Domestic housing is likely to continue to lose in the second quarter, unless sales recovery is stronger than expected and there is an unexpected aggressive relaxation policy.
The Zhitong Finance App learned that J.P. Morgan published a research report saying that in 2023, the core net profit of Chinese real estate developers fell 22% year on year. It is expected that this downward trend will continue from 2024 to 2025, mainly due to continued contraction in profit margins, which also means that the industry has not yet reached its bottom. Sales and policies are still the main driving force for domestic housing stocks, and the current weak performance is fully reflected. However, Motong believes that domestic housing may continue to lose in the second quarter, unless sales recovery is stronger than expected and there is an unexpected aggressive relaxation policy. China Resources Land (01109) and China Overseas (00688) were preferred for domestic housing stocks. The ratings were “increase in holdings”. Vanke (02202) was first avoided, and the rating was “reduced holdings”.
Motong pointed out that there were several surprising things during this performance period, including: 1) the dividend payout rate for domestic housing of state-owned enterprises increased; 2) the profits of some state-owned enterprises were too high, but the expectation was that they would gradually decline; 3) if state-owned enterprises did not fulfill the guidelines, they would be downgraded; 4) Vanke did not pay dividends.
Motong believes that developers' profit margins have not bottomed out, and it is expected that further depreciation and property price adjustments will continue to drag down profits. The bank expects interest rates for property development to fall to 9% in 2026, with state-owned enterprises falling to 14.4%. As for today and next two years, Motong estimates that profits will drop another 6% to 2%.
Motong also pointed out that although the risk of default is low in the background of state-owned enterprises, the 2023 results prove that this may continue for several years due to low profit margins and weak profitability.
In terms of property management, Motong said that the average profit of property management stocks rose 10% year on year last year, but it is expected that the growth momentum will weaken this year and next. It only believes that state-owned enterprise property management stocks can still record low double-digit returns. The first choice for the trip was Poly Property (06049) and China Resources Vientiane Life (01209). Additionally, Greentown Services (02869)'s rating was upgraded to “increase holdings”.