Improvement in Shenyang market with resilient sales and decent ASP growth    We recently visited seven residential projects in Shenyang by the majordevelopers that we cover (Vanke, CR Land, Sunac, Longfor, Sino-Ocean, CIFI).As one of the major cities in North-Eastern China that had high inventorybefore, Shenyang has shown good improvement this year with resilientproperty sales (9M17sales volume +9% yoy) and decent ASP growth (+10.4%YTD). Inventory has dropped to 15months (vs. 30months in 2014), but is stillhigher than other T2cities. Locals expect further ASP growth due to limitedland supply.    Resilient property sales despite policy headwinds    In addition to the HPR, Shenyang introduced the restricted re-sale policy (fiveyears in core districts for primary sales) on 7August. However, property saleshave remained resilient (9M17sales volume +9% yoy, Fig. 1) with stablevisitations, although the sale-through rates have declined to 55-60% (vs. >65%before). Local demand remained strong with >80% buyers local upgraders andnew citizens (low requirements for university graduates to get ShenyangHukou), and minimal speculators (difficult for non-local buyers to acquire acommercial mortgage). Sales managers are optimistic on 4Q property salesand several projects we visited are planning for new launches in the next twomonths.    ASP remains stable amid lower inventory, decent credit and higher land prices    Although the prevailing mortgage rate has increased to a 5-10% premium onthe base rate (vs. a 15% discount last year and at par in 1H17), credit remainsdecent, with the down-payment ratio staying at 30% and the mortgageapproval period only lengthening slightly to about one month. Also, propertyprices in Shenyang showed decent growth (+10.4% YTD, Fig. 2) due to: 1)lower inventory (15months in August vs. peak of 30months in 2014, Fig. 3);    and 2) the government’s control on sales registration at an ASP within 5%up/down of previous launches. Locals are expecting further ASP increases nextyear in view of higher land prices due to limited land supply (recent landauction reached >RMB6k/sqm, vs. city ASP of RMB7.6k/sqm).    Land price has rocketed due to limited land supply    The YTD residential land price in Shenyang has rallied 97% yoy due to asignificant decline in land supply (-58% yoy by GFA, Fig. 4). According to thesales managers, Shenyang has limited land that is readily available for sale(especially in the city center), and most new supply is located in suburbandistricts (accounting for >80% of total land sales), due to being over-sold inprevious years amid fast urbanization.    Sector performance to diverge; Buy quality names on share price dip    We expect national property sales volume to moderate further in 4Q17, due tostrict policy tightening and a high base. Unlike in 1H17, we expect moredivergence in developers’ sales growth, due to different strategies andexecution. We suggest investors accumulate developers with a strongexecution record, including Vanke, Country Garden, Longfor, KWG, CIFI andFuture Land. We value stocks using NAV for existing projects. Key risks arefurther credit/policy tightening.

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