Oneweekgov’t/banks/property/cementtriptoShaanxi,Sichuan,Chongqing
WevisitedthethreekeyeconomiesofWesternChinainmid-Julyandremainedoptimisticofa2Hrecovery.Creditremainedtight,butwesawsomeunannouncedlooseninginlendingquota.Propertysalesstayedweakbutmajorinfrastructureprojectsarebeingaccelerated.Thestrictlendingquotahaskeptmortgagerateshighanddeterredbanksfromspeedingupmortgageapprovals.Withhomebuyerssidelined,propertysalesandstartscouldstayweakin2HevenwithASPcuts,althoughfurtherworseningisnotexpected.Webelieveloosermonetaryconditionsandincrementaldemandfrominfrastructurewillleadtoapricerecoveryby4Q.BuyConch,CRCandWCC.
Banks:nolooseninginlendingpolicy;wealthmanagementproductscraze
Withthelendingquotainplace,banksarefocusingonmoreprofitablesegmentsratherthanonthemortgagebusiness.Somebanksclaimedtheyarestillhandlingmortgageapplicationsfrom4Q13.WealsosawbankscompetingfiercelyonWMPforoff-balancesheetliquidity,pushingupyields(nowatc.6%).Banksarereducingexposuretowardstheresourcesindustriessuchassteel,coalandcement(inthatpeckingorder),whichshouldhelpsqueezeoutsmallerplayers.Banksremainsupportivetoinfrastructureprojectsacrosshighways,railways,lightrailandsubways,allofwhichhavestrongcashflows,whileshyingawayfromthosewithpoorcashflows,suchasshantytownreconstruction,unlessrepaymentofloanscanbetiedtotaxrevenues.
Property:nolooseninginHPR,thoughgovernmentsareturningablindeye
Unlikeinpreviouscycles,localgovernmentsaretakingamorehands-offapproachtohandlingthecurrentsituation.WelearntfromsomelocalgovernmentsthattheyhaveturnedablindeyetoHPR,thereforetherelaxationofHPRisunlikelytoboostsales.AccordingtoCentaline,pricecutshavebeendrawinginthestrongpent-updemand.Rightnow,thedevelopers’reluctancetocutpricesandthebuyers’wait-and-seeapproachhavecausedthecurrentdeadlockinthemarket.Pricecutswilllikelywidenin2H,particularlyfordeveloperswithpoorcashflows.However,mostdevelopersbelievetherewillbenofurtherslowdowninconstructionstartsin2H.
Infrastructure:acceleratedstartsinrailways;strong2Hand2015outlook
Rail-relatedtransportinfrastructureshouldseeadecentpick-upin2Handcometoaconstructionboomoverthenextfewyears.Forexample,on30June,theShaanxiNDRCapprovedphase1ofthecentralShaanxiintercityrailworthRMB50bn,withthefirsttwolinestobeginworkin2H14.Meanwhile,localinfrastructureprojectssuchassubwayandlightrailhaveremainedontracksince2H13andtherearemorenewstartstocomein2H14.
Cement:waitpatientlyforQ4pricehikes;Toppicks:Conch,CRCandWCC
Weseecementbeingthedirectbeneficiaryofincreasedinfrastructuredemand,allowingpricedisciplinetoresumebyend-August.OurfavoriteregionsareSouthChina(CRC)andpartsofWesternChina(WCC),suchasShaanxiandSichuan,whereimpactfromcommodityhousingislessandexposuretoinfrastructuredemandishigh.EnteringJuly,dailyoutputforcementproducersinWesternChinahasseenasharpMoMpick-upandthismomentumshouldcontinuetowardstheendoftheyear.WederiveourtargetpricesusingPE,Keyrisk:asharper-than-expectedslowdowninproperty.