Webelieve tightening headwinds to peak out; expect mildlooseningin the next 6-9months    Uptick in land supply and lower land premium suggest lower land cost in 2018, boosting developers’ profitability    Sector is currently trading at 8.5x fwd P/E, 1s.d. above historical average; valuation undemanding    The strictest tightening is over    We believe policy headwind is more or less over. Residential market was suppressed following the introduction of tightening policies in early 2017. Growth rate of resid. GFA sold dropped for four consecutive months: down from 18.4% in Jun to -8.6% in Oct 2017 (vs 4.1% in Nov 2017), reaching trough. Although it could take a few months for momentum to turn positive, we believe sector is bottoming out. Bear in mind that the last tightening cycle in 2014 lasted for about 12 months. We do not expect further and stricter tightening policies to take policy in ST.    Rising land supply implies better profitability    As a result of loosening land bidding approval and increased land supply since 2H17, land supply in GFA term increased from 7.71mn sqm in May 17 to 13.19mn sqm in Nov 17, up 71%. In addition, land bidding premium has declined since 1H17 and this trend is expected to remain. This should stimulate developers to replenish landbank at relatively low land cost in 2018. Should we assume mild construction cost rise and low single digit ASP rise, then margins of projects launched in 2018 could go up by est. 5-10%. We favour developers with solid balance sheet hence stronger capability for landbank replenishment.    2017 sales targets beat expectation    Most developers met their contracted sales targets set at the beginning of 2017, with total contracted sales growth yoy at 51%, beating the market expectation. We expect at least 30-40% contract sales target to be satisfied in 2018e, driven by strong execution and improving macro backdrop.    Sector valuation andtop pick    Our Top Pick is Vanke (2202 HK) on strong balance sheet (net gearing c.31%) and aggressive land acquisition strategy; Yuzhou (1628 HK) on its high sales growth visibility (2017-20e CAGR: 38%). China property stocks outperformed HSCEI by 60% in 2017 and by c.20% YTD. It is currently trading at 8.5x fwd P/E, vs. historical average of 7.6x. We expect sector re-rating to continue in ST as more developers revised up their 2018e contracted sales targets. Catalyst: faster than expected policies loosening. Key Risks: Further credit tightening and unexpected ASP decline.

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