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Urbanization Benefits China's Developers, Merrill Lynch Raises Evergrande's Target Price

BEIJING, Jan. 9, 2013 /PRNewswire/ -- After the 18th CPC National Congress convened, the media attached great importance to new urban construction, an issue that concerned the public after it was listed in the national strategic plan. Due to such policy, China's real estate industry will step back from its "Golden Times" after years of fast development and several rounds of strict government controls, which will bring brand-new opportunities for development.

It is widely believed that the "Golden Times" for China's real estate industry have come to an end due to the monetization reform of housing, demographic dividends, fast GDP growth, and loose monetary policy. However, along with the implementation and continuous promotion of new urbanization policies, the demands for housing inventory will expand greatly, and the largest rigid demand in history is expected to awaken, so that the real estate industry may enter another boom period, namely the "10-Year Silver Times".

As the data listed in the Development Trend of China's Real Estate Market in the Next Ten Years (2011-2020) released by China Index Academy showed, in the next 10 years, China's urbanization ratio will on average rise by 1.1% per year, and people will need another 15.7 billion square meters for living, 8.19 billion of which will be needed by first-time buyers, accounting for 52%.

In addition, Haitong Securities released a report showing that from 2012 to 2021, another 592 million square meters of living space will be added to housing demand because of urbanization, which is equivalent to 61% of sales volume for commodity houses in 2011.

Third-tier cities will become the market with the most potential. As a report released by First Capital showed, second- and third-tier cities in central and western China and third-tier cities surrounding the first-tier cities will benefit from urbanization.

According to the recent situation of housing sales, some buyers with rigid demand for improved housing have already actively purchased houses in several third-tier cities, and many developers have also begun to arrange their development plans in second- and third-tier cities, showing that the real estate market is recovering. Zhang Minhua, Director of the Department of Investment Strategy & Research of the Global Personal Banking Service Division of Citibank, forecasts that the real estate market within China will remain stable with a growth of 9%, and the stocks of leading real estate enterprises may even rise 20%. In addition, Moody's also has revised its prospects for China's real estate industry from "negative" to "stable", and even predicts that the sales status and financing channels will continue to be better in 2013.

Of course, the real estate enterprises that have already arranged development plans in second- and third-tier cities will benefit most from the new urbanization. As data showed, Evergrande Real Estate Group, a leading real estate enterprises within China, gained RMB 92.32 billion RMB from sales in 2012, up 14.8% year-on-year, and its annual sales targets have again outperformed ahead of schedule, with a fulfillment rate of 115.4%. It is estimated that Evergrande's performance will improve in 2013, for most of its projects are located in third-tier cities, and its land reserve is sufficient. Furthermore, Merrill Lynch recently predicted that the sales volume of Evergrande in 2013 will amount to 110 billion RMB, up 20%. Therefore, Merrill Lynch has maintained its "Buy" rating on Evergrande and raised its target price from HKD$4 to HKD$5.75.

SOURCE Sina Leju

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