Credit Suisse picks stocks in China's beaten-down property sector that could soar by 30%

Published Thu, Jan 6 20226:57 PM EST

Evelyn Cheng @in/evelyn-cheng-53b23624 @chengevelyn

Credit Suisse analysts think some Chinese real estate stocks are a buy, despite the industry's slump. Highly indebted Chinese property developers, such as Evergrande , have struggled to stay afloat as Beijing has taken new measures for limiting the industry's reliance on debt. Worries about potential spillover to the rest of the economy sent Chinese real estate stocks and bonds plunging last year. For China investing in 2022, Credit Suisse's biggest increase to its model portfolio versus last year is a 3% boost in the weighting of real estate. "We closed our negative position on real estate, given significant underperformance and recent policy relaxation on developers," the analysts said in a Jan. 3 report. The skies are far from clear. The Credit Suisse analysts expect national property sales to decline by 6.6% this year and property investment to drop by 3%. But they expect the government's more relaxed position on financing for developers and homebuyers will help state-owned developers as well as a select few that are not state-owned. The analysts said their stock picks have faster earnings growth than industry peers and stronger financing capabilities. Here are the three names with the biggest projected upside: China Overseas Land & Investment Price target: 26.6 Hong Kong dollars, upside of 30.7% from Thursday's close of 20.35 Hong Kong dollars a share. State-owned China Overseas Land & Investment ranks among the top 10 largest real estate developers in China by sales. The company reported contracted property sales growth of 2.7% for January to November 2021, versus the same period a year ago, for a total of 329.73 billion yuan ($51.52 billion). The company develops and manages residential and commercial projects, primarily in China's largest cities, and lists three commercial properties in London on its website. China Overseas is a subsidiary of the giant state-owned enterprise China State Construction Engineering Corporation. China Resources Land Price target: 44 Hong Kong dollars, upside of 30.4% from Thursday's close of 33.75 Hong Kong dollars. State-owned China Resources Land is one of seven Hong Kong-listed subsidiaries of state-owned CR, according to its website. CR Land said in December that rental income from investment properties for the first 11 months of 2021 rose by about 45% from the same period a year ago to 16.57 billion yuan. Gross contracted sales for the year so far rose by about 10% to 270.61 billion yuan, according to the company's estimates in mid-December. Longfor Price target: 48.3 Hong Kong dollars, upside of 23.8% from Thursday's close of 39 Hong Kong dollars. Chongqing-based Longfor Group Holdings isn't state-owned. It develops apartments for sale and rent, and also operates the "Paradise Walk" brand of upscale shopping malls. The company reported 3.1% year-on-year contracted sales growth for the January to November 2021 period, to 250.4 billion yuan. "Some investors are concerned about the rental income prospects of both [CR Land] and Longfor after retail sales growth momentum has showed some signs of moderation," the Credit Suisse analysts said. But they expect the two companies' growth "will be well underpinned" by the companies' "sufficient" project pipeline and management's "well-proven execution." — CNBC's Michael Bloom contributed to this report.

China's real estate industry accounts for more than a quarter of national GDP, according to Moody's. Pictured here is a residential complex under construction on Dec. 15, 2021, in Guizhou province.

Costfoto | Future Publishing | Getty Images

Credit Suisse analysts think some Chinese real estate stocks are a buy, despite the industry's slump.

Highly indebted Chinese property developers, such as Evergrande, have struggled to stay afloat as Beijing has taken new measures for limiting the industry's reliance on debt. Worries about potential spillover to the rest of the economy sent Chinese real estate stocks and bonds plunging last year.