Qiu Dongrong significantly increased his holdings in PDH in the first quarter

Starting from the "three red lines" in real estate, with the changes in the entire domestic real estate environment, the real estate index has undergone a significant adjustment for more than three years.

Many overly aggressive real estate companies have begun to reap what they have sown. There are countless cases of bankruptcy due to insolvency.

In the capital market, real estate has also become a sector that everyone avoids, as if buying into it would bring misfortune.

But at a time when the market is avoiding the real estate sector, Qiu Dongrong, the fund manager of Zhonggeng Small Cap Value Fund, started to buy in reverse.

I. Crazy Buying in the First Quarter

In the first quarter of this year, Zhonggeng Small Cap Value Fund significantly increased its holdings in Poly Developments, with a holding market value of 268 million yuan, becoming the fund's third largest heavy stock.

It is worth noting that this over 200 million yuan was mostly added in the first quarter.

Because at the end of 2023, Poly Developments was just an observation position in the fund, with a holding of just over 1.6 million shares, ranking 129th among all its holdings.

It must be said that Qiu Dongrong is indeed bold and has a lot of his own money in the fund.

Qiu Dongrong is famous for his contrarian skills, and his outstanding performance in the past has also placed him among the top fund managers, especially during the bear markets in recent years, highlighting his level of expertise.

Coincidentally, Poly Developments is also the seventh largest heavy stock in Jiang Cheng's Zhongtai Value Selection.

Why buy Poly Developments?

Qiu Dongrong gave his thoughts in the fund's first quarter report:

Supply-side contraction or rigid industries, value stocks with high growth potential or profit elasticity. Such as real estate,

1) Quantity to the bottom and price to the bottom. The clearance speed of real estate is extremely fast, with residential sales area dropping below 910 million square meters in the past year, a decrease of over 47% from its peak; residential new construction area dropping below 660 million square meters in the past year, a decrease of over 61% from its peak. New home sales have approached the bottom of natural demand, with a significant drop in house prices but not evolving into financial risks.

1. The policy shift is stimulating effective demand, and there is a shortage of high-quality supply in the future. The real estate industry has enormous economic value, and the remaining top-quality real estate companies are resilient, with the potential to realize market share logic.

2. The valuation level of high-quality real estate companies is extremely low, pricing includes considerations of significant price declines, and the investment return potential of high-quality real estate companies is significant.

Based on Poly Development's first-quarter stock price, it is estimated that Qiu Dongrong's buying price is around 9-10 yuan, possibly closer to 9 yuan, which is not far from the current stock price, and can be considered logically. According to Qiu Dongrong, the industry is close to the bottom, and with the policy shift, high-quality real estate companies will benefit and receive valuation restoration.

Qiu Dongrong is optimistic about the dual undervaluation of the industry and stocks, but can we be so sure about the current situation of the real estate industry? Is there a chance to usher in a Davis double-click or is there still hell beneath the surface?

II. Current Real Estate Situation

The logic of the industry is greater than that of individual stocks in the current real estate industry. Only when the industry risks are cleared, individual stocks will have better investment opportunities, otherwise even strong real estate companies will be in vain.

The most obvious thing now is the clear shift in policy attitude, especially when even the former real estate giant Vanke is facing life and death difficulties. In April, Vanke was downgraded by Moody's, with both stocks and bonds falling, seeming to be a turning point, with policies continuing to intervene.

First, Chengdu opened up the restriction on purchases, sounding the horn for a wide range of relaxations. Then on May 17, the State Council Information Office held a routine policy briefing, introducing the "practical work of ensuring the delivery of houses and related policies," with main policy content including four aspects: 1) relaxed mortgage policies; 2) acquisition of existing commercial housing; 3) revitalization of existing land reserves; 4) further promotion of ensuring delivery.

After the "517" new policy, various regions have promptly followed suit. The first-tier cities of Beijing, Shanghai, and Guangzhou also implemented new policies that month. Regions have generally lowered mortgage rates and down payments. More than 20 provinces nationwide have explicitly canceled the lower limit of mortgage rates and reduced the lower limit of down payment ratios. In May, the average interest rates for first-time and second-time home loans in 100 cities fell by 12BP and 26BP month-on-month to 3.45% and 3.90%, respectively, reaching the lowest levels since 2014. The lowest levels of interest rates for first-time and second-time home loans have dropped to 3.15%. Second-tier cities' mortgage rates have generally fallen to the policy bottom line set by the central bank.

On the other hand, regions have implemented different policy combinations. The policy content mainly involves relaxing restrictions on purchases, loans, prices, sales, household registration, provident fund loans, tax and fee reductions, providing housing subsidies, supporting trade-ins, and other aspects. For example, Guangzhou has combined incentives for trade-ins and housing acquisition policies, while Shanghai has relaxed land price restrictions.

Overall, the policies have had a positive impact on market sentiment.

According to preliminary data from Ke Rui, in May, catalyzed by policy expectations and the "517" real estate policy combination, the sales of the top 100 developers in May have improved compared to April. The total sales volume for all calibers in May 2024 increased by 4.3% month-on-month from 3,401 billion yuan in April to 3,548 billion yuan Sales total area in May 2024 was approximately 1,899 square meters, up 0.8% month-on-month.

Although in the first week of June, new homes decreased by 15% compared to the May average, second-hand homes increased by 16% year-on-year, with a slight 3% increase compared to May, maintaining the level seen in March.

The nature of second-hand home transactions tends to be rigid demand, reflecting a certain degree of market demand. Looking at quarterly data, the overall transaction of second-hand homes shows a sense of bottoming out.

If policies continue, it may accelerate the pace of market stabilization.

During the State Council meeting on June 7th, it was directly stated that it is necessary to fully understand the new changes in the supply and demand relationship in the real estate market, respond to the new expectations of the people for quality housing, focus on promoting the effectiveness of policies already introduced, continue to study and prepare new destocking and market stabilization policy measures. In addition, the China Banking and Insurance Regulatory Commission and the Ministry of Housing and Urban-Rural Development have spoken out, jointly issuing documents on the coordination mechanism for real estate financing, providing precise support for reasonable financing of real estate projects.

It can be said that from top to bottom, apart from the safety line, there are almost no restrictive policies on real estate. If the real estate market still does not stabilize, there is a high probability that further relaxation will be implemented.

Qiu Dongrong believes that new home sales volume has almost reached the natural demand bottom, meaning that supply and demand may be approaching a balance point, with natural demand support if it goes further down.

If we look at the adjustment range of overseas property markets in the past, it is already quite close.

Looking at the national new home sales volume in 2023, in terms of sales area, it has returned to the level of 2012. What was the level in 2012?

It is important to note that after the introduction of purchase restrictions in 2010, the industry fundamentals rapidly declined, real estate inventory accumulated rapidly, reaching a historical peak in 2015; from 2014 to 2015, policies were relaxed with the main goal of "destocking," focusing on relaxing purchase restrictions and loans and the monetization of shantytown renovation.

The current sales area of new homes is even lower than the level in 2014, which was the level that policies could tolerate at that time. In addition, in terms of inventory, as of April 2024, the area of unsold commercial housing has exceeded the peak in 2015, and the corresponding inventory turnover period for started but unsold properties has reached 44.4 months, also surpassing the peak in 2015, setting a new historical record.

In January 2015, China reached a historical peak in real estate inventory, and the government began to emphasize destocking. Subsequently, policies gradually took effect, and by August 2017, the narrow inventory of residential properties in 80 cities had decreased to 396 million square meters.

Now, the policy has once again emphasized destocking. If the active destocking phase is entered in the cycle, it means entering the rising phase of the cycle. Currently, in addition to stimulating market demand, the main method is to take over some inventory through acquisitions.

According to calculations by Ping An Securities, the central bank has set up a 300 billion yuan re-lending facility for affordable housing, which is expected to ultimately drive bank loans of 500 billion yuan. Based on the average selling price of 9,595 yuan per square meter in the first four months, without any discount, it is possible to acquire 52.11 million square meters of completed but unsold commercial housing, accounting for 4.7% of the national commercial housing sales area in 2023. Although it is far less intense than during the shantytown renovation period, if targeted only at core cities, the 500 billion acquisition fund may be relatively sufficient. If the 500 billion acquisition fund is used entirely to purchase projects below 90 square meters, it can digest at least nearly 60% of the existing small-sized unsold area in 35 cities, and at most, all of it, potentially leading to the stabilization of the real estate market in core cities.

However, the true bottoming and recovery of the market still rely on market forces. So when will the market bottom out?

Referring to the experience in Hong Kong, when rental yields approach mortgage rates, the real estate market will recover. At this point, the market will consider buying a house more favorable than renting, which is a strong indication of nearing the bottom.

If the rental yield even exceeds the holding cost, it will stimulate demand for property allocation.

According to calculations by Huachuang Securities, the rental yield for some older residential properties in first and second-tier cities is close to 2% or even exceeding 2%, indicating that the prices of these properties may have bottomed out or are forming a preliminary bottom, while the prices of relatively new and new properties may still face certain pressures Rental yields in some third- and fourth-tier cities have reached a reasonable range of 3%-3.5%, with some projects even approaching 4%.

Comparing rental yields with loan interest rates, there are signs of nearing the bottom, at least the period of the largest price decline may have passed.

However, reaching the bottom and reversing are another matter. Economic prosperity and residents' wealth are necessary for a true turnaround in real estate.

In China, the previous real estate cycle saw a significant uptrend due to the monetization of shantytown renovations and urban expansion in June 2015.

In the United States, the housing market also underwent a significant adjustment following the subprime mortgage crisis. In the first quarter of 2010, rental yields began to exceed the 30-year fixed mortgage rate, but at this stage, house prices had not yet stabilized, and the sales volume of commercial housing was still declining. It wasn't until 2012 when rental yields significantly surpassed mortgage rates, coupled with low new housing inventory, continued improvement in residents' employment, and income growth, that residents actively started investing in real estate.

III. If the industry hits bottom, Poly is a relatively easy choice

In terms of valuation, real estate companies are generally in historically low areas. If the industry hits bottom and reverses, there is hope for a "Davis double-click". However, although the market shows a trend of hitting bottom, there is currently a lack of stimulus for residents to actively invest in housing. In addition, China still faces factors such as high housing inventory and slowing urban population growth, which may make it difficult to change residents' home-buying behavior. The market is likely to continue its policy game until the fundamentals reverse. It is highly probable to first observe the situation of land acquisition and storage.

If considering investment, it is definitely safer to choose central state-owned enterprises, as they not only have abundant funds and low loan rates, but also low risks. Moreover, when private enterprises retreat, central state-owned enterprises become the main force in land acquisition, with their long-term advantages and market share expanding.

Secondly, companies with land reserves in core cities. The People's Bank of China's re-lending for affordable housing may play a key role in some core cities. And high-quality resources in core cities are ultimately scarce, requiring financial strength to develop high-end projects. However, with many real estate companies facing financial difficulties, there are not many with remaining strength. Perhaps this is also the reason why Qiu Dongrong believes there is a shortage of high-quality housing supply.

If the real estate industry has limited downside potential and it is difficult to grasp the timing of the industry's turnaround, then Poly may be a relatively simple choice Poly Group took the crown in real estate sales in 2023, with sales amounting to 422.2 billion yuan. The company's sales in the core 38 cities, known for their strong certainty, accounted for nearly 90%. Sales contributions in the Pearl River Delta and Yangtze River Delta exceeded 110 billion yuan and 140 billion yuan respectively, with Guangzhou and Foshan combined exceeding 80 billion yuan, and Shanghai exceeding 50 billion yuan.

In 2023, 99% of Poly's expansion amount was located in the core 38 cities, with residential properties accounting for 95%. The company's land reserves have a planned construction area of 77.9 million square meters, including 66.08 million square meters of existing projects and 11.82 million square meters of new projects; the core 38 cities account for nearly 70% of the area reserves.

At the same time, Poly's land acquisition is also leading the industry, perhaps due to taking on certain responsibilities, but in the long run, it may not necessarily be a bad thing. As we enter 2024, Poly has become more conservative. As a central enterprise backed by Poly Group, its strength is unquestionable.

Poly started repurchasing stocks on December 13, 2023, spending a total of 1 billion yuan, with an average transaction price of 9.53 yuan per share, which should be somewhat close to Qiu Dongrong's buying range.

The controlling shareholder Poly Group also increased its holdings by 250 million shares. In the past, each time Poly Group increased its holdings, it was usually around the bottom range of the real estate industry.

IV. Conclusion

Could the stock god Poly Group's purchase be one of the reasons why Qiu Dongrong bought Poly Development? It is hard to say. However, from the industry perspective, it is still relatively close to the bottom area. Whether it can reverse the trend remains to be seen, especially considering the economic outlook