According to the report released by Soochow Securities, the national inventory is currently at a relatively high level in history, about 85% of the historical high point. Referring to the experience of the 2014 cycle, assuming that the turnover cycle will decrease by 21% or the turnover cycle will drop to around 16.9 months, the volume and price of real estate sales will significantly recover. If you want to reduce the turnover cycle by 21% or drop to 16.9 months, the required acquisition funds are 2.04 or 3.67 trillion yuan. If 60% of these are the central bank's indemnificatory housing re-loans, an additional 1.22 or 2.20 trillion yuan in re-loans are needed. This round of acquisition and storage policy focuses on the supply side and is expected to lower the inventory level, improve the supply-demand relationship, and stabilize the expectation of housing prices while supporting indemnificatory housing and construction work. Combined with demand-side policies, it is expected to drive the basic recovery of real estate sales.

The main viewpoints of Soochow Securities are as follows:

What is the current inventory situation in China?

The national inventory is currently at a relatively high level in history, about 85% of the historical high point; the sales of new houses continue to decline, and the turnover cycle has rapidly risen, currently reaching a new high since 2010 of 27.2 months; the inventory distribution of first/second/third-tier cities is at the highest point in history, at 90%/75%/96% respectively, and has been generally stable for the past year. The turnover cycle in the first, second and third-tier cities has reached a new high in history, with the third-tier cities experiencing the fastest rise and the most severe situation.

How does the "de-inventory" in the 2014 cycle drive the recovery of real estate prices and sales?

After the introduction of the 2010 purchase restriction policy, the industry's fundamentals rapidly declined, and the real estate inventory quickly accumulated, reaching a historical peak in 2015. The policies in 2014 focused on "de-inventory" as the main objective, focusing on relaxing purchase restrictions and mortgage restrictions and monetizing shanty town transformation. With the stimulus of the comprehensive policies, housing demand was quickly boosted, and prices followed suit. This round of "de-inventory" can be divided into two phases: Phase One (September 2014- March 2016): the monthly supply area> the monthly transaction area, and the inventory area has not shown a significant decrease in the 80 cities; Phase Two (March 2016-June 2017): month supply area < month transaction area, and the inventory water level in 80 cities has dropped rapidly. The decline in the monthly supply area in 2016 is mainly due to the gradual reduction of land acquisition investment in the previous period.

According to Soochow Securities, in the 2014 cycle, the decrease in the turnover cycle was the starting point for the positive cycle of "quantity-price-supply-demand". (1) In this round of the cycle, the decrease in the turnover cycle is more due to the increase in sales area rather than the decrease in inventory. (2) Quantity is prior to price: housing prices lag behind sales area by 3 months/2 months. (3) After this round of relaxation, the decrease in the turnover cycle by 21% to 16.9 months will drive the positive cycle of "quantity-price-supply-demand" in the property market.

What is the implementation path and role of this round of acquisition and storage policy?

This round of acquisition and storage is divided into two policies: the "indemnificatory housing re-loans" policy for newly built houses and the "renovating old houses with new ones" policy for second-hand houses. Acquiring new houses refers to local state-owned enterprises purchasing the unsold existing stock of new houses from developers, while "renovating old houses with new ones" refers to local state-owned enterprises purchasing existing residential properties from residents as indemnificatory housing, and residents need to buy new houses with a higher total price after selling their second-hand houses. Generally speaking, the implementation and replicability of the new housing acquisition policy are stronger, while the acquisition of second-hand houses has a stronger boost effect on market demand.

Soochow Securities believes that the role of the acquisition and storage model mainly includes (1) providing incremental supply for indemnificatory rental housing; (2) digesting the inventory to improve the supply-demand relationship and stabilize the expectation of housing prices; (3) easing the liquidity pressure on acquired and stored developers and supporting the construction of indemnificatory housing. In the landing process, it may also encounter problems such as insufficient local government motivation due to income coverage issues.

How much funds are needed for this round of acquisition and storage policy to take effect?

Soochow Securities predicts that a 500 billion yuan acquisition and storage fund can purchase 467,000 to 534,000 sets of existing new houses, with a single cost of about 1 million yuan per set. The total inventory of new and second-hand residential housing in the country is about 9.63 million sets. Referring to the experience of the 2014 cycle, assuming that the turnover cycle will decrease by 21% or the turnover cycle will drop to around 16.9 months, the volume and price of real estate sales will significantly recover. If you want to reduce the turnover cycle by 21% or drop to 16.9 months, the required acquisition funds are 2.04 or 3.67 trillion yuan. If 60% of these are the central bank's indemnificatory housing re-loans, an additional 1.22 or 2.20 trillion yuan in re-loans are needed. Based on this, it is expected that the central bank will add more re-loan funds to promote the stabilization and recovery of the real estate market.

Recommendation symbol:

1) Recommend companies with sound finances and concentrated land reserves in core cities: Poly Developments and Holdings Group (600048.SH), China Merchants Shekou Industrial Zone Holdings (001979.SZ), Hangzhou Binjiang Real Estate Group (002244.SZ), China Res Land (01109), Yuexiu Property (00123), and Zhuhai Huafa Properties (600325.SH); Suggest paying attention to: China Vanke Co., Ltd. (000002.SZ).

2) Recommending real estate companies with ample holdings of high-quality assets and expected improvement in cash flow: Seazen Holdings (601155.SH) and Gemdale Corporation (600383.SH); Suggest paying attention to: Longfor Group (00960).

Property companies: China Res Mixc (01209), Poly Ppt Ser (06049), Greentown Ser (02869), Yuexiu Ser(06626).

Contracting and agency companies: Greentown Mgmt (09979), Ke Holdings(02423).

Risk warning: Slow progress in follow-up of collection and storage policy; sustained industry downturn, slower sales than expected; continuous industry credit risk spreading, liquidity deterioration exceeding expectations.