UBS says Chinese homebuyers are getting pickier. Here are the bank's stock plays

Published Mon, Jan 17 20229:03 PM EST

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

As analysts reassess China's beaten-down property stocks, UBS has upgraded one name and raised price targets for others. The Chinese government tightened financing conditions for real estate developers in the last two years in an attempt to rein in the industry's high reliance on debt. Highly indebted developer China Evergrande teetered on the edge of default for months, rattling global investors with fears of widespread fallout. Those worries wiped out cumulative eight-year returns for a China real estate high-yield bond index, UBS analyst Wei Jin pointed out in a Jan. 5 report, noting it will take time to restore market confidence even with Evergrande's default and new policy signals. Since Evergrande's liquidity problems last year, homebuyers are purchasing properties developed mainly by state-owned enterprises, the report said. "We now prefer developers that are larger (suggesting lower earnings volatility) and have higher contract sales growth, stronger balance sheets, and more competitive advantages than their smaller peers," the report said. Here are some of UBS's stock picks in real estate for the year ahead: China Merchants Shekou UBS's most-preferred stock in the sector is state-owned China Merchants Shekou . The Shenzhen-traded shares have an upside of 16% from Monday's close of 13.10 yuan to UBS' new price target of 15.2 yuan, up from 12.9 yuan previously. UBS has a "buy" rating on the stock. The real estate conglomerate is part of the giant state-owned enterprise China Merchants Group. It develops and operates industrial parks as well as apartment complexes. China Merchants Shekou is also building up a cruise business. Poly Developments State-owned Poly Developments ranks second on the UBS list of 10 Chinese real estate stocks. UBS rates Shanghai-listed Poly Developments a "buy," and earlier this month raised its price target to 18.8 yuan from 17.1 yuan. That implies 22.3% upside from Monday's close of 15.37 yuan. The company reported a 17.2% increase in operating revenue to 285 billion yuan ($44.53 billion) last year, according to preliminary figures released Jan. 10. Profits declined by about 4.8%. Beijing Capital Development The only upgrade among UBS' list of 10 Chinese real estate stocks is for state-owned Beijing Capital Development, to "neutral," from "sell." UBS also raised its price target to 5.7 yuan from 3.8 yuan. That's in-line with Beijing Capital Development's close of 5.91 yuan on Jan. 5. The stock closed at 6.12 yuan on Monday. "BCDC has relatively lower financing cost among peers and stronger refinancing capability," the report said, noting the developer has no debt maturing in the first half of this year. "Under the current market structure, we think BCDC may benefit from policy support on financing." "In addition, BCDC's sales momentum has outperformed peers' and it continues to acquire land (similar to other major SOEs, while many non-SOEs have stopped acquiring land)," the report said. — CNBC's Michael Bloom contributed to this report.

The Evergrande Mingdu Residential area in Huai 'an city, Jiangsu Province, China, on December 6, 2021.

Costfoto | Future Publishing | Getty Images

As analysts reassess China's beaten-down property stocks, UBS has upgraded one name and raised price targets for others.