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【Industry Nuggets】Understanding Real Estate Stock Investment in One Article! Can you still buy the real estate stocks that have recently risen sharply?

Since June 2021, risks in private real estate companies represented by Evergrande have been exposed and have at one point caused panic in the market regarding real estate stock investments. The stock prices of leading real estate companies such as Evergrande and Rongchuang have been greatly reduced, and many real estate companies have defaulted on their debts or extended their debts. Investors have lost confidence in them, further exacerbating the tight situation of real estate companies, which has further spread to real estate stock investments. However, as the situation develops and the situation becomes clear, the transmission of risks between real estate companies has not expanded to the industry. On the contrary, the real estate stock market has quietly rebounded. Since mid-March, the A-share real estate sector (BK0444) has risen nearly 30%, and the Hong Kong stock market's mainland real estate sector (BK1234) has risen nearly 40%. Poly Development has even reached a historic high, and China Overseas Land & Investment, China Resources Land, Longfor, Vanke, and other heavyweight real estate companies have all experienced growth.

There is a heated debate among mooers about whether the recent real estate stock market is a "real rebound" or a "wolf coming". This issue of 【Industry Nuggets】will follow the popular sister to explore the secrets of real estate stock investment.

1. What is real estate? What are real estate stocks?

Real estate is a general term for property and land. Simply put, it refers to houses built through human labor and the land related to those houses. Real estate stocks are stocks of listed companies whose main business is real estate projects.

In China, real estate is highly valued and regarded. On the one hand, the real estate industry has many associated industries and is an important pillar industry of the national economy. On the other hand, due to the traditional concept of home and country, "housing" holds significant symbolic meaning. Having a place to live is one of the most basic livelihood needs, so the development of real estate focuses on people's livelihood.

The upstream of the real estate industry's entire industry chain includes land supply, raw materials provided by the construction, machinery, and steel industries, and mechanical engineering. It covers real estate development, operation, and transactions, and has rich downstream connections, including the home appliance, furniture, decoration industries, and the currently popular property management industry. Currently, with the improvement of people's living standards and the increasing demand for high-quality housing, coupled with enhanced customer stickiness due to the epidemic situation, the property management industry is experiencing good development momentum.

2. What are the classifications of real estate stocks?

The real estate industry is mainly divided into five categories: land development, commercial real estate, residential real estate, industrial real estate, and real estate services.

The most concerning residential real estate can be further divided into commodity housing, rental housing, and indemnificatory housing. The leading companies in this field include Vanke, Evergrande, Country Garden, China Merchants Shekou, Poly Real Estate, China Overseas, and China Resources Land.

In addition, commercial real estate, known to everyone, can be subdivided into office buildings, shopping malls, hotels, and mixed-use apartments. Representative companies in this field include Wanda Group, Shimao Group, Financial Street Holdings, and Shanghai Lujiazui Finance & Trade Zone Development.

3. The current situation and market concentration of China's real estate industry.

In 2016, China's urbanization rate was 57.3%, while in 2021 the urbanization rate of permanent residents reached 64.72%. Compared with the average urbanization rate of developed countries such as the United States and Japan, which is 80%, China's urbanization rate will enter the second stage of slow improvement. In this stage, the population will gradually gather in metropolitan areas. From this perspective, the future real estate market in China's cities will further differentiate, with some cities still having structural opportunities.

According to data from CRIC Research Center, as of the end of 2020, the market share of TOP 50 real estate companies in terms of sales revenue was 62.2%, and the market share of TOP 100 real estate companies increased to 76.2% year-on-year.

4. Investment Logic for Real Estate Stocks

There is a commonly used analytical framework in the real estate industry that says "long-term view population, medium-term view land, short-term view finance." Based on the issues that investors in the market are generally concerned about, let's discuss the investment logic for real estate stocks.

Characteristics of the real estate industry:

1. Capital and labor-intensive industry:The sale of the products (commodity housing) constructed is a large-scale commodity consumption, which requires a large amount of labor, mostly in construction sites and related supply labor.

2. Strong industry correlation: The real estate industry has strong associations with multiple entities in the real economy.

3. Strong cyclicity:The real estate industry can be divided into long cycles and short cycles. Long cycles are determined by indicators on the supply and demand sides. The supply side depends on indicators such as per capita housing construction area, per household housing units, value of existing residential stock, and available inventory. The demand side depends on the population involved in property purchase and the urbanization rate. Short cycles in the industry usually arise from the mismatch between supply and demand in real estate. On one hand, the government faces a balancing act between "supporting the economy" and "supporting people's livelihoods," resulting in a situation where policies and fundamentals influence each other. On the other hand, policies have an immediate impact on the demand side, while supply-side adjustments are relatively inflexible, resulting in a mismatch between supply and demand and subsequent volatility in both upward and downward directions.

4. Dual attributes:On one hand, real estate has the attribute of a commodity, reflecting the rigid demand of residents, with prices related to economic growth but with higher volatility than economic fluctuations. On the other hand, it has the attribute of a financial asset, with the trend of housing prices positively correlated with the money supply, making it an investment and speculative product.

What are the key points for real estate stock investment?

1. Dynamic analysis to grasp the industry life cycle:The real estate industry usually goes through three stages: a rapid development phase, a market adjustment phase, and an industry recovery phase. The real estate market is influenced by various factors, including development investment, land market, housing supply and demand, demand psychology, sales volume, housing price trends, and policy adjustments. In general, the appearance of the high point of stock prices usually precedes inflection points in policy adjustments and market cycles. Investors need to observe and recapitulate the market continuously over the long term. In a complete industry cycle, real estate companies' performance does not usually exhibit continuity, and historical performance does not have a necessary connection to future returns. It can be studied but should not be used for analogies, as the saying goes, "We cannot see the future through the rearview mirror."

2. Make good use of valuation.Combining relative valuation market method (PE, PB) with absolute valuation net asset valuation method (NAV), the value of real estate enterprises can be effectively and reasonably determined by using projects as the basis and land reserves to determine the valuation range, and the value of under-construction and for-sale projects and land value can be reflected through cash flow discounting.

3. Real estate excess returns are usually closely related to policy regulation and fundamentals.Looking back at the pace, interpretation, and logic of the four rounds of excess returns in the real estate market from 2005 to the present, the short-term fluctuations are mainly driven by policy games. When the policy is loose, there is excess returns, and it is difficult to achieve excess returns when the policy is tight. After experiencing a wave of policy-driven increases, the most obvious stage of excess returns is during the turning point of the fundamentals (such as continuous narrowing of declines). In the mid-to-late stage, the verification of real estate fundamentals data is crucial for the sustainability of excess returns, from the stage of continuous improvement in fundamentals to the signal of policy tightening.

5. From the current point of view, how to view the opportunities and risks of real estate stocks?

[Institutional View]

What changes will happen in the future operation of real estate enterprises from the perspective of policy trends and industry changes?

Zhongtai Securities: From the perspective of inventory, the policy trend and investment opportunities of real estate.

First, from land being king to cash being king. Currently, the land transfer process still relies on competitive land prices and price limits for property. In the process of implementing strong regulation and standardization of pre-sale funds, real estate companies find it difficult to earn excess profits from rising property prices by hoarding land. Instead, they retain cash to buy land at reasonable costs and earn operating profits from real estate development, which has become a consensus in the industry.

Second, from pursuing scale to pursuing stability. After the implementation of the 'three red lines,' sales volume is no longer the reference factor for measuring real estate companies' access to financing from the capital market. Instead, it is whether the financial statements meet the regulatory requirements of the 'three red lines'. In this trend, companies choose to survive in the long term rather than sprinting.

Third, from national expansion to regional deep cultivation. In the process of continuously regulating pre-sale funds, group funding allocation channels are blocked. From 2018 to 2021, real estate companies, in order to overcome the complete blockage of the path to excess growth beyond the industry by speeding up capital turnover, continuously expanded their management radius. However, with the advantages of low control costs, the strategy of regional deep cultivation will gradually replace the national quick turnover strategy.

What signals does the current policy relaxation bring?

Zheshang Securities: Q2 policy relaxation signals strengthen, Beta market continues to evolve.

1. Continuous fermentation of demand-side policy relaxation.
2. Demand recovery is slower than expected, and the pace of bankruptcy policy relaxation is accelerating, and the level is increasing.
3. Phase progress in the rescue of private enterprises: Rongchuang, China Fortune Land Development, and Aoyuan released positive information on April 1st. JiaZhaoye introduced China Merchants Shekou Industrial Zone Holdings and AMC for cooperation.

How to seize the investment opportunities in real estate stocks?

CICC: Six key issues in the real estate sector at present

We believe that in the short term, the dominant logic of real estate stocks is still policy gaming. We recommend investors to continue embracing high-quality developers with a "balanced and good" approach until key policy measures are observed. If positive changes in the policies described in the main text occur in the future, the certainty of the valuation recovery opportunity for flexible private enterprises will be greatly enhanced.

In the medium to long term, as the industry returns to its core essence, we continue to be optimistic about "good students" in the development track with long-distance running ability and "versatile players" in the real estate track layout.

Orient Securities: Optimistic about the solid performance of leading companies in the first-tier cities

Due to the impact of the Spring Festival holiday, coupled with the tightening of real estate regulation in first-tier cities, market supply has contracted and customer wait-and-see sentiment has increased, resulting in a slight decline in market transactions in the past two weeks. The transaction volume in the land market has increased, but the premium rate has also decreased.

We believe that in the medium to long term, the overall neutrality of real estate regulation policies and the relative valuation level of the current sector compared to the potential growth rate of leading players still represent great value for money. Leading real estate companies with low debt and strong operation capability have the ability to grow across cycles. In the favorable cyclical environment, we still have a positive view on the sales performance for the whole year and the valuation recovery market in the first quarter.

Why are we firmly optimistic about the real estate sector?

China Securities Co., Ltd.: Bullish on the real estate sector as a whole, future related policies are expected to continue to be loose.

Currently, the stage we are in has similarities with a historical phase of sustained market performance in the real estate sector: strong demand for stable macroeconomic growth, sustained sluggishness in the property market, and a shift in real estate policies.

Currently, the overall valuation of the real estate industry is still at a low level, with a PB ratio of the sector at a historical percentile level of 12.8% since 2014; the current valuations of leading real estate companies such as Poly and Vanke still have a significant gap compared to the highest valuation levels in the three previous historical market periods.

We reiterate that the opportunities in the real estate industry are comprehensive, with the following three main themes in the development sector:
1) The theme of increased concentration
2) The theme of mixed ownership and credit repair for private real estate enterprises
3) The theme of re-evaluation of the value of diversified business: the worst time for the property management sector has passed, and bullish on the performance of leading property enterprises.

Guosen Securities: Multiple cities are relaxing property purchase restrictions, sales and land acquisition still await recovery.

From an industry perspective, we are bullish on the investment opportunities in the real estate sector:

1. In the short term, the investment logic lies in policy inference, as long as land is not hot, the market is not cold.

2. In the medium to long term, the investment logic lies in the improvement of the model, with the quality of ROE in the "slow era" improving: as the free use of pre-sale funds is no longer viable, the development industry will detach from financial attributes and return to the slow turnover manufacturing sector.

From a stock perspective, in the development industry, state-owned enterprises with low market capitalization and low valuation have reflected the substantial improvement space of private enterprises with low operating risks; in the property management industry, the certainty of the market share of state-owned developers has increased, and their sibling property management companies will "gratis" gain more market share, while also having a certain valuation advantage. We recommend Seazen Holdings, China Merchants Property Operation & Service.

【Mooer's View】

Q: What are the influencing factors in the real estate market?

@曹多鱼：How will the real estate market perform in 2022?

From the current perspective, the current stage is characterized by stability, and there should not be much change in the real estate market under the dual role of stable and healthy market conditions and the policy of houses for living in, not for speculation.

In practice, specific policies have a significant impact on the trend of housing prices. For example, the impact of easing household registration restrictions on the Beijing property market, the impact of relaxation of purchase restrictions on related cities, and the relaxation of the three red lines, the accelerated approval of credit funds, and even the relaxation of the proportion of future housing loans or the relaxation of mortgage interest rates, etc. These changes in operational logic are likely to have an impact on the real estate market.

Q: How do we view the development logic of the current real estate stocks?

@择菜谋士：Market observations: Real estate is booming, and only real estate seems to be able to make a move?

Currently, the core of the real estate downturn lies in the expected weakening, which comes from various factors. However, with the impact of the fluctuating epidemic and the return of orders overseas on consumption, exports, and investment, among the three pillars of consumption, exports, and investment, the only thing that can be controlled at the moment is investment. Easing restrictions on real estate seems to be one of the few options available for policy intervention.

After a short-term surge, the risks in the real estate sector are already high. For investors participating in the real estate game, they should be cautious and avoid becoming sacrificial lambs for policy stabilization. In the real estate field, the relatively reliable ones are:$CHINA RES LAND (01109.HK)$、$CHINA OVERSEAS (00688.HK)$This state-owned enterprise.

Q: What are the predictions for the future trend of mainland real estate stocks?

@金吾资讯：What signal does the simultaneous rise of mainland real estate stocks release?

In the context of increasing external instability and uncertainty factors and the repeated outbreak of domestic epidemics, "stable growth" has become the top priority of economic work this year. Whether from the perspective of stabilizing the economy or preventing risks, the stability of the real estate market is crucial.

Due to the recovery of the real estate market and the normalization of financing channels for high-quality real estate companies, it is expected that the real estate sector will continue to be reevaluated to a more reasonable level. Risk-averse investors can pay attention to state-owned developers and property management companies. However, in the case of reevaluation, investing in a basket of high-quality private enterprises may increase risk and returns.

Hot topics in the real estate sector:

Will the rise of mainland real estate and property management stocks continue?

Do you see a bullish trend in the continuous rebound of Hong Kong's mainland real estate and property management stocks?

Conclusion

After understanding the investment logic of real estate stocks, what are the thoughts and gains of the mooers? So here's the question:

1, Can the recently warming real estate stocks still be laid out?

2, Which real estate stock do you like the most, and what are the reasons for your recommendation?

3, What insights and supplements do you have for real estate and real estate stock investment?

Welcome mooers to discuss in the comments section (recommended not to exceed 300 words), and excellent comments will have the opportunity to receive a 188-point reward.188 points rewardCome and share your unique insights into real estate stock investment~

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