China property stocks under pressure

The Chinese property sector is showing more signs of a slowdown, which will likely weigh on industry-related shares.

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Source: Bloomberg

The country’s largest residential property developer, China Vanke, released some underwhelming results over the weekend.

While Q3 net profit rose 2.8%, margins shrank from 24.9% to 23.8%, reflecting the dip on home prices and higher land costs.

A similar outlook was shared by China Overseas Land’s earnings last Tuesday. The country’s fifth largest developer saw Q3 operating plunge by nearly half and warned of potential future downside risks.

This follows last weeks’ China housing price index which reflected a slowdown, where new home prices fell in a record 69 out of 70 cities. The latest reading for September prices dropped -1.3% from 0.5%, a break into negative territory for the first time in nearly two years.

With the property sector contributing nearly 15% to the Chinese economy, it’s not a surprise to see real estate stocks leading the dip in Chinese indices. There has also been wider dampener on sentiment with investors put off by the delay of the Shanghai-Hong Kong exchange link, which was supposed to be up this week.

One stock that has been under pressure in recent months has been China Evergrande. It has lost 25% since its one-year high of $3.92 in April, and looks capped by a downtrend line. It currently appears to have found some support at $2.94.

The stock is under its 20 DMA, suggesting the bias is on the downside. There will be two scenarios to watch out for. A clear break below the support of $2.94 is likely to accelerate a sell off. Conversely, a break above its 20 DMA or downtrend line may signal the start of a rebound.

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