China Property Outlook 11Apr11

INDUSTRYOUTLOOKGLOBALCORPORATEFINANCEAPRIL14,2011TableofContents:OVERVIEW1KEYTRENDSANDRATINGIMPLICATIONS3LIQUIDITYSTRESSTESTFINDSTENDEVELOPERSVULNERABLE11APPENDIX1:RATEDCOMPANIES14APPENDIX2:REGULATORYMEASURE16APPENDIX3:MACROECONOMICENVIRONMENT18APPENDIX4:FUNDRAISINGBYHONGKONGLISTEDCHINESEDEVELOPERS20MOODY'SRELATEDRESEARCH21AnalystContacts:HONGKONG852.3551.3077KavenTsang852.3758.1304AssistantVicePresident–[e-mail]@moodys.comGaryLau852.3758.1377ManagingDirector–[e-mail]ueezedCreditWillCoolChina’sPropertyMarketOverviewDriversforNegativeOutlook.China’spropertydevelopersfaceatoughoperatingenvironmentdrivenbytighteningregulatorymeasures,risinginterestrates,reducedbanklending,significantrefinancingneedsandincreasingsupply.Webelievethiswillinevitablyleadtoslowingsales,pressureonprofitmarginsandpressureonbalancesheetliquidityforsome.Inthemediumterm,developersmayneedtoadjusttheirbusinessmodelstoaccommodatethechangingoperatingenvironmentandtoremaincompetitiveinagradualconsolidationintheindustry.Weexpectsmallerdevelopersandthosewithweakbalancesheetliquiditytobethemostexposed.Greaterlocalenforcementofcentraldirectives.Wecontinuetorecognizethatincreasedurbanizationandrisingwealthprovidelong-termsupporttothegrowthofthepropertysector.But,governmentmeasures–implementedinaccordancewiththecountry’smacro-economicpriorities–arenowacceleratingthepaceofchangeintherealestatecycle,whichrecordeditslaststrongrallyinlate2009duetogovernmenteasingincredit.Themarketnowfacesacoolingperiod,triggeredby8property-specificmeasuresissuedbytheStateCouncilon26January2011andfollowedbytheneweconomicplan–the12thFiveYearPlan–passedbytheNationalPeople'sCongressinearlyMarch2011.Specifically,weconsiderthatoverthemediumterm,thegovernment’sprioritiesofmaintainingsocialstability–bycontrollinginflationandcontaininganyemergingpropertybubble–willcontinuetoheavilyinfluencethedirectionofthepropertymarket.Inthiscontext,thecentralgovernmentnowholdslocalgovernmentsaccountableforensuringstabilityinrealestateprices.Accordingly,asmorecitiesmoreeffectivelyimplementthenewregulatorymeasures,especiallypurchaserestrictionsandpricetargets,downwardpressureonpricesandtransactionvolumeswillbecomemoreevidentoverthenext12months.WehavechangedtheoutlookfortheChinapropertysectortonegativefromstable.Theoutlookreflectsourexpectationsforthefundamentalcreditconditionsofthesectoroverthenext12to18months.GLOBALCORPORATEFINANCE2APRIL14,2011INDUSTRYOUTLOOK:SUPPRESSEDDEMANDANDSQUEEZEDCREDITWILLCOOLCHINA’SPROPERTYMARKETExpectationofdecliningsalesproceeds.Weexpecttheproceedsfromcontractedsalesofresidentialpropertiestodeclineby25%-30%inChina’sfirst-tierandmostsecond-tiercities,andwherethelocalauthoritieshaveimplementedmeasurestostabilizepricesandprohibittheownershipofmorethantwopropertiesperhousehold.Thedeclinewillincludeamildpricecorrectionandcontractioninvolume.Impactonindividualpropertydeveloperscouldvary,dependingonthequalityofproducts,thelocationandnumberofnewprojectstobelaunched.Thoseinthethirdandfourthtiercitiesarelessexposedtothetighteningmeasures.Greatersupply.Atthesametime,ahigherbudgetedsupplyofnewpropertiesfromdevelopersandaplanbythegovernmenttointroduce10millionunitsoflow-incomeapartmentsin2011amidrestrictionsonpropertyownershipwillputdownwardpressureonprices.Higherinputcostswillpressureprofitmargins.Risingconstructioncosts–reflectingthebroadertrendininflation–willweighonprofitmargins,aswillacompetitiveneedtoproducebetter-qualityproductstocompeteforbuyersinasituationofreduceddemand.Goodcostcontrolisessentialforsustainingbusiness.Tightercredit.Atthesametime,duringthenext6-12months,propertydeveloperswillfacechallengesinsecuringonshoredebtfinancing.Thebackdropwillbethegovernment’senforcementofitsstrategyofslowingmonetarygrowthtoreducetheriskofacceleratinginflationandtomanagedomesticbanks’exposurestothepropertysector,aswellashelpthemimproveassetqualityandperformance.Alreadyduring1Q2011,bankshaveincreasinglytightenedcreditextension,leadingtoearlyoffshorefund-raisingsbyoverseas-listeddevelopers.Weakeningbalance-sheetliquidity.Sincewedonotforeseearelaxationofthecurrentregulatorytrendswithinthenext12months,developers’balance-sheetliquiditywilllikelyweaken.Althoughtheyhaveaccumulatedlargecashholdingsfromstrongsalesin2010,theywillexperienceslowingreceiptsofpresaleproceedsandsizeablecashoutflowsin2011tocovercommittedlandpayments,largerdevelopments–plannedorunderconstruction–andmaturingtrustfinancingandbankloans.Therefore,in2011,materialincreasesinpricesareunlikely,whilemilddownwardcorrectionsshouldoccurincitiesthatexperiencedsharprisesinthepast12–18months.RatingactionssinceNovember2010.Thechangesinratingsandoutlookoverthepast5monthswerepredominatelywithnegativeimplication.Wehavedowngraded5developers–CoastalGreenland,SREGroup,Renhe,GloriousandCountryGardenandhavechangedratingoutlooktonegativefor2developers–PowerlongandEvergrande.Duringthesameperiod,AgilewasupgradedtoBa2witha