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September 20, 2010
China: Portfolio Strategy
Social housing – A new growth focus
Social housing progress picking up noticeably Social housing is clearly a key new focal point in the Chinese govt’s
social welfare and investment agenda. Slow build progress and low
completion rates in the past were due to insufficient pressure from the
top, and lack of local govt economic incentive. We expect a noticeable
pick-up in pace as the central govt escalates political pressure and
introduces a stream of supportive policies to jump start investment.
We should see more progress in economic housing for sale (rather
than low-cost rentals) and in tier one/two cities. MOHURD announced
on Sept 19 that ‘10E’s 5.8m targeted units will all begin construction by
end-Sept, and 60%+ of targeted units will finish construction by yr-end.
Likely to help cushion investment demand risksThe market is concerned that commodity property tightening may
reduce GFA/investment and hurt the upstream suppliers. Our analysis
shows: (a) residential housing is only half of property GFA and other
segments are not exposed to the same policies; (b) social housing could
offset a good portion of potential commodity property slowdown. For
example, if commodity housing growth is 10pp slower in 2010E, GFA
impact could be offset by 20pp higher social housing completion rate.
Positive for upstream; low impact on property Building materials, steel, construction services and machinery are sectors
with social housing exposure (we are overweight machinery and building
materials). We do not expect social housing to seriously affect commodity
property developers, due to minimal overlap in product/target audience.
Buy-rated stocks with social housing exposure include Anhui Conch (H)
and Angang (H). Our new China policy momentum basket GSCNPLCY
also includes social housing beneficiaries.
Social housing targets, if met, may equal 30%-50% of commodity housing GFA
Source: MOHURD, Goldman Sachs Research estimates.
This is a redacted version of our original
“Social housing – A new growth focus”
report published September 20, 2010. For a
copy of the complete report please contact
your Goldman Sachs sales representative.
Helen Zhu
+852-2978-0048 [email protected] Goldman Sachs (Asia) L.L.C.
Timothy Moe, CFA
+852-2978-1328 [email protected] Goldman Sachs (Asia) L.L.C.
Christopher Eoyang
+81(3)6437-9888 [email protected] Goldman Sachs Japan Co., Ltd.
Ben Bei
+852-2978-1220 [email protected] Goldman Sachs (Asia) L.L.C.
The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. This report is intended for distribution to GS institutional clients only.
The Goldman Sachs Group, Inc. Goldman Sachs Global Economics, Commodities and Strategy Research
Units (mn)
Avg Floor
Space
(sqm/unit)
Floor
Space
(sqm,mn
Low Rental Housing 1.8 50 90 Economic Housing 1.2 60 72 Shantytown Renovation 2.8 70 196 Total 5.8 358 Low Rental Housing 1.5 50 74 Economic Housing 1.0 60 60 Shantytown Renovation 2.3 70 162 Total 4.8 296
2010
Social housing category
2011&12 (yearly)
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 2
Table of contents
Social housing has had a slow start historically 2
Social housing is divided into three major models 2
Poor completion progress historically due to lack of emphasis and motivation 3
Costs are significant without full funding; margins are thin 6
More emphasis will lead to policy support and concrete progress 6
Central government focus has dramatically picked up, as a way to address potential social problems and
to support growth 6
Increased focus has already been met with results 7
We believe more policies will be introduced to encourage faster social housing build 8
More immediate progress expected in first tier cities and in economic housing/capped price housing 8
We expect improving social housing build to partly offset risks of commodity housing slowdown 9
Our base case shows still teens yoy growth in GFA completion 9
Concerns over commodity housing drag on GFA growth may be overdone 10
Positive for cement, steel, construction services and machinery; low impact on property 12
Upstream industries are key beneficiaries 12
We believe cannibalization impact on commodity housing property developers will be very limited 15
Social housing is represented in our new China Policy Momentum basket 16
Appendix: Additional data 17
Social housing has had a slow start historically
Social housing is divided into three major models
China’s need for affordable housing has become increasingly evident in the past few
quarters, as commodity residential property prices reached new highs. By late 2009,
commodity property prices had become a focal point of social discontent and symbol of
the widening wealth gap. The concept of social housing has been around for years, but the
focus on widespread investment has only gained prominence in the recent past.
The exhibit below illustrates different types of social housing available in China. The
blue highlighted types are the officially defined social housing products. Of these, official
build targets do not yet explicitly include public rental housing, a new product type starting
off a low base. Capped price housing (in gray) is not classified as social housing but is a
similar type of product to economic housing.
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 3
Exhibit 1: Social housing differs by ownership and target segment
Note: Detailed policies may differ at the local government level.
Source: GS Global ECS Research.
Different products cater to different needs groups. All involve land provided by the
government and property for use at below market prices. Differences lie in the ownership
structure (own or rent) and degree of price discount (slightly or dramatically below market).
For example, economic housing (ASPs could be 50% or more below market) may cater to
an even lower affordability group than capped price housing (ASPs 20%-30% below
market). Similarly, low rental housing may be only a few hundred Rmb in rent while public
rental housing may be closer to the high triple digits.
Poor completion progress historically due to lack of emphasis and
motivation
Unfortunately, available data on the social housing market is extremely scarce. NBS
reports yearly economic housing GFA completed but lacks data on low-cost rental housing.
Clean, apples-to-apples data on the entire social housing market in terms of past GFA
completion or total investment is not available.
We do know that economic housing completion rates have historically been small.
The exhibit below shows completion for economic housing (and as a proportion of
commodity residential housing) – the ratio is low double digits to even single digits during
certain periods. While this data does not represent the low-cost rentals, we believe
completion rates for such are even smaller (for reasons we will discuss later in this report).
Low rental housing Economic Housing Shanty-town renovation Public rental housing Capped price housing
How does it work?
Government constructs
housing for low income
families at deeply
discounted rents
Government or developer
constructs housing and
sell to med to low income
class at a discounted,
capped price
Government renovates/ reconstructs
shanty-town area. The original
residents are compensated by new/
renovated flats for free or at a very
cheap price
Government constructs housing for
mid income families at discounted
rents, but higher than low rental
housing
Government or developer constructs
housing and sell to mid income
class at discounted price, but higher
than econ housing price
Ownership? Government Purchaser Original residents/purchaser Government Purchaser
Land injection needed?Y Y N Similar to low rental housing model Similar to economic housing model
Construction cost needed?Y
Borne by govt or
developerY Similar to low rental housing model Similar to economic housing model
Proceeds from saleN To government/developer
Y (for additional units after
compensating original residents)Similar to low rental housing model Similar to economic housing model
Pros
Most affordable, more
flexibility to adjust
occupancy and rentals
over time
Less hassle in managing
properties than rentals;
developer may bear most
of construction working
capital expenses
Similar to economic housing model Similar to low rental housing model Similar to economic housing model
Cons
Requires the most
upfront govt financial
burden in land injection
and construction cost -
no immediate cash
inflow of size
Ownership belongs to
buyer, less flexible to
meet longer-term or
lowest end user needs.
Often requires 'bundling'
of social and commodity
housing in one area to
ensure construction
progress.
Similar to economic housing model Similar to low rental housing model Similar to economic housing model
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 4
Exhibit 2: Economic housing completion rate historically has been low vs. commodity
housing Property developers’ economic housing completion rate has been poor
Note: Data based on NBS statistics on property developers.
Source: NBS, CEIC, GS Global ECS Research.
Local governments had insufficient motivation to fund such projects historically. The
exhibits below are a back-of-the-envelope analysis of social housing costs per year, based
on the central government’s published units completion targets.
Exhibit 3: 2010-12E social housing target is for 15.4m
units
Exhibit 4: Social housing land opportunity cost should be
in line with nationwide land sale price
Source: Ministry of Land and Resources (MLR), Ministry of Finance (MoF), CEIC, GS Global ECS Research.
Source: Ministry of Housing and Urban Development (MOHURD), MLR, CEIC, GS Global ECS Research.
0%
5%
10%
15%
20%
25%
30%
0
100
200
300
400
500
600
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
sqm mn Floor space completed-Commodity housing
Floor space completed-Economic housing
Economic housing as % of total residential
Units (mn)
Total target for 2010-2012 15.4 Plan for 2010 5.8 Target for 2011 and 2012 each 4.8
2011-12 Social housing target
Housing land sale proceeds (Rmb, mn) 1,339,180 Housing land sold (sqm, mn) 765 Housing land sale price (Rmb/sqm) 1,751
2009 Land sale price
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 5
Exhibit 5: Social housing direct construction costs and land opportunity costs are significant Construction costs are only part of the equation
Note: Assume % allocation for each category of social housing in 2011-12 will be same as 2010; 2011-12E target is 2010-12E target minus 2010, divided evenly between the two years. *In calculating land opportunity cost, we use half of the shantytown renovation land required to calculate cost, assuming half the land is needed to house existing inhabitants and the other half is available for redevelopment/redeployment.
Source: MOHURD, MLR, MoF, CEIC, Goldman Sachs Research.
The two key cost components are:
1. Construction cost: We derive this by multiplying target units completed by the
different size per type of unit, then assume Rmb 1,500-2,000 per square meter
construction cost. Our discussions with developers and housing construction
companies suggest that the construction cost range is around Rmb1,500 for second
and third tier cities and slightly higher for first tier cities (raw material prices are not
dramatically different but labor costs do vary). We believe that some more bullish
estimates of as low as Rmb1,000 per square meter construction cost are unrealistic.
2. Land opportunity cost: Land cost is an opportunity cost – the local government does
not need to buy the land, but is giving up potential land sale proceeds that the land
could otherwise generate.
Land price per sq meter in line with national average: We assume nationwide
average land sale price in 2009 (it is not reasonable to assume land cost much
lower than nationwide average because although social housing is sometimes on
the outskirts of towns, this is not always the case, and demand/construction is likely
to be centered in the cities where commodity property price is most out of reach).
We estimate that about 65% of the land price is sufficient to meet relocation
expenses (necessary for economic housing and low-cost rentals), while the other
35% is profit margin for the local government. For shantytown renovation, we
assume half of the land has opportunity cost as the other half will be reallocated
back to the original inhabitants post social housing construction.
Plot ratio of 1.5x: We have assumed 1.5x plot ratio for social housing. This might
seem counterintuitive, since many lower-end commodity residential properties
have even higher plot ratios at 2+. However, because low rises tend to be much
cheaper and faster to construct on a per GFA basis (lower demands on
sophistication/strength of foundation, frame, elevator systems, etc.), most social
housing projects so far have been low rise (up to six stories, no elevator). We note
that plot ratios may rise going forward, as we think it does not make sense to penny
pinch on construction cost when the land needs for lower plot ratios are likely to
imply higher land opportunity cost, which most likely more than offsets any
construction cost savings.
Units (mn)
Avg Floor
Space
(sqm/unit)
Total Floor
Space
(sqm,mn)
Avg
constructio
n cost
(Rmb/sqm)
Total
constructi
on cost
(Rmb, bn)
Plot ratio
assumed
Land
required
(sqm, mn)
Land cost
(Rmb/sqm)
Total land
cost
(Rmb, bn)
Total cost
(Rmb, bn)
Low Rental Housing 1.8 50 90 1,500 135 1.5 60 1,751 105 240 Economic Housing 1.2 60 72 2,000 144 1.5 48 1,751 84 228 Shantytown Renovation 2.8 70 196 1,500 294 1.5 131 1,751 114 408 Total 5.8 358 573 239 304 877 Low Rental Housing 1.5 50 74 1,500 112 1.5 50 1,751 87 199 Economic Housing 1.0 60 60 2,000 119 1.5 40 1,751 70 189 Shantytown Renovation 2.3 70 162 1,500 243 1.5 108 1,751 95 338 Total 4.8 296 474 198 251 725
2010
Social housing category
2011&12 (yearly)
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 6
Costs are significant without full funding; margins are thin
Central government funding only meets a fraction of the cost. The budget allocated by
the central government for social housing this year (Rmb63 bn) can meet only 11% of
construction cost and 7% of total cost (including land opportunity cost) if this year’s 5.8mn
units target were to be completed. And this does not include the 1.2mn units targeted for
rural reconstruction or other types of new products like public rental housing or capped
price housing (these new products are still small scale and related targets are not yet
explicit). The intention is that local governments bear the brunt of the expenses.
Local governments lack economic motivation to pursue social housing. Although local
governments could fund social housing with bank lending or fiscal revenue, officials lack
motivation to do so because:
1. social housing projects are either extremely low return or negative return, and are (in
many cases) unable to become self-funding even over time;
2. target KPIs from the central government tended to be tied to economic growth, so loan
quotas were prioritized towards higher economic return projects.
Even the social housing projects that did get the green light were met with low
enthusiasm from the supply chain. Commodity housing developers are unenthusiastic
about participating, because social housing margins are designed to be very thin (single
digit vs. 30%+ for commodity housing). The bulk of construction thus far has been borne by
state-owned enterprises under the local governments’ oversight.
More emphasis will lead to policy support and concrete progress
Central government focus has dramatically picked up, as a way to
address potential social problems and to support growth
We show in the exhibit below the potential funding sources to meet social housing
construction costs this year. Although we have not included land opportunity cost in the
shortfall calculation, it is important to note that land injections are also a detractor from the
government budget, as it directly sacrifices commodity property land sale proceeds.
Key sources of cash funds for construction include the central government grant, a
required 10% of local government land sale profit for the year (as per MOHURD rules),
and proceeds from the sale of economic housing (we assume quick sales of the
economic housing given demand vastly exceeds supply). Other funding sources include
housing provident fund (HPF) interest or possible additional proceeds from sale/rental of
commercial shops and surrounding facilities, but these are not likely to be significant.
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 7
Exhibit 6: Social housing funding gap is not insignificant
Source: MOHURD, MoF, GS Global ECS Research.
Creative types of financing have also started to materialize, such as REIT structures and
build-transfer models with construction partners (which lightens the upfront funding need
for the local government). We expect their maturation and development to further rectify
the funding shortfall issues.
The central government has also directed HPF resources to be allocated to social
housing construction loans.
Up to 50% of HPF surplus: MOHURD, MoF, NDRC, PBOC and CBRC issued a joint
document titled ‘Regarding utilizing HPF funding to support social housing construction
pilot projects’, declaring that local governments can tap up to 50% of HPF surplus (HPF
balance net of necessary withdrawals) as long-term borrowing for social housing
construction. Loan duration is limited to three years for economic housing and shantytown
renovation, and five years for cheap rentals. As of end-2008, the potential 50% of HPF
surplus available equalled around Rmb160 bn. Tapping into this fund will be a gradual
process as only approved pilot cities and projects can participate.
Pilot cities identified: In early August 2010, MOHURD announced that 28 pilot cities
building 133 social housing projects would start to tap this fund. Total funding from HPF
available to these projects for borrowing is Rmb49 bn in this first batch.
Increased focus has already been met with results
MOHURD announced on Sept 19 that:
– By end August, 75% of economic housing/low rental housing targets for 2010E has
commenced construction, equivalent to 2.2m units; while 65% of shantytown
renovation target units have commenced construction, equivalent to 1.9m units.
– Progress on the above construction will be monitored and it is expected that at least
60% of 2010E targeted units will complete construction before year-end.
– MOHURD and relevant agencies will continue to monitor progress and ensure that all
of 2010E social housing targeted units begin construction by end Sept.
– Year-to-August social housing investment has reached Rmb 470bn (GS comment: it is
unclear whether this refers to construction cost only or also land relocation expenses
or other costs).
Rmb (bn) GS comment
Central government budget 63 Previously announced
Local government 344
10% Land sale profit 40 Assume conservatively that land sales proceeds fall by -20% yoy
and profit margin is approx 35% as per our property team
Sale of econ/renovated housing 291 Assume 0% margin over construction cost to govt for econ housing
& half of renovation housing is sold, other half is returned to original residents
Housing provident fund interest 13 Assume 1% interest income from fund balance per year
Total funding 407
Construction cost need 573 Excludes land opportunity costs from local government land sales profit
Relocation cost 123 Assume 65% of total land cost of low rental housing and economic housing
Funding gap 289% shortfall 50%
Social Housing funding
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 8
– Furthermore, relevant agencies are in the process of drafting the ‘2010-12 social
housing project construction plan’ which will be unveiled in time.
We believe more policies will be introduced to encourage faster
social housing build
Repeated speeches from the highest level leaders emphasize the importance of social
housing as one of the key priorities for 2010 and beyond. Not only does social housing help
to alleviate quality of life issues for low- to middle-class Chinese, we believe the
policymakers also intend for social housing to help sustain investment as its commodity
property tightening measures have already slowed developers’ pace of new project starts,
as the ASP outlook is increasingly murky. We believe that as macro policy is gradually
loosened in the coming quarters, social housing will be one key niche area to see
meaningful support.
Possible further forms of policy assistance that may be considered over time (some of
which we believe may be adopted in the upcoming ‘2010-12 social housing project
construction plan’) include:
More dedicated land supply required from the local governments, and greater
supervision in meeting targets
Exhibit 7: Land supply for social housing is intended to be >30% of total for 2010E, higher than historical actual Only 21% of full-year social housing land supply was spent in 1H10
Source: MLR, CEIC, GS Global ECS Research.
Tying social housing completion targets to local government officials’ KPIs
Bundling social housing obligations with land sales to commodity developers (a piece
of land won requires a fraction to be developed into economic housing – developers end
up bidding lower for the land but are forced to construct social housing and to bear
construction cost)
Linking future land auction qualifications more explicitly with commodity property
developers’ social housing
Greater funding resource allocation from the central government
Preferential policies from banks and other funding sources towards social housing
More immediate progress expected in first tier cities and in
economic housing/capped price housing
The development of social housing across China remains a long and winding road, in our
view. Deep-rooted issues cannot be resolved in a short time. More central government
policies or not, we are not so optimistic to assume that targeted completion rates are
within our sights near-term.
1H10/FY10Land Supply
(Hectare)
Low rental
housing
Economic
housing
Shanty-town
renovation
Med/Small
Size
% Social
housing
completion
%
2009 (Actual) 76,461 3,000 18.3%
2010 (Plan) 184,749 7,051 17,402 36,606 80,431 33.0%
1H10 (Actual) 56,108 1,513 4,433 6,596 29,535 22.4% 21%
Total
residential
housing
10,958
Social housing
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 9
2010E may reach only 60% completion rate, considering dismal completion rates in 1H10
and the need to severely back-load investment in 2H10. Nonetheless, given the latest
MOHURD announcement and high conviction in meeting this figure, we believe 60%
should be achievable.
But we expect improvements thereafter, as gradual policy implementation and
structural fixes to accelerate the pace of development. We believe completion rates can
show increases yoy to 80%+ by 2011-12E. This could even prove conservative, considering
that MOHURD and relevant agencies are requiring that all of the 2010E’s 5.8m units
commence construction by end Sept.
We expect economic housing in first and second tier cities to report the most progress
near-term, because:
Economic housing is sold after construction for an immediate cash flow
turnaround – even if the margin is very low, at least the construction cash expenses
can be recouped quickly.
Economic housing is easier to ‘bundle’ with commodity housing development, as
mentioned earlier, because it does not require as much operating / management
commitment as low rental housing, and typically is geared towards middle-income
customers that may fit in better with the commodity pricing inhabitants/buyers.
Tier one and two cities may see faster progress, as they face much greater demand for
social housing vs. lower-tier cities where prices have not moved as much, and because
their governments tend to have more funding resources/flexibility.
We expect improving social housing build to partly offset risks of
commodity housing slowdown
Our base case shows still teens yoy growth in GFA completion
To what extent would a potential slowdown in commodity residential housing GFA
completion put total property investment at risk? We have done the sensitivity analysis in
the below to try to answer this question. We acknowledge that due to aforementioned
incomplete historical data, as well as significant uncertainties on regulatory oversight and
execution, that there could be meaningful deviations from our estimates.
1. We assume 10% floor space completion growth for non-residential (commercial
mostly) and for residential housing other than commodity and social housing (i.e.
dorms, etc). This looks reasonable to us vs. the 1H10A trend and also is roughly in the
middle of the historical ranges. Our property team estimates that total GFA growth for
commercial and residential property should reach 20% per year for 2010-12E, based on
an average of 2.3 follow-on years (between 2000 and 2009) to complete GFA under
construction. So we feel 10% is sufficiently conservative.
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 10
Exhibit 8: National floor space completed has been growing at double digits for most
years
Source: NBS, CEIC, GS Global ECS Research.
Exhibit 9: Social housing assumptions on floor space GFA completion
Note: 1) Assume residential housing built by developers is commodity housing in 2009. 2) 2009 social housing floor space is calculated by proportion of land supply comparing to 2010 target
Source: MOHURD, MLR, NBS, CEIC, GS Global ECS Research.
2. We assume 20% commodity residential housing growth per annum as per our
property team’s estimate. We note that this is the area where government is tightening
policy and thus is the more controversial area of investment that the market is
concerned about.
3. We assume conservatively a 60% social housing completion rate for 2010E
ramping up to 80% for 2011-12E. What level is actually reached will depend largely
upon some of the supportive policies discussed earlier and oversight on
implementation/execution.
Assuming the above, we estimate yearly GFA growth in the teens for 2010-12E.
Concerns over commodity housing drag on GFA growth may be
overdone
We feel that the risk of a possible slowdown in commodity housing investment dragging
down overall GFA growth /investment into single digit or even negative territory are
overdone.
Historically commodity residential housing is only about half the total China GFA,
with the other half belonging to areas not subject to the policy tightening.
Social housing targets are equivalent to 30%-50% of the commodity housing GFA
by our estimate, so the potential contribution is quite significant. If completion rates
are reasonable, it could be enough to buffer some degree of potential miss on
commodity residential housing.
sqm mn
Floor space
completed-
Total yoy %
Floor space
completed-
Residential yoy %
Floor space
completed-
Non-
residential yoy %
2005 1,103 14% 611 10% 492 19%
2006 1,121 2% 594 -3% 527 7%
2007 1,270 13% 661 11% 609 16%
2008 1,281 1% 658 0% 623 2%
2009 1,574 23% 789 20% 785 26%
2010(1-7) 527 10% 290 10% 237 10%
Residential housing
Assumed
growth rate
Commod
housing-
Base caseBase case
growth rate
Social
housing
target
Base case
completion
%
Social
housing-
Base case
Other
residential
housingAssumed
growth rate yoy %
2009 785 596 82 111 1,574 5%
2010E 864 10% 716 20% 358 60% 215 122 10% 1,916 22% 11%
2011E 950 10% 859 20% 296 80% 237 134 10% 2,180 14% 11%
2012E 1,045 10% 1,030 20% 296 80% 237 147 10% 2,460 13% 10%
Non-residential
Floor space
completed (sqm
mn)
Social
housing %
of total
Total floor
space-
Base case
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 11
The exhibits below show the implied total GFA growth rates across different assumptions
for yearly commodity residential GFA completion growth vs. various social housing target
completion assumptions.
We also show the GFA completion rate vs our base case scenario described above. Even if
commodity housing were to grind to a halt in 2010E with zero growth (very unlikely in our
view given the construction schedule already underway), missing our estimates by 20pp
growth, total impact to GFA completion base case would be negligible, if social housing
completion could reach 80%.
Exhibit 10: GFA growth sensitivity to commodity housing slowdown and social housing
completion
Source: GS Global ECS Research.
2010E GFA growth yoy %
Commodity housing floor space growth yoy %
30% 20% 10% 0% -10%
100% 35% 31% 27% 23% 19%
90% 32% 29% 25% 21% 17%
80% 30% 26% 22% 19% 15%
70% 28% 24% 20% 16% 13%
60% 26% 22% 18% 14% 10%
50% 23% 19% 16% 12% 8%
40% 21% 17% 13% 10% 6%
2011-12E GFA growth yoy % avg
Commodity housing floor space growth yoy %
30% 20% 10% 0% -10%
100% 19% 15% 11% 7% 4%
90% 18% 14% 10% 7% 3%
80% 17% 13% 9% 6% 2%
70% 17% 13% 9% 5% 2%
60% 16% 12% 8% 4% 1%
50% 15% 11% 7% 4% 0%
40% 15% 11% 7% 3% -1%
Social
Housing
Completion
%
Social
Housing
Completion
%
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 12
Exhibit 11: GFA completion vs. base case, sensitivity to commodity housing slowdown
and social housing completion
Source: GS Global ECS Research.
Positive for cement, steel, construction services and machinery;
low impact on property
Upstream industries are key beneficiaries
Social housing beneficiaries include the usual upstream suppliers including various types
of raw materials/commodities, construction services and machinery. Some of the key
offshore and onshore larger caps with exposure to social housing are shown below.
Exhibit 12: Offshore social housing exposure stocks
For important disclosures, please go to http://www.gs.com/research/hedge.html. Share prices as at the close on 16 Sept.: Anhui Conch Cement (H) HK$32.70; Angang Steel (H) HK$12.90; Maanshan Iron & Steel (H) HK$4.62; Lonking Holdings HK$7.41.
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
2010E completion vs base case (%)
Commodity housing floor space growth yoy %
30% 20% 10% 0% -10%
100% 11% 7% 4% 1% -2%
90% 9% 6% 2% -1% -4%
80% 7% 4% 1% -2% -6%
70% 5% 2% -1% -4% -7%
60% 3% 0% -3% -6% -9%
50% 1% -2% -5% -8% -11%
40% -1% -4% -7% -10% -13%
2011-12E completion vs base case (%)
Commodity housing floor space growth yoy %
30% 20% 10% 0% -10%
100% 8% 3% -3% -7% -12%
90% 7% 1% -4% -9% -13%
80% 5% 0% -5% -10% -14%
70% 4% -1% -6% -11% -16%
60% 3% -3% -8% -12% -17%
50% 2% -4% -9% -14% -18%
40% 0% -5% -10% -15% -19%
Social
Housing
Completion
%
Social
Housing
Completion
%
Offshore market
Company Name Ticker Covg Analyst Industry Rating Form of Exposure
Anhui Conch 0914.HK Rowena Chang Cement BuySocial housing will improve cement demand; particularly earlier in the Eastern
and Southern areas where Anhui Conch is stronger
Angang 0347.HK Jim Hung Steel Buy Social housing will improve steel demand, esp for long products
Magang 0323.HK Jim Hung Steel Neutral Social housing will improve steel demand, esp for long products
Lonking 3339.HK Tian Lu, CFA Machinery Neutral Lonking has about 20% revenue exposure to property machinery
BBMG 2009.HKCement/construction
materials, property
BBMG develops commodity and social housing in Beijing (commodity only in
other cities). BBMG also provides cement mainly in the Northeastern region.
Land supply includes industrial rezoning
China State Construction 3311.HKConstruction Engineering /
servicesInvolved in some social housing construction projects with rising contribution
China Metallurgical 1618.HKConstruction Engineering /
services
Involved in social housing development and construction, expects rising
contribution
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 13
It is challenging to quantify exact earnings implications by stock, as each company has
may have only a portion of their revenues exposed to property or social housing in
particular. We do expect that the proportion of social housing exposure for the above
names will increase over time.
Exhibit 13: Cement and machinery have more property revenue exposure than steel
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Commodities & machinery companies can benefit more immediately from social housing
Our commodities and machinery analysts have performed broader industry sensitivity
analyses on their sectoral demand for various levels of social housing completion rates, as
shown below:
0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
Steel Cement Sany Heavy Lonking Guangxi Liugong
Property Infrastructure Others
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 14
Exhibit 14: Cement supply/demand could swing favorably if social housing completion rates are higher
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
Exhibit 15: Steel supply/demand is slightly less sensitive due to less property exposure
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
For example, our cement analyst Rowena Chang forecasts 2010E cement oversupply of 7m
tons (assuming 50% social housing completion) would become 7m of undersupply if
completion rate could reach 70%. A swing in the supply/demand situation could have
numerous impacts on industry dynamics due to higher sales volumes as well as likely
higher ASP.
20% 30% 40% 50% 60% 70% 80%
2010E Floor Space Completed
(mn sqm)72 107 143 179 215 251 286
2010E Cement Consumption from
Social Housing
(mn tonnes)
14 21 29 36 43 50 57
Implied 2010E oversupply condition
(mn tonnes)29 22 14 7 0 -7 -14
20% 30% 40% 50% 60% 70% 80%
2011E Floor Space Completed
(mn sqm)59 89 118 148 178 207 237
2011E Cement Consumption from
Social Housing
(mn tonnes)
12 18 24 30 36 41 47
Implied 2011E oversupply condition
(mn tonnes)20 14 8 2 -4 -10 -16
2010E Social Housing Completion Ratio
2011E Social Housing Completion Ratio
20% 30% 40% 50% 60% 70% 80%
2010E Floor Space Completed
(mn sqm)72 107 143 179 215 251 286
2010E Steel Consumption from Social
Housing
(mn tonnes)
7 11 14 18 21 25 29
Implied 2010E oversupply condition (mn
tonnes)30 26 23 19 15 12 8
20% 30% 40% 50% 60% 70% 80%
2011E Floor Space Completed
(mn sqm)59 89 118 148 178 207 237
2011E Steel Consumption from Social
Housing
(mn tonnes)
6 9 12 15 18 21 24
Implied 2011E oversupply condition (mn
tonnes)20 17 14 11 8 5 3
2010E Social Housing Completion Ratio
2011E Social Housing Completion Ratio
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 15
Construction services companies show selective interest, but are keener to diversify into even higher-margin businesses
Companies like CCCC, CRG and CRC are actively looking for diversification avenues, as in
the medium- to longer-term, capex demand from areas like railroads may decline past their
peak periods. However, interest in social housing is selective as some are keener to move
into higher-margin businesses like property development instead. We forecast a less
immediate impact on this sub-set of companies. As the exhibit below shows, only China
Metallurgical Corp is currently involved actively in social housing.
Exhibit 16: Construction services and engineering companies generally have less exposure to date
Source: Goldman Sachs Research estimates, Gao Hua Securities Research estimates.
We believe cannibalization impact on commodity housing property
developers will be very limited
We believe the inevitable pick-up in social housing is unlikely to meaningfully affect
commodity housing developers because:
1. Product overlap should be small: Social housing sizes are on the small side and
should not overlap much with the same addressable market as commodity housing.
The insufficient supply vs. hypothetical demand and lack of clarity in who can qualify
and when means that buyers who may be able to borderline afford a commodity
property are unlikely to indefinitely delay purchase plans to wait for the social housing
allocation. In addition, the longer-term targets more skewed towards rentals rather
than economic housing, which further reduces overlap issues.
2. Ownership conditions are different: The government will impose strict rules on
transfer of economic housing, which will limit demand strictly to self-use, whereas
commodity housing demand will also include investment, rental, and speculation.
3. Product bundling requirements will be reflected in land bid prices: Most of the
property developers are uninterested in building social housing due to unattractive
margins/returns. Going forward, land bids could have a rising ‘bundling’ aspect
whereby a portion of land must be developed for social housing – this is already
starting to take place in some locations. This may not necessarily meaningfully erode
returns for commodity housing developers because they will take the construction
expenses and working capital needs into their returns calculation, and accordingly
lower their land bid prices as well.
According to our conversations with a number of developers, both SOE and private, only
Vanke showed clear interest in building social housing, as Chairman Wang Shi said in post-
results briefings that this is Vanke’s responsibility, it is a large and growing market, and
participation will be positive for company image and branding to various constituency
groups.
Company Name Ticker Main BusinessExposure to Property
Development?
Exposure to Property
Construction? Current Participation in Social Housing?
China State Construction 3311.HKBuilding Construction, International Engineering
Contracting, Real estateHK and overseas Mainly in HK and overseas
One social housing related project is a build-
transfer project in Tianjin that they recently won
the bid for.
CRCC 1186.HK Railload Construction Services close to 10% of revenue Single digit Slight exposure (one project only)
CCCC 1800.HK Infrastructure Construction Services
None at listco for now, but may
have exposure when property
assets are transferred from the
parent after the recent merger
with China National Real Estate
Development Group
Not meaningful No
CRG 0390.HKRailload Construction Services and Construction
Contractingclose to 10% of revenue Single digit No
MCC 1618.HKNatural Resources Exploitation Businesses,
Engineering and ConstructionSingle digit about 15% of total revenue Yes. Act as both developer and constructor
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 16
Social housing is represented in our new China Policy Momentum
basket
We have recently introduced GS Policy Momentum basket ticker GSCNPLCY1, which
includes exposure to a variety of focused investment themes, including social housing (as
well as rural/Western/Central development, consumption, etc.). Magang, Lonking and
Anhui Conch are three of the social housing beneficiaries that are included in the basket.
For more details on the basket, please see our report entitled Asia Pacific: Portfolio
Strategy: Selected slices for an undulating upturn, published September 17.
1 Note: The ability to trade this basket will depend upon market conditions, including liquidity and
borrow constraints at the time of trade.
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 17
Appendix: Additional data
Exhibit 17: Bottom-up targets for 2010E social housing construction new starts, by province
* Newly started units are yearly averages from 2-3 year announced targets.
Source: Various media reports, MOHURD.
Provinces/Regions # of units (New start) # of units (Completion)
Beijing 136,000 46,000
Tianjin 85,000 NA
Hebei 31,800 NA
Shanxi 200,000 NA
Inner Mongolia 350,000 275,000
Jilin 436,000 NA
Heilongjiang 234,000 NA
Shanghai 150,000 NA
Jiangsu* 186,000 NA
Zhejiang 50,000 NA
Anhui 160,000 70,000
Fujian 70,000 60,000
Jiangxi 130,000 NA
Shandong* 152,000 NA
Henan 160,000 NA
Hubei* 220,000 NA
Hainan 100,000 NA
Hunan 230,000 NA
Guangdong* 169,000 84,000
Chongqing* 200,000 NA
Sichuan 199,300 NA
Guizhou 100,000 NA
Yunnan* 200,000 NA
Shaanxi* 100,000 NA
Gansu* 67,000 NA
Qinghai* 60,000 NA
Ningxia 35,000 NA
Xinjiang 80,000 NA
Total 4,291,100
Target for Social Housing Constructions (Provincial, 2010)
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 18
Exhibit 18: Social housing is targeted to comprise 30% of 2010E land supply, but has only reached 17% in 1H10
Source: MOHURD data.
Provinces and Regions
Planned Land
Supply in 2010
(Hectare)
Actual Land
Supply in 1H
10 (Hectare)
1H10 as % of 2010
planned supply
Land
Supply for
Social
Housing in
Social
housing %
of 1H10
land supply
Beijing 2,500 1,450 58% 99 7%
Tianjin 1,740 1,568 90% 192 12%
Hebei 9,779 2,398 25% 329 14%
Shanxi 4,730 484 10% 115 24%
Inner Mongolia 10,489 2,513 24% 483 19%
Liaoning 12,708 3,906 31% 126 3%
Jilin 5,565 1,219 22% 238 20%
Heilongjiang 8,753 2,557 29% 524 20%
Shanghai 1,100 321 29% 235 73%
Jiangsu 13,010 6,615 51% 1,304 20%
Zhejiang 8,240 2,736 33% 547 20%
Anhui 10,674 2,238 21% 430 19%
Fujian 4,234 812 19% 84 10%
Jiangxi 4,391 1,538 35% 246 16%
Shandong 18,165 6,357 35% 652 10%
Henan 7,372 2,692 37% 845 31%
Hubei 5,548 1,665 30% 152 9%
Hunan 3,180 1,491 47% 197 13%
Guangdong 7,504 1,830 24% 121 7%
Guangxi 5,002 924 18% 151 16%
Hainan 1,564 336 21% 103 31%
Chongqing 6,449 1,191 18% 208 17%
Sichuan 8,160 2,711 33% 469 17%
Guizhou 4,544 1,639 36% 396 24%
Yunnan 4,970 1,392 28% 51 4%
Tibet 270 42 16% 16 39%
Shaanxi 3,466 1,022 29% 244 24%
Gansu 2,420 499 21% 127 25%
Qinghai 835 161 19% 114 71%
Ningxia 1,787 644 36% 234 36%
Xinjiang 4,822 989 21% 332 34%
Xinjiang Legion 1,427 167 12% 108 64%
Total 185,399 56,108 30% 9,472 17%
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 19
Exhibit 19: More social housing land supply went to economic housing, shantytown renovation and low-cost rentals,
with minimal allocation to capped price or public rental in 1H10
Source: MOHURD data.
0
10
20
30
40
50
60
70
80
90
0
5,000
10,000
15,000
20,000
25,000
30,000
35,000
40,000
45,000
50,000
Commodity
Housing
Economic
housing
Shanty-town
renno-mid/small
units
Low rental Capped-price
housing
Public rental
Land Supply in 1H 2010 (hectare) % Total Land Supply in 1H 2010 (RHS)
September 20, 2010 China: Portfolio Strategy
Goldman Sachs Global Economics, Commodities and Strategy Research 20
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Goldman Sachs Global Economics, Commodities and Strategy Research 21
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