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

The Zhitong Finance App learned that on the morning of May 8, US Central Time, Goldman Sachs released an in-depth research report “Shifting Driven by Domestic Demand; Focusing on Buying Opportunities in China's Real Estate Value Chain”. Goldman Sachs believes that as the Chinese government may introduce a series of policies to support domestic demand to deal with external uncertainty, real estate value chain stocks have ushered in new investment opportunities.

This report focuses on recommending 7 stocks in 5 industries, including developer China Resources Land, building materials company Dongfang Yuhong, Beixin Building Materials, Jianlang Hardware, home appliance company owner's appliances, brokerage company Shell Housing Search, and property management company Greentown Services. These companies are expected to benefit from a resurgence in demand for housing upgrades and building renovations.

Furthermore, the report predicts that by 2035, second-hand housing transactions and renovations will largely offset the decline in newly built housing, bringing domestic market demand of 5.7 trillion yuan to value chain companies, an increase of 70% over 2024.

Goldman Sachs anticipates that these stocks have fully absorbed the negative impact of the contraction in the new housing market, but the market has yet to fully appreciate the positive impact of potential domestic demand stimulus policies and new market demand. Under the basic and optimistic scenario of 2035, the implied valuations of these stocks have an average of 42%/69% room to rise, while the 12-month target price is expected to increase by 20%.

Since the downturn in the market, these companies have achieved significant financial improvements by optimizing sales channels (biasing retail and non-real estate sectors), introducing product solutions (expanding product range, integrating services), and focusing on asset quality and cash flow management. Compared to before the downturn, their share of distribution sales increased by an average of 10 percentage points, improving cash recovery (accounts receivable turnover less than half of the previous period) and profitability (doubling operating margin); accounts receivable and financial leverage decreased by 15% and 10 percentage points, respectively; and reduced capital expenditure by 30%.

Combined with the 2035 real estate industry outlook, Goldman Sachs expects these companies to achieve:

Continued growth: By 2035, revenue will grow at an average compound annual rate of 5%, and real estate cyclical risk exposure will fall below 20% from 40% in 2024. Industry supply adjustments will support an increase in their share of the domestic market (an average increase of 8 percentage points by 2035 compared to 2024), while capital expenditure falls.

Increased profitability: From 2020 to 2024, these companies' gross profit margins, operating margins, and net margins declined substantially (all by 7 percentage points). With improvements in channel optimization, cost control, and working capital management, net interest rates are expected to increase by an average of 4 percentage points by 2035, and a moderate increase in gross margin will further drive earnings per share to grow at a compound annual growth rate of 9% from 2025 to 2035.

Increased dividends: As operational efficiency increases and capital expenditure is controlled, these companies are expected to have stronger free cash flow (average free cash flow yield of 15% in 2035), thereby increasing dividend yields.

Four major conclusions for China's real estate industry as it heads towards 2035

Conclusion 1: Housing demand will be 40% below peak in 2035, 70% from first- and second-tier cities

In 2035, China's housing demand is expected to be 1 billion square meters (basic scenario) or 1.2 billion square meters (optimistic scenario) per year, down 40% and 30% from the 2017 peak level, respectively.

This demand mainly consists of essential requirements (about 400 million square meters per year), upgrade needs (about 300 million square meters per year), and replacement needs (about 300 million square meters per year), and takes into account a demolition rate of about 0.6% and a vacancy rate adjustment of 15%.

It is estimated that first-tier and second-tier cities will contribute about 70% of the country's new housing demand, supporting the new steady state of the real estate market.

It is expected that in 2035, the country's real estate saleable resources will stabilize at 1.6 billion square meters/1.9 billion square meters per year, the residential sales area will be 410 million square meters/520 million square meters, the primary market will meet about 40% of the new housing demand (55% in 2024), and the rest of the demand will be met by the secondary market and public supply.

Conclusion 2: The concentration of the developer industry will increase — one of the main reasons for the reduction in the size of the primary market

As the new housing market shrinks and the weight of first-tier cities in national real estate sales increases, Goldman Sachs expects leading developers' market shares to resume their upward momentum in 2025. They have relatively sufficient project reserves in first-tier cities, and will benefit more from improved sales and price stability.

Looking forward to the future, mainstream developers have adjusted their investment strategies to take a more positive attitude towards land reserve opportunities in some first-tier cities. As the gap between leading developers and small developers in terms of access to capital, financing costs, product attractiveness, and brand value continues to widen, it is expected that leading developers will continue to lead the industry and accelerate market integration.

Goldman Sachs anticipates that the top ten developers will have a national market share close to 50% by 2035 (21% in 2024), and the market share of first-tier and second-tier cities may double, from more than 30% in 2024 to around 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)

As the supply of new homes dwindles and the developer industry shrinks/concentrates, demand for housing will increasingly shift to the second-hand housing market.

Goldman Sachs expects second-hand housing sales to reach 800 million square meters/900 million square meters (basic/optimistic scenario), and the turnover rate will rise from 1.3% and 2.4% in 2025 to 1.6%/1.8% (relative to total urban housing) or 3.0%/3.3% (relative to total urban commercial housing), mainly driven by rising turnover rates in first-tier and second-tier cities.

The second-hand housing market is expected to surpass the new housing market by 2035, accounting for 66%/64% of the total housing transaction volume/value, which is comparable to 60% to 90% in developed countries. In the long run, about 3/4 of second-hand housing transactions are expected to be concentrated in first-tier and second-tier cities.

Conclusion 4: Increased demand for refurbishment (almost doubling by 2035 compared to 2024) is largely offsetting the decline in newly built housing

By 2035, based on a comprehensive renovation rate of around 1% and a total building stock of over 11 billion square meters, and growing second-hand housing transactions, renovation demand is expected to almost double (2 billion square meters/2.3 billion square meters in 2035 and 1.2 billion square meters in 2024), accounting for 60% of the total construction area (26% in 2024).

It is estimated that in 2035, real estate construction volume will stabilize at 480 million square meters/60 million square meters (basic/optimistic scenario), down 30%/20% from 2024; the country's total construction volume will stabilize at 1.2 billion square meters/1.5 billion square meters, down 60%/50% from 2024. The total building stock will grow at a modest 1% CAGR to reach 11.4 billion square meters by 2035.

Analysis of key stocks

China Resources Land (01109; purchase): leading real estate recovery

China Resources Land is a state-owned enterprise and ranked the third-largest developer in China by real estate sales in 2024. With a strong balance sheet, an advantage in obtaining capital as a central enterprise, and its position as a top shopping center operator in China, China Resources Land is expected to stand out during the real estate downturn and become a long-term winner in the industry. It is expected that by 2035, despite a contraction in the new housing market, China Resources Land's national market share will further increase (8 percentage points increase in 2035 compared to 2024), and contract sales will reach 450 billion yuan (70% increase over 2024). Rental revenue from its shopping center business is expected to grow at a high single-digit CAGR to reach 40 billion yuan by 2035. Core profit is expected to grow to $53 billion ($29 billion in 2025-2027), and the return on free cash flow will expand to 15%, which is expected to achieve a higher dividend yield (13% in 2025). Scenario analysis for 2035 shows that China Resources Land's implied value under the basic/optimistic scenario was HK$46 per share (up 75%) and HK$55 per share (up 110%), respectively.

Oriental Yuhong (002271.SZ; purchase): Channel transformation to better capture changes in demand structure

Dongfang Yuhong is the largest producer of waterproof materials in China. With cost competitiveness, strong channel capabilities, and improved industry standards, it is expected to further expand its market share in a highly fragmented market. In addition to waterproof materials, the company is also expanding its products into other construction chemicals such as decorative coatings and mortar. Since the market downturn, Dongfang Yuhong's sales exposure to developers has dropped from 33% in 2021 to less than 10% now. Despite being cautious about the future of the waterproof materials industry (demand is expected to drop another 11% from 2024 by 2035), Dongfang Yuhong is expected to strengthen its market position in the waterproofing business through channel transformation (accounting for more than 35% of retail revenue in 2024 and 10% in 2020) and product expansion, and benefit from rising demand for refurbishment. It is expected that from 2027 to 2035, the company's revenue will grow at a compound annual growth rate of 2%, and profit margins will improve due to channel structure optimization, driving net profit to grow at a compound annual growth rate of 5%. The free cash flow yield is expected to rise to 15% in 2035, leaving room for higher dividend yields. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the company's implied value was $14.4 per share (up 29%) and $17.1 per share (up 53%), respectively.

Beijin Construction Materials (000786.SZ; purchase): Diversified product portfolio, benefiting from increased demand for refurbishment

Beixin Building Materials, the world's largest producer of gypsum board, has successfully expanded its construction materials business into the fields of decorative coatings (ranked fourth in China) and waterproofing (ranked third in China) through a series of acquisitions. Currently, the company's sales exposure to residential and large commercial properties is approximately 60% (a high single-digit drop from 2021). As rising demand for refurbishment is likely to mitigate the slowdown in new real estate completions in China, the outlook for Beixin Building's core drywall business is stable (a CAGR of 0.4% from 2024 to 2035). The company is optimistic about the expansion of new products such as metal framing, waterproofing, and coatings, which will be a key driver of profit growth in the next few years (4% CAGR 2024-2035). The company's revenue/net profit is expected to grow at a compound annual growth rate of 2 to 3% from 2027 to 2035, mainly driven by continued growth in the market share of new businesses. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the company's implied value was $34.3 per share (up 22%) and $40.3 per share (up 44%), respectively.

Guangdong Jianlang Hardware (002791.SZ; purchase): Using product advantages to cope with industry cyclicality

Jianlang Hardware is the largest hardware market supplier in China. Its core competitiveness lies in a wide range of high-quality products, which can provide customers with one-stop, systematic solutions, and competitive prices. Its sales exposure to the real estate market has declined from a peak of 65% before 2021 to 46% in 2024. In addition to continuing to expand revenue in the underpenetrated new/non-real estate market and overseas markets, Jianlang Hardware will also benefit from the increase in demand for refurbishment brought about by second-hand housing transactions and old buildings in the long term. The company's net profit is expected to increase 12 times to 1.2 billion yuan by 2035 (compared to 2024), and the return on free cash flow will expand to 13%, supporting a higher dividend yield. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the implied value of the company was $33 per share (up 45%) and $38 per share (up 67%), respectively.

Hangzhou Boss Electric (002508.SZ; purchase): Product expansion to consolidate leadership in changing demand

Boss Electric is the leading enterprise in the high-end range hood/gas stove market in China, and has gradually become a leader in overall kitchen appliances by expanding into rapidly growing product categories such as dishwashers, built-in ovens, and integrated stoves. Its core competency lies in a strong brand and diverse channels. Currently, most of the company's sales are related to the new housing market, but future revenue growth is expected to be increasingly driven by replacement demand associated with second-hand housing transactions and renovations. It is expected that Bosang Electric will use strong brands and diversified channels to attract more scattered customer traffic and ultimately achieve market share growth. In addition to maintaining a leading position in range hoods and gas stoves, the company's expansion of growth products such as dishwashers will provide additional growth impetus. It is expected that from 2024 to 2035, the company's revenue/net profit will grow at a compound annual growth rate of 4%/5%, respectively, the return on free cash flow will expand to 12%, and the dividend payment ratio will increase to 80% in 2035. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the implied value of the company was 28 yuan per share (up 43%) and 36 yuan per share (up 84%), respectively.

Shell Housing Search (02423; Purchase): Committed to building a one-stop residential service platform

Shell Property Search is the largest online and offline housing transaction and service platform in China. It has an extensive network of agents and stores as well as an agent cooperation network (ACN). The company provides second-hand and new home brokerage services through 1P and 3P models (66% of revenue in 2024), and is expanding its business to home renovation and renovation, home rental services, quilt home improvement, and other emerging services. Shell's housing search is expected to benefit from the rise in second-hand housing transactions, the increase in the penetration rate of new real estate agents, the expansion of share in the second-hand housing/new housing transaction market, and the increase in demand for renovation in the long term. The company's net profit is expected to triple (compared to 2024) to $232 billion by 2035. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the company's implied value was $25.2 per share of American Depositary Shares (ADS) (up 24%) and $29.0 per ADS share (up 43%), respectively.

Greentown Services Group (02869; purchase): Expanding share in a growing market

Greentown Services is a leading high-end property management company in China. It has always been at the top in terms of customer satisfaction (brand strength). Compared with its peers, it has a relatively strong record of organic growth and value-added services. Looking ahead, this will help Greentown Services significantly surpass the expansion of the industry's market size (as the building stock grows) and achieve healthy returns and free cash flow under an asset-light model. Greentown Services' net profit is expected to double to 2.6 billion yuan by 2035 (compared to 2024), and the return on free cash flow will expand to 17%, supporting higher dividend yields. Scenario analysis for 2035 shows that under the basic/optimistic scenario, the implied value of the company was HK$7 per share (up 58%) and HK$8 per share (up 80%), respectively.