Primary residential property sales area continued to drop in Oct NBS data for Octreleased today show total property investment rose 7.8% YoY to Rmb9trn, whileresidential property investment rose 10% YoY to Rmb6.2trn. Total new starts GFA rose5.6% YoY to 1.45bn sqm, and residential new starts rose 10% YoY to 1.0bn sqm. Totalland area purchased increased by 13% YoY to 190m sqm, and total land premium rose43% YoY to Rmb970bn; YTD average land price is up 27% YoY.    According to our calculations, primary residential GFA sold dropped 9% YoY and 18%MoM to 121m sqm during Oct, while property sales revenue dropped 3% YoY toRmb909bn. In 10M17, total GFA sold rose 8% YoY to 1.3bn sqm, with primaryresidential GFA sold up 5.6% YoY to 1.1bn sqm. Property sales revenue rose 12.6%YoY to Rmb10trn, with primary residential property sales revenue up 9.6% YoY toRmb8.6trn.    Oct sales in line with our forecast for a new down-cycle Sept primary residentialGFA sold dropped 6% YoY but rose 39% MoM to 147m sqm, according to NBS data.    The continued decline in residential GFA sold in Oct is in line with our forecast for a newdown-cycle.    Restrictive policies to continue; declining contract sales ahead Due to ongoingrestrictive policies, rapidly-rising land prices and a cyclically high contract sales basefigure in 2017 YTD, we expect most China developers to post declining contract sales in2018. Given tightening policies and the likely deceleration in contract sales ahead, wesee limited catalysts for the sector.    We prefer developers likely to exceed sales and earnings consensus Given a lackof sector-wide share price catalysts, we prefer developers that are likely to exceedconsensus expectations for sales and earnings in 2018. We also like land-owners in theGuangdong-Hong Kong-Macau Bay Area.    Our top picks are Gemdale P&I (535 HK, Buy) and Yuexiu Property (123 HK, Buy)Management from both companies believe their 2018 earnings growth outlooks havebeen underestimated by sell-side analysts. According to management at Gemdale P&I,its earnings may double in 2018, which would exceed current market consensus by40%. According to Yuexiu Property’s management, its earnings may grow at least 30-40% YoY in 2018, which would exceed current consensus by 20%. We expect thesetwo regional state-owned developers to double their contract sales revenue in the nextfour years, given their premium land banks in first-tier cities and support from localgovernments. With stock option-based incentive schemes, management from bothcompanies are well incentivized to deliver solid results, in our view.

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