[I-bank focus]China property three-stage re-rating underway

   Citi Research has just published a research report on China property. It believes the sector's current re-rating is sustainable over multi-years in 3 stages:
  First stage re-rating completed (2H 2016 to August 2017): In this stage, the sector's past distorted valuation (average 5-6x PE) on expectations of a "bubble-burst" was
"repaired" (back to 7x by August), after the physical market depicted its resilience while
mega-consolidation began.
  It is now on the second stage re-rating (August-2017 to mid-2019). Starting with upbeat 1H results, Citi sees the second stage of the re-rating being driven by a strong earnings upcycle in 2017-19 and ROE rebound. Visibility is further raised by strong contracted sales amid accelerating consolidation.
  Citi said current valuations (7.2x 2018 PE) should further expand, say to 9-10x PE, which would still be cheap on a global basis (average 16.1x PE) even as China offers the highest growth (PEG 0.5x vs Global 1.8x), decent ROE (2017: 13.3% versus Global 7.5%), attractive yield (2018 4.8% versus Global 2.5%) and manageable leverage (2017E net gearing 70% versus Global 68%).
  Third stage re-rating (is expected to start post 2019). In this stage, valuation multiples further expand, say to 10-12x PE or even higher, for a more "mature" market - (1) Government's long-term housing mechanism is largely in place; Policy uncertainty reduces; (2) An oligopoly market emerges post mega-consolidation, for a more stable competitive landscape; (3) Listed names transform to mature business models (homebuilders,
landlords) with cycle-resilience, stable ROE and sustainable yield.
  Citi expects a stable physical market in 2017-19, with controls still on ASPs (flat in 2017-18) and credit (property-related loans ~1/3 of total), and a pacing up of development of the rental market (three-pronged, along with private and social housing).