The fundamentals of China's real estate staying healthy from January to June 2017. Commercial housing sales rebounded from January to June 2017. Among them, the cumulative sales area of commercial housing increased by 16.1 percent over the same period last year to 747 million square meters, up 1.8 percent from January to May 2017. Cumulative sales of commercial housing rose 21.5 percent year-on-year to 5.92 trillion yuan, up 2.9 percent from January to May 2017. These figures show that sales in the real estate market remain strong. But the performance of housing sales is divided among cities with different levels of energy. In the same period, the area of housing sold in first-tier cities fell 33.7% from the same period last year, while that in second-tier cities fell 12.6%, but that in third-and fourth-tier cities fell only slightly by 7.7%, with Shantou, Taizhou and Yueyang all growing by more than 35.0%, according to CRIC.

From January to June 2017, the cumulative investment in real estate increased by 8.5% over the same period last year, and the cumulative area of new construction increased by 10.6% to 857 million square meters compared with the same period last year. Destocking also performed well, with the national salable area declining for seven consecutive months compared with the same period last year. According to CRIC, the stock-to-sales ratio in 70 cities across the country fell to a low level of 8.5 months at the end of May 2017, and the overall inventory was not high. Since March 2017, policies in first-tier cities and some second-tier cities have been further tightened. And third-and fourth-tier cities around some big cities have also implemented purchase restrictions. Looking back, we think that the purchase restriction policy may be further tightened in some cities where the real estate market is overheated. But at the same time, the real estate inventory pressure still exists in low-level cities, and policies to promote real estate sales are still likely to continue to be launched in low-level cities. As bank debt-side costs rise, credit policy is likely to tighten in the second half of the year. However, since June 2017, we have seen an expansion of bond issuance by real estate developers, which will reduce the financial pressure on real estate developers. Generally speaking, urban policy is still the main tone of real estate policy, and the purpose of the policy is still to maintain the stable and healthy development of the real estate market. Due to economic development, population mobility, unbalanced industrial development structure and different policies under different inventory conditions, the real estate market will continue to be divided. The year-on-year increase in average sales prices in first-and second-tier cities may gradually shrink due to purchase restrictions, while the situation in some third-and fourth-tier cities will not be significantly improved. For 2017, we expect: 1) the sales area of first-tier cities and strong second-tier cities is expected to decline due to the upgrading of purchase restrictions; 2) sales in second-tier cities with less stringent purchase restrictions will benefit from the release of demand for improved housing 3) Housing sales in third-and fourth-tier cities will be divided, housing sales attached to metropolises or third-and fourth-tier cities with a better economic base will increase, while housing sales in other third-and fourth-tier cities will be difficult to improve due to population outflow and poor economic base. The rapid increase in land cost means that the real estate market has entered an era of profit margin erosion and industry integration. Real estate companies with high-quality cost control, specialized product lines and strong financial strength are more likely to maintain good profitability than their peers, and will be able to promote growth by mergers and acquisitions at a relatively low cost in the era of integration.

Contemporary Real Estate (01107 HK) contract sales have grown steadily, the green product line ensures the company's competitiveness, profitability is expected to be restored, and the company's stock price should benefit from further optimization of soil storage structure. Contract sales of contemporary real estate in June rose 37.5 per cent year-on-year to 2.8 billion yuan, the average monthly sales price fell 13.2 per cent year-on-year to 10839 yuan per square meter, and the contracted area rose 57.8 per cent to 253522 square meters. From January to June, the company achieved contract sales of 9.04 billion yuan, a steady increase of 21.3% over the same period last year, the contract sales area increased by 35.7% to 893855 square meters, and the average sales price dropped 11.5% to 9855 yuan per square meter. After the real estate industry enters the silver era, the quality and characteristics of the house itself will be paid more and more attention, and the house price will have a greater opportunity to sell at a premium. Therefore, real estate companies with a certain unique product line will be more favored by the market. Thanks to the company's upgraded energy saving and heating and cooling systems, the company's products deserve a premium, so we expect the company's profitability to remain good.

We believe that the fundamentals of China's real estate industry are getting healthier and the company's performance in 2017 should be guaranteed. Sales in the real estate industry have cooled somewhat, but the relationship between supply and demand in the industry continues to improve, and the overall fundamentals of the industry are becoming more healthy and stable. Thanks to its green product line, we believe that the decline in the growth rate of contract sales of contemporary home ownership in 2017 will be lower than the industry average. Further optimized soil storage and the company's upgraded energy saving and heating and cooling systems will help stabilize the profit margins of contemporary home buyers. The company's closing price as of July 31 is only 3.8 times, 3.4 times and 3.0 times 2017, 2018 and 2019 core price-to-earnings ratios, we think the company's current valuation is quite attractive. Therefore, we recommend "buying" contemporary home ownership with a target price of HK $1.81, which is equivalent to a 39% discount for NAV in 2017, 4.7 times 2017 core price-to-earnings ratio and 0.8 times 2017 price-to-book ratio.