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ChinaPolicytighteningheatingup;beselectiveonbothequityandcreditOver20citiesrecentlyannouncedpolicytightening.Althoughthedegreeoftighteningismuchweakerthaninpreviousrounds,themarketseemstohaveassumedthatwhathappenedin2010/11willrecurinthenextcycle.Amidsuchconcerns,wethinkstockswillcontinuetounderperformoverthenexttwotothreemonths,regardlessofhowfundamentalsperform,althoughvolumeinlow-tiercitiesmaybestable,whilenationalASPwilllikelystaystrong.Wecontinuetobepositiveonselectequitynameswithstrongearningsgrowthoverthenext6-12months,andbelievenowisabuy-on-dipopportunityformedium-terminvestors.Wearemoreselectiveinthecreditspaceandpreferonlystrongnameswithlowdowngraderisksandshorter-dateHYs.EquityNotalltighteningpoliciesarethesame:ThemostcommontighteningmeasuresareLTVadjustments,homepurchaserestrictions(HPR),andASPcontrolviapresalepermits.TheonlypolicythathasbeeneffectiveincontrollingsalesvolumeisHPR.However,fewercitieshaveenactedHPRthanin2010/11,andthescopeisalsomorelimited(e.g.,someareapplicableonlytonon-locals,orincertaindistricts).Hence,wearguethattheimpactfromHPRwillbemuchweakerthanin2010/11.Weexpecta20%Y/Yfallinvolume(40-50%sequentialdrop)intop-tiercities,bringingthefull-yearvolumetrendto+15-20%Y/Y.Buyqualitynamesondips:Whilesectorvaluationislikelytoremainunderpressure,wethinkitwillbetooriskytogoone-sidedshort.Sectorvaluationtroughedata~5.5xforwardP/EinSep-11andApr-14vs.7.1xnow.Backthen,ASPwasonthedownsidewithamarginsqueeze,creditwastightwithdefaultrisks,andsalesvolumewasdownsharplyY/Y.Allofthesearenotlikelytohappeninthenextonetotwoyears,inourview.WecontinuetobepositiveonselectChinapropertystockswithstrongearningsgrowthoverthenext6-12months.Givenpotentialearningsdifferentialsinthenextthreemonths,wesuggestthefollowingpairtradeideas:amonglarge-caps,LongCRL–ShortCOLI;andamongmid-caps,LongLongfor/CG/Shimao–ShortR&F/Agile.CreditIGproperty:Thesector’sspreadoverChinaIGhasreachedarecordlowofaroundzero,fueledbytechnicalsandastronger-than-expectedphysicalmarketYTD.For1H16results,therewassomestabilizationorslightimprovementincreditmetricsduetotherecognitionofpreviousyears’sales,lowerfinancingcostandgenerallycautiouslandacquisition.However,forcross-overnames(Yuexiu,Sino-Ocean,ChinaJinmao),morematerialimprovementsarerequiredtopreventadowngrade,inourview.Weareverylightinsectormendations,withOWsonlyonstrongnames(CRLand‘19s,COLI‘23s)withpositivecatalysts,andwestaycautiousoncross-overnamesandareUWonYuexiu‘23s,ChinaJinmao‘21s,andSino-Ocean‘19sand‘20s.HYproperty:Wehaverecentlyseensomepositiveinitiativesintermsoffinancialmanagementfromcertainhighlyleverageddevelopers,suchasEvergrandeandSunac.WeagreewithMoody’sexpectationthatstablemarginsandinterestcoveragelevelsforFY16areliketoimprove.WecontinuetothinkKaisaSeriesA‘19sandSeriesB‘20sprovidereasonableyieldpickupoverhigh-betaChinaHYpropertybondssuchasEvergrande‘20sandnewlyissuedChinaSouthCity‘21s,whicharetradingata6%handle.Westilllikeshorter-datedCentralChina‘18sandbondslikelytoberedeemedearly,suchasFutureLand‘19s,Logan‘19sandYuzhou‘19s,aswellasGreentownperps,whichshouldbenefitfromintegrationwithcontrollingshareholderCCCG,anSOE.

12Oct201612:48AMDisseminated12Oct201612:49AMHKTAsiaPacificCorporateResearch12October2016RyanLi,CFAACBloombergJPMARLIKarlJevonJ.P.ManSecurities(AsiaPacific)DanielFanACLuChinadevelopersindex’srelativeperformanceacrosspolicycyclesJan-06Oct-08Jun-11Feb-14Oct-Source:Bloomberg,JP.Man.Note:Reddenotesperiodofgeneralpolicytightening;greendenotesreferstooutperformancetocountryindex.KeyChinaProperty:Downsidewellsupported;buyqualitynamesondips(4OctoberChinaEvergrandeGroup:Restructuringcontinues;bewareofdeal-breakrisk(3OctoberSeepage58forystcertificationandimportantdisclosures,includingnon-USystJ.P.Mandoesandseekstodobusinesswithcompaniescoveredinitsresearchreports.Asaresult,investorsshouldbeawarethatthefirmmayhavea makingtheirinvestmentdecision. isbeingprovidedfortheexclusiveuse PAGEPAGE6PAGEPAGE5TableofEquity Policytighteningtocapsectorvaluationinnear Notallpolicytighteningmeasuresarethe Pairtradeoverone-sided Keycreditviews:HY IG Chinaresidentialpropertymarket e Shanghaiand Beijingand Chongqingand Monthlysummaryofpublications(sinceSep- Industry Summaryofequitycoverage:Chinaproperty EquityPolicytighteningtocapsectorvaluationinnearThedéjàvuof“policyOver20citieshaveannouncedpolicytighteninerthepasttwoweeks.Althoughthedegreeoftighteningismuchweakerthaninpreviousrounds,suchactsremindedthemarketofwhathappenedin2010and2013,anditwasassumedthatwhathappenedthenwillrecurinthenextcycle.Asaresult,thesectorhasunderperformedcountryindicesforaboutaweek.Thebelowfigureillustratesthatthesectordidunderperformcountryindicesduringpastperiodswithpolicytightening(shadedinred)untilpolicystanceschangedtoalooseningstance(shadedingreen).Hence,itisreasonabletoassumethatthesectorwillcontinueunderperformingwithtoday’spolicystance.Thisiswhywethinkpolicytighteningconcernswillresultinsectorunderperformanceoverthenexttwotothreemonths,regardlessofhowfundamentalsperform.WhilewethinksalesandASPwillremainstrong,theywillnotbeabletocauseasectorrerate.Credittightening:9RRRhikesin Crediteasing:27ratecuts+Rmb4trillion Credittightening:4rateCrediteasing:InterestJan-Nov07(from9.0%Credittightening:9RRRhikesin Crediteasing:27ratecuts+Rmb4trillion Credittightening:4rateCrediteasing:InterestJan-Nov07(from9.0%to hikes+8RRRhikesinrateandRRRcutspoliciesinOct2008-Dec Nov2011-JulCrediteasing:6Interestrateand5RRRcutsinNov2014-Feb201611-pointnoticeApr17,2010:State10-pointnoticetier-2citiesloosenedHPR.HPRonlyinT1cities&May1,May19,"SixOct2010:15citiesFeb20,2013:New"Five-pointmeasure";WenreiteratedstrictimplementationofpropertymeasuresinStateCouncilMarLoweringofdownpaymentfor2nd2016 citieshave tighgslowdown Councilissued"8-pointmeasures"tocurbpricegrowthJan26,2011:Sep2015:ofdownpaymentratiofor1sthomesofdownpaymentrequirementfor1sthomes&2ndChinaDevelopersPriceIndex0Jan-06Jul-06Dec-06May-07Oct-07Mar-08Aug-08Feb-09Jul-09Dec-09May-10Oct-10Mar-11Sep-11Feb-12Jul-12Dec-12May-13Oct-13Apr-14Sep-14Feb-15Jul-15Dec-15May-16Oct-Source:Bloomberg,Guandian,Xinhua,JP.Man.Note:Reddenotesperiodofgeneralpolicytightening;greendenotesperiodofgeneralpolicyNotallpolicytighteningmeasuresaretheSince2006,whentheernmentstartedputtingavisiblehandonthepropertymarket,themeasuresusedhavebeenquitesimilar:(1)LTVadjustmentformortgages;(2)homepurchaserestriction(HPR);and(3)ASPcontrolviapresellpermits.TheonlypolicythatwaseffectiveincontrollingsalesvolumehasbeenHPR.Thiscanbeseenviathesalesvolumetrenddifferentialin2010and2011,whenHPRwasenactedintier-1citiesin2010andtier-2citiesin2011,causingunderperformanceinvolumeinthemfortheperiod.Table1:ResidentialsalesvolumeY/Y-tiercities TopsecondtierLowsecondtierSecond-tiercitiesThird-tiercitiesHomePurchaseRestriction–fewercities,lessHPRwasmostlyremovedstartingApril2014,andabout16citieshavere-enactedHPRsinceJune2016.However,therearefewerapplicablefamiliesinthenewHPRthaninthepreviousround.Forexample,Xiamen’sandZhengzhou’sHPRsareapplicableonlytoordinaryhouses,butnotlarge-sizedunits.Hangzhou’sandWuxi’sHPRsareapplicableonlytonon-locals,butnotthosewithlocalhukou.Tianjin’s,Wuhan’sandHefei’sHPRsareapplicableonlytothecorearea,butnotthesuburb.Hence,wearguethattheimpactoftheseHPRswillbemuchweakerthanin2010/11.Foramoredetailedcomparison,pleaserefertoTable3.LTVtightening–NotnecessarilyeffectiveduetoabundantwealthavailableWhileLTVsintop-tiercitieshavemostlybeentightened,downpaymentrequirementsatthenationallevelremainloose,at20-25%for homesand30%forsecondhomes.Comparedtothe2010/11roundoftightening,wheredownpaymentrequirementswere30%for homesand50-60%forsecondhomes,LTVsatthenationallevelarestillloose.Historically,evenifwelookattheimpactofLTVtighteningonsalesvolumeatboththenationallevelandinBeijing/Shanghai,whileLTVtighteningwouldusuallycauseadeclineinsalesvolume,thisisnotalwaysthecase,asseenintheLTVtighteningof2007and2011,wheresalesvolumewasnotaffecteddespitealoweredLTV,andwebelievethiscanbeattributedtothefactthattherewasabundantwealthavailable,andaslightchangeinLTVcouldnotdrasticallyhurtvolume,unlessitwerecoupledwithotherpowerfultoolslikeHPR.Pairtradeoverone-sidedHavingsaidtheabove,basedonthetradingpatternyear-to-date,themacrouncertaintiesofChinaandDM/EMallocationhavemadeitmoredifficultforinvestorstoformapositiveviewonasectorwithbothpositiveandnegativearguments.Asaresult,webelievethemarketwillremainindifferenttothedegreeoftighteningandthatsectorvaluationcouldremainunderpressureoverthenexttwotothreeweeks,whennewsflowislikelytostaynegative,withmorepotentialtightening.However,wethinkitwillbetooriskytogoone-sidedshort.Sectorvaluationtroughedata~5.5xforwardP/EinSep-11andApr-14vs.7.1xnow.Backthen,ASPswereonthedownsidewithamarginsqueeze,creditwastightwithdefaultrisks,andsalesvolumewasdownsharplyY/Y.Allofthesearenotlikelytohappeninthenextonetotwoyears,inourview.PairtradeGivenpotentialearningsdifferentialsinthenextthreemonths,wesuggestthefollowingpairtradeideas:amonglarge-caps,LongCRL–ShortCOLI;andamongmidcaps,LongLongfor/CG/Shimao–ShortR&F/Agile.BuyqualitynamesonWecontinuetobepositiveonselectChinapropertystockswithstrongearningsgrowthoverthenext6-12months.Givenuncertaintyaboutpolicyimpacts,thesectorcouldremainunderpressurenear-term,butweseesomebuy-on-dipopportunitiesformedium-terminvestors,giventhebelow:Systematicriskcontinuestocomedown:Lowlandsupplymeanscontinuousimprovementinnationwideinventory;moreover,theopeningoftheonshoredebtmarkethasstructurallychangeddevelopers’fundingsources.SystematicriskforChinapropertyasawholewillcontinuetocomedown,inourview.ASPs,andhencedevelopers’margins,shouldremainintact.Withlesslandsupplyandstablesales,ASPsareonanuptrend,andthereserveoflandsaleshasalwaysbeenapositivestockpricedriverinthepastfewyears.Earningsmomentumremainsstronerthenextthreeyears:ApositiveASPoutlook,togetherwithstrongsalesin9M16,shouldtranslateintostrongerearningsfor2017-18andisapositivefordevelopersthatdidnotreinvestinexpensivelandbank.Table2:SummaryofrecentpolicytighteningCredittightening(commercialTierHPR1sthome(ordinaryhousing):30%→1sthome(non-ordinaryhousing):30%→2ndhome(ordinaryhousing):50%(previouslybasedonmortgagebalance;nowbasedonBOTHownershipandmortgagebalance)2ndhome(non-ordinaryhousing):50%→70%(previouslybasedmortgagebalance;nowbasedonBOTHownershipandmortgageTierLocalsingle:max.2homes→1Non-local:taxproofraisedfrom3yearsto51sthome(w/mortgage):40%→2ndhome(w/omortgage):40%→TopTierNon-local:Nil→max.1*sixurbandistrictsandWuqingDistrict1sthome(non-local):raisedto*sixurbandistrictsandWuqingDistrictTopTierNon-local:Nil→max.1*coreHangzhouarea2ndhome(ordinaryhousing;w/mortgage):30%→*coreHangzhouareaTopTierLocal:Nil→max.2homes(single:1Non-local:Nil→max.1homew/1-yeartax2ndhome(w/omortgage):35%→2ndhome(w/mortgage):50%→TopTierLegals:max.additional1*applicableto112ndhome:30%→*applicableto11TopTierLocal:Nil→max.2Non-local:Nil→max.1homew/2-yeartax*applicabletounits<1802ndhome:raisedto70%(w/TopTierNon-local:Nil→max.2*Core10districts1sthome:25%→2ndhome(local):40%→2ndhome(non-local):40%→*Core10districtsTopTierLocalfamilies:Nil→max.2Non-localfamilies:Nil→max.1*applicableonlytounitssized<180sqminfiveurbandistrictsandfournewdistricts1sthome:20%→2ndhome(w/mortgage):30%→*applicableonlytofiveurbandistrictsandfournewLowTierLocalfamilies:Nil→max.3Non-localfamilies:Nil→max.12ndhome(w/omortgage):30%→2ndhome(w/mortgage):50%→LowTierLocalfamilies:Nil→max.2Non-localfamilies:Nil→max.11sthome:20%→2ndhome(w/omortgage):30%→2ndhome(w/mortgage):30%→LowTierLocalfamilies:Nil→max.3Non-localfamilies:Nil→max.additional11sthome:20%→2ndhome:30%→LowTierNon-local:max.1home(primary2ndhome:30%→LowTierLocalfamilies:Nil→max.2homesNon-localfamilies:Nil→max.1home(w/1-yeartaxproof)*applicabletoordinaryhousinginfivecore1sthome(local):25%→1sthome(Non-local):25%→2ndhome(localw/mortgage):30%→*applicabletoordinaryhousinginfivecoreLowTierLocalfamilies:Nil→max.1home(primaryNon-localfamilies:Nil→max.1home(bothprimaryandsecondary)1sthome:20%→TierLocalfamilies:Nil→max.3homesNon-localfamilies:Nil→max.1home(w/1-yeartaxproof)*applicabletoordinaryhousingTierLocalfamilies:Nil→max.2homesNon-localfamilies:Nil→max.1home(w/1-yeartaxproof)*applicabletoprimaryunitsineight1sthome(w/andw/omortgage):20%→2ndhome(w/mortgage):30%→TierLocalfamilies:Nil→max.2homesNon-localfamilies:Nil→max.1home(w/1-yeartaxproof)*applicabletoprimaryTierNon-local:Nil→max.17788Table3:HPRcomparison(2016vs.OrdinaryNon-ordinaryNoforunits>180FamilyHukouNon-hukou1homemax(w/2-yeartaxUrbanUrbanOrdinaryNon-ordinaryFamilyHukouNoNon-hukou1homemax(w/1-yeartaxOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartax1homemax(w/1-yeartaxSixurbandistricts&WuqingDistrictOrdinaryNon-ordinaryFamilyHukouNoNon-hukou1homemax(w/1-yeartaxCoreCoreOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartaxCore10OrdinaryNon-ordinaryFamilyHukouNoNon-hukou1homemax(w/1-yeartaxMax.2UrbanOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartaxUrbanUrbanOrdinaryNon-ordinaryFamilyHukou2homesmax(w/1-yeartaxNon-hukou1homemax(w/1-yeartaxUrbanUrbanOrdinaryNon-ordinaryFamilyHukouNoNon-hukou1homemax(w/1-yeartaxUrbanUrbanOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartaxUrbanUrbanOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartaxapplicableOrdinaryNon-ordinaryFamilyHukou3homesNon-hukouyeartax1homemax(w/1-yeartaxHPRcomparison(2016vs.2010/11)–OrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartax1homemax(w/5-yeartaxOrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartaxproof)OrdinaryNon-ordinaryFamilyHukouNon-hukou1homemax(w/1-yeartax1homemax(w/1-yeartax8OrdinaryNon-ordinaryFamilyHukou2homesmaxNon-hukou1homemax(w/1-yeartax1homemax(w/1-yeartaxproof)UrbanUrbanOrdinaryNon-ordinaryFamilyHukou1homemax(primaryNon-hukou1homemax(w/1-yeartax1homemax(bothprimary& ernmentwebsites,J.P.MTable4:SummaryofratingsandpriceLastP/EPotential/3383China0817ChinaOverseasLand0688NChinaResources110912ChinaVanke-H2202923Country2007633332777N12 6139 4 JoyKWG1813Longfor096008136ShuiOn02723Sino-3377 ChinaVanke-PolyRealEstate-11Gemdale-78 Source:Bloomberg.JP.Manestimates.Note:AllquotedinHKDexceptA-shares,whicharequotedinTable5:Chinadevelopers–ValuationDiv.NetAvg.11-Oct-Marketvalue (US$(US$ CR ChinaVanke- Country Shimao Longfor ShuiOn Joy KWG Guangzhou China Future Poly ChinaSouth BeijingCapital ChinaVanke- PolyRealEstate- GemdaleCorp- ChinaMerchantShekou- FinancialStreet- RisesunRealEstate- BeijingCapitalDev- ShanghaiShimao- Jinmao Yuexiu Spring HuiXian NewCentury HK-listedsectoraverage(marketcapA-sharesectoraverage(marketcapREITsectoraverage(marketcapFigure2:Chinaproperty–Stockpricevs.HSCEIIndex(2016ChinaChinadevelopersindexwas-4.6%YTD,vs+1.5%ofHSCEIChinadevelopersindex

Figure3:ChinaProperty–P/Bchart(ex-P/B+2+2+1Average=-1Dec-15Jan-16Feb-16Mar-16Apr-16May-16Jun-16Jul-16Aug-16Sep-16Oct-16Source:J.P.Man,Bloomberg.Figure4:ChinaProperty:NAVdiscountchart(exVankeandNAVdiscount+2+2StdLongTermAvg:-+1Std-1Std-2Std---

Jan03Jun04Oct05Mar07Jul08Dec09Apr11Aug12Jan14May15OctSource:Bloomberg,Companydata,J.P.ManFigure5:SectorP/Etimeseries(exEvergrandeandP/E+2Std---

+1Std

Average--Jan08Feb09Mar10Apr11/