentation.

On the same day, the company reported a 19% decline in net profit to 9.9 billion yuan ($1.35 billion) for the six months to the end of June.

Some of China’s big cities have started to roll out measures to shore up home sales, including lifting various homebuying curbs and cutting mortgage costs.

(The author is a Reuters Breakingviews columnist. The opinions expressed are their own.)

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