Major Asian bank sees more than 30% upside for these 'quality' Chinese real estate stocks

Published Thu, Dec 23 20219:44 PM EST

Chinese real estate stocks will likely remain volatile in the short term, but one major Asian bank sees major upside for two "quality" companies and is advising investors to look for buying opportunities. "We recommend investors to watch for entry windows for quality names with a sound balance sheet and capacity for land acquisition to underpin presales growth," analysts at Singapore's DBS Group Research wrote in a note. One of DBS' top picks in the sector is Country Garden , with a price target of 12.46 Hong Kong dollars — representing more than 76% upside from where the stock closed on Thursday. It also likes China Overseas Land & Investment and has a 24.69 Hong Kong dollars price target on the stock, nearly 34% higher than its Thursday close. "Short-term price volatility on the sector will likely persist as we head into the upcoming repayment peak in 1Q22," the analysts. Many of China's real estate companies face debt repayment deadlines in the coming months as well as deferred wages for construction workers due before the Lunar New Year. Still, the DBS analysts said additional supportive policies for refinancing and mortgages could be catalysts for the stocks. Chinese real estate stocks languished this year as a credit crunch and fear of defaults drove investors away from the sector. As of its Thursday close, the Hang Seng Properties Index in Hong Kong has plunged almost 9% for the year. Chief among the property developers of concern is debt-laden China Evergrande Group , which defaulted earlier this month . The company has amassed $300 billion in liabilities, with $19 billion in offshore U.S. dollar-denominated bonds — the most of any Chinese developer. To be sure, Evergrande is not the only Chinese real estate firm in financial distress. Other developers like Kaisa and Sinic Holdings have also struggled to repay their debt . The uncertainty has weighed on sentiment for homebuyers. DBS analysts said buyers are staying on the sidelines, waiting for clarity on developers' liquidity risk profiles as well as the policy outlook. The analysts noted national residential sales data for November showed a "slightly better than expected" 17% year-on-year decline. "In Nov-21, weighted average presales growth of 27 developers we track remained weak at -28% [year over year]," they said. "Most developers will likely miss their presales targets, as they will need to record 52% weighted average presales growth in Dec 21 to meet targets." — CNBC's Evelyn Cheng contributed to this report.

People look at models of houses at the 2021 Dalian autumn real estate fair at Dalian World Expo Center on October 15, 2021 in Dalian, Liaoning Province of China.

Liu Debin | Visual China Group | Getty Images