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Opinion | Are Chinese property developer stocks a good buy right now?
- The valuations of Chinese developer stocks have started to look attractive, and the recent policy changes could also serve as a catalyst for price gains
- However, investors must be aware that the long-term investment logic for these stocks has changed
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Up to September, the Chinese property sector had come under increasing pressure from market controls ranging from credit tightening to purchase restrictions. Home sales and land acquisition slid across the country, leading to liquidity risks in the real estate sector.
As a result, Chinese developers’ stocks delivered the worst performance among all sectors in the A-share market, with market capitalisation shrinking by 18.4 per cent, or 2.8 trillion yuan (US$440 billion), in the first 10 months of this year.
With the continuous tightening of controls, some major developers faced debt default problems, and growth risks spilled over into related sectors, such as construction and property-related consumption.
Since October, the authorities have been fine-tuning property-related policies to mitigate the risks. In the stock market, investor sentiment has also started to improve, and the sector recorded a 4.1 per cent, or 600 billion yuan, rebound in market capitalisation from October 29 to November 23.
After a protracted correction, the valuations of Chinese developer stocks have started to look attractive, and the recent policy changes could also serve as a catalyst for price gains. However, many may neglect the fact that the long-term investment logic for Chinese property stocks has changed.
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The Evergrande theme park left derelict in China’s Jiangsu province
The Evergrande theme park left derelict in China’s Jiangsu province
Over the past decade, developers established their business models based on high leverage, high turnover and high growth. With heavy borrowing from banks and the bond market, some sector leaders could use capital extremely efficiently and boost returns on equity. Investors were also attracted by the large profit margins and tended to boost these developers’ valuations.
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