Primary property area sold declined across most cities in July According to thelatest data from CREIS, primary property area sold in July declined across most of the30 key cities surveyed in China. First-tier cities saw declines of 17% MoM and 46%YoY; second-tier cities fell 4% MoM and 23% YoY, while third-tier cities suffered dropsof 18% MoM and 16% YoY.    In YoY terms, primary area sold in Fuzhou, Beijing and Guangzhou dropped 60%, 55%and 53% respectively in July. In MoM terms, Xi’an, Guangzhou and Shantou recordeddeclines of 39%, 32% and 31% respectively.    Declining residential property transaction volume in 2H17; land prices likely torise further Given ongoing monetary tightening and a relatively high base in 1H17, thedeclining transaction figures in July were in line with our previous estimates. Accordingto China NBS, total residential GFA sold increased 13.5% YoY to 648m sqm in 1H17.    We expect this figure to fall 10% HoH to 583m sqm in 2H17, with the full-year figure todrop 10% YoY to 1.2bn sqm. According to NBS data, the average land price picked up27% YoY to Rmb4,231/sqm in 1H17. In our view, the long-term trends of increasingmarket concentration and rising land prices driven by shrinking supply in China’sproperty sector remain unchanged.    Stick to industry leaders and undervalued first-tier city developers Givenincreasingly fierce competition and tightening regulations, we expect most small privatedevelopers to be pushed out of the market over the next five to ten years. We are bullishon underperforming industry leaders such as COLI (688 HK, Buy) and CR Land (1109HK, Buy), as well as undervalued first-tier city players such as Gemdale P&I (535 HK,Buy) and Yuexiu Property (123 HK, Buy).    Key risks: 1) Third- and fourth-tier cities were the main growth drivers for China’sproperty market during 1H17. Given tightening monetary supply, a relatively high salesbase in 2016 and 1H17, and the lack of consistent owner-occupier housing demand, theChinese property market is likely to move into a new down-cycle in 2018.    2) The Chinese central government is encouraging a higher proportion of rental housingsupply in key cities with net population inflows, which might slow developers’ assetturnover and increase their capital allocation to the rental housing business. Given thatrental housing generally has a much longer payback cycle compared with the residentialproperty sales business, the newly issued policies for rental housing might hurtdevelopers’ profit margins and ROE over the next 3-5 years, in our view.

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