In China Property, Investors May Switch From Bonds to Stocks
Stocks of Chinese property developers are a better buy than their bonds even after a huge rally.
(Bloomberg) -- Stocks of Chinese property developers are a better buy than their bonds even after a huge rally, according to JPMorgan Chase & Co.
That’s because the gap between developers’ dividend yields and credit spreads are narrowing after years of expansion -- signaling stock prices have more room to advance in 2018.
Shares of BB rated Chinese property developers will rise, according to the analysts led by Ryan Li, Hong Kong-based executive director of the firm’s China property research division. Dividend yields on those companies were less than the credit premiums on their bonds for seven years to 2016. The past year has been an exception, however, with dividend yields having the edge, and the the two gauges currently stand at about the same level, the analysis showed.
The analysts expect the differential to revert to the norm, with the dividend yield again lower -- a move they say will be driven by compression of the dividend yield underpinned by a rally in shares. “At close to zero spread between equity and credit, equity holders can enjoy a free option on earnings and dividend growth,” the analysts added in a Nov. 18 note.
Read about JPMorgan’s 2018 outlook for China’s property market
Some long-term investors may be interested in shifting their investments from bonds to stocks if they are convinced earnings growth can sustain the increase in dividend payout, said Patrick Wong, a Bloomberg Intelligence property analyst in Hong Kong.
“Attractive valuations and the need to fund market share drives amid consolidation have lured some builders to issue new equity in 2017 -- we may see more next year,” said Wong.
Stronger fundamentals support the case for equities. “Growth looks solid in property next year, listed developers are gaining market share and margins are increasing,” said Sean Taylor, chief investment officer for Asia Pacific at Deutsche Asset Management in Hong Kong. "A lot of high-yield bonds are from lower quality companies with weaker balance sheets.”
Things are looking different in the offshore debt market, where issuer-friendly technicals have changed as domestic demand has waned on Beijing’s deleveraging efforts and tighter valuations versus onshore, wrote Li and his colleagues. Also, profit-taking ahead of the year-end as well as an expected heavy pipeline are not helping debt issuers.
Property stocks are having a mixed day, with China Vanke Co. rising 2.8 percent and Country Garden Holdings Co. up 2.5 percent, while China Evergrande Group fell 1.9 percent and Sino-Ocean Group Holding lost 1.6 percent.
To contact Bloomberg News staff for this story: Narae Kim in Hong Kong at nkim132@bloomberg.net, Lianting Tu in Hong Kong at ltu4@bloomberg.net, Moxy Ying in Hong Kong at yying13@bloomberg.net, Emma Dong in Shanghai at edong10@bloomberg.net.
To contact the editors responsible for this story: Christopher Anstey at canstey@bloomberg.net, Colin Simpson
©2017 Bloomberg L.P.
With assistance from Narae Kim, Lianting Tu, Moxy Ying, Emma Dong
