Goldman Sachs heavyweight! Where will China's real estate go in the next ten years? Where are the investment opportunities in the real estate chain?

On the morning of May 8, Central Time in the United States, Goldman Sachs released a research report titled "Turning to Domestic Demand; Focus on Buying Opportunities in the Chinese Real Estate Value Chain." Goldman Sachs believes that with the possibility of the Chinese government implementing a series of policies to support domestic demand in response to external uncertainties, stocks in the real estate value chain are facing new investment opportunities. The report focuses on recommending 7 stocks from 5 industries, including developer CHINA RES LAND, building materials companies Beijing Oriental Yuhong Waterproof Technology and Beijing New Building Materials Public, hardware company Guangdong KinLong Hardware Products, appliances company Hangzhou Robam Appliances, brokerage company Beike Findings, and property management company GREENTOWN SER. These companies are expected to benefit from the rebound in demand for housing upgrades and building renovations. In addition, the report predicts that by 2035, second-hand housing transactions and renovations will largely offset the decrease in new housing construction, bringing domestic market demand of 5.7 trillion yuan to value chain companies, a growth of 70% compared to 2024. Goldman Sachs expects that these stocks have already fully absorbed the negative impact of the contraction in the new housing market, but the market has not fully recognized the potential positive impact of stimulus policies for domestic demand and new market demand. In the basic and optimistic scenarios for 2035, the implied valuation of these stocks has an average upside potential of 42%/69%, with an expected increase of 20% in the target price over 12 months. Since the market downturn, these companies have achieved significant financial improvement by optimizing sales channels (leaning towards retail and non-real estate sectors), introducing product solutions (expanding product categories, integrating services), and focusing on asset quality and cash flow management. Compared to the pre-downturn period, their share of distribution sales has increased on average by 10 percentage points, strengthening cash recovery (less than half the days of accounts receivable turnover before) and profitability (doubling operating profit margin); accounts receivable and financial leverage have decreased by 15% and 10 percentage points respectively; capital expenditure has decreased by 30%. Combined with the outlook for the real estate industry in 2035, Goldman Sachs expects these companies to achieve: Sustained growth: by 2035, revenue will increase at an average compound annual growth rate of 5%, and the cyclical risk exposure of the real estate industry will decrease from 40% in 2024 to below 20%. Industry supply adjustments will support their market share growth in the domestic market (average increase of 8 percentage points by 2035 compared to 2024), while capital expenditure decreases. Profitability improvement: from 2020 to 2024, the gross profit margin, operating profit margin, and net profit margin of these companies have all decreased significantly (all down 7 percentage points). With improvements in channel optimization, cost control, and working capital management, it is expected that by 2035, the net profit margin will increase by an average of 4 percentage points, and moderate increases in gross margin will further drive a compound annual growth rate of 9% in earnings per share from 2025 to 2035. Dividend increase: with improved operational efficiency and control of capital expenditure, these companies are expected to have stronger free cash flow (average free cash flow yield of 15% in 2035), thereby increasing dividend yield. Four main conclusions for the Chinese real estate industry by 2035: Conclusion 1: Housing demand in 2035 will be 40% lower than the peak, with 70% coming from first and second-tier cities It is estimated that China's housing demand in 2035 will be 10 billion square meters per year (basic scenario) or 12 billion square meters per year (optimistic scenario), a decrease of 40% and 30% from the peak level in 2017, respectively. This demand is mainly composed of essential demand (about 4 billion square meters per year), upgrade demand (about 3 billion square meters per year), and replacement demand (about 3 billion square meters per year), and takes into account approximately 0.6% demolition rate and a 15% vacancy rate adjustment. It is expected that first-tier and second-tier cities will contribute about 70% of the national new housing demand, supporting the new balance of the real estate market. It is projected that in 2035, the national real estate available resources will stabilize at 16 billion square meters / 19 billion square meters per year, with residential sales area of 4.1 billion square meters / 5.2 billion square meters, and the primary market will meet about 40% of the new housing demand (55% in 2024), with the remaining demand being met by the secondary market and public supply. Conclusion 2: Concentration in the developer industry will increase - one of the main reasons for the shrinking primary market With the shrinking new housing market and the increasing weight of first-tier cities in the national real estate sales, Goldman Sachs expects the market share of leading developers to resume an upward trend in 2025. They have relatively sufficient project reserves in first-tier cities, which will benefit more from sales improvements and price stability. Looking ahead, mainstream developers have adjusted their investment strategies and are more positive about land reserve opportunities in certain first-tier cities. As the gap widens between leading developers and small developers in obtaining funds, financing costs, product attractiveness, and brand value, it is expected that leading developers will continue to lead the industry and accelerate market consolidation. Goldman Sachs expects that by 2035, the market share of the top ten developers nationwide will be close to 50% (21% in 2024), and their market share in first and second-tier cities could double, increasing from over 30% in 2024 to about 60%. Conclusion 3: Second-hand housing transactions will surpass new housing transactions (66%/64% of total transaction volume / value in 2035, 42%/45% in 2024) With the decrease in new housing supply and the contraction/concentration of the developer industry, housing demand will increasingly shift towards second-hand.Real estate market.jing New Building Materials Public 2035 3% 6% 2035 / 8.6 40% 10.1 63% Citychamp Dartong Co., Ltd.600067.SH Citychamp Dartong Co., Ltd. 2035 2035 2024 3 4% 8% 2025 0.52 0.702035 / 2.3 25% 2.7 61% SHANGHAI Real Estate160128.HK SHANGHAI Real Estate 2035 SHANGHAI Real Estate2035 2024 6 2035 / 1.8 30% 1.5 45%The core gypsum board business of Jing New Building Materials Public has a stable outlook (compound annual growth rate of 0.4% from 2024 to 2035). The company is optimistic about the expansion of new products such as metal frames, waterproofing, and coatings, which will be key drivers of profit growth in the coming years (compound annual growth rate of 4% from 2024 to 2035). It is expected that from 2027 to 2035, the company's revenue/net profit will grow at a compound annual growth rate of 2-3%, driven mainly by the continued increase in market share of new business. Scenario analysis for 2035 shows that under the base/optimistic scenarios, the implied value of the company is 34.3 yuan per share (up 22%) and 40.3 yuan per share (up 44%) respectively.Guangdong KinLong Hardware Products (002791.SZ; Buy): Using product advantages to cope with industry cyclicality Guangdong KinLong Hardware Products is China's largest hardware market supplier, with core competitiveness in a wide range of high-quality products that can provide customers with one-stop, systematic solutions at competitive prices. Its exposure to the real estate market has decreased from a peak of 65% before 2021 to 46% by 2024. In addition to continuous revenue expansion in underpenetrated new home/non-real estate markets and overseas markets, Guangdong KinLong Hardware Products will also benefit in the long term from the growth in renovation demand brought by second-hand home transactions and old buildings. It is expected that by 2035, the company's net profit will increase 12 times to 1.2 billion yuan (compared to 2024), with a free cash flow yield expanding to 13%, supporting a higher dividend yield. Scenario analysis for 2035 shows that in the base/optimistic scenarios, the implied values of the company are 33 yuan per share (up 45%) and 38 yuan per share (up 67%) respectively. Hangzhou Robam Appliances (002508.SZ; Buy): Product expansion to consolidate leadership position in changing demand environment Hangzhou Robam Appliances is the leading enterprise in China's high-end range hood/gas stove market, and gradually becoming a leader in overall kitchen appliances by expanding into rapidly growing product categories such as dishwashers, built-in ovens, and integrated stoves. Its core competitiveness lies in its strong brand and diversified channels. Currently, most of the company's sales are related to the new home market, but future revenue growth is expected to be increasingly driven by replacement demand related to second-hand home transactions and renovations. It is expected that Hangzhou Robam Appliances will attract more diversified customer traffic with its strong brand and diversified channels, ultimately achieving market share growth. In addition to maintaining a leading position in range hoods and gas stoves, the company's expansion into growth products such as dishwashers will provide additional growth momentum. It is expected that from 2024 to 2035, the company's revenue/net profit will grow at compound annual growth rates of 4%/5%, with a free cash flow yield expanding to 12% and a dividend payout ratio increasing to 80% by 2035. Scenario analysis for 2035 shows that in the base/optimistic scenarios, the implied values of the company are 28 yuan per share (up 43%) and 36 yuan per share (up 84%) respectively. Beike Real Estate (02423; Buy): Committed to building a one-stop residential service platform Beike Real Estate is China's largest housing transaction and service platform, with a wide network of brokers and storefronts as well as a broker cooperation network (ACN). The company provides second-hand housing and new home brokerage services (66% of revenue in 2024) through the 1P and 3P models, and is expanding its business to house renovation and decoration, house leasing services, Beibei home decoration, and other emerging services. Beike Real Estate is expected to benefit from the increase in second-hand housing transaction volume, the increase in new home brokerage penetration rate, the expansion of market share in the second-hand/new home transaction market, and the long-term growth in renovation demand. It is estimated that by 2035, the company's net profit will triple to 23.2 billion yuan (compared to 2024). Scenario analysis for 2035 shows that in the base/optimistic scenarios, the implied values of the company are $25.2 per American Depositary Share (ADS) (up 24%) and $29.0 per ADS (up 43%) respectively. GREENTOWN SER Group (02869; Buy): Expanding market share in a growing market GREENTOWN SER is China's leading high-end property management company, consistently ranking high in customer satisfaction (brand strength) and having a stronger organic growth record compared to peers. Looking ahead, this will help GREENTOWN SER significantly surpass the industry market size expansion (as construction stock grows) and achieve healthy returns and free cash flow under a light asset model. It is expected that by 2035, GREENTOWN SER's net profit will double to 2.6 billion yuan (compared to 2024), with a free cash flow yield expanding to 17%, supporting a higher dividend yield. Scenario analysis for 2035 shows that in the base/optimistic scenarios, the implied values of the company are 7 Hong Kong dollars per share (up 58%) and 8 Hong Kong dollars per share (up 80%) respectively.