Weak 1H26 earnings are already priced in, and HSBC is still pricing in a 2027 recovery in China real estate

Overview

HSBC released a 1H26 earnings preview for China's real estate sector, with the core judgment that short-term earnings pressure remains, but the market is increasingly trading the recovery starting in 2027. The report notes that the decline in revenue recognition, weaker JV contributions, and margin pressure reflected in Yuexiu Property's July 17 profit warning are not isolated cases; developers such as China Merchants Shekou and Huafa Properties have also flagged sharp profit declines or potential losses. Even so, narrower house price declines, easing destocking pressure, improving secondary-home liquidity, and resilient high-end demand lead HSBC to maintain a positive view on high-quality sector leaders.

Core views

The report's core views include: first, weak earnings in 1H26 and FY26 are highly likely already priced in by the market, and investor focus is shifting to an earnings recovery in 2027; second, the sector recovery is showing K-shaped divergence, with the mass market supported by improved secondary-home transactions and affordability, while the high-end market is supported by luxury home transactions in cities such as Hangzhou and strong sell-through of quality new launches in core cities; third, market share continues to concentrate in leading developers with strong products and high-quality land banks, with high-quality developers such as CRL, COLI, and Jinmao gaining about 1 percentage point of market share in 1H26 versus 2025; fourth, the top picks are CRL and C&D International, as both have stronger advantages in high-end projects, earnings visibility, and near-term earnings resilience.

Analysis framework

The report combines profit warnings, monthly sales and rental announcements, secondary-home transactions, sell-through of high-end projects, developer market share, retail property share, forward PE, NAV discounts, PB, and year-to-date share price performance to assess sector pricing and stock opportunities. At the individual stock level, HSBC uses NAV valuation and sets relative discounts based on operating and financial strength, execution track record, sales momentum, land bank quality, margin recovery prospects, and investment property resilience.

Methodology notes

• Valuation methodsNAV valuation

  Net asset value valuation

  The target price is based on the total asset value of development and investment projects minus net debt, after which a relative discount is applied to NAV per share; the discount level references historical averages and standard deviations, and is adjusted based on sales momentum, recurring income, execution track record, and land bank quality.

• sector_cycleK-shaped recovery

  K-shaped recovery

  Real estate demand and corporate performance are diverging: the mass market is supported by improved secondary-home liquidity and affordability, the high-end market is supported by luxury home transactions and quality projects in core cities, while weaker developers continue to face pressure on revenue, margins, and impairments.

• industry_structuremarket consolidation

  Rising market concentration

  The report uses changes in the market share of top developers and the share of covered retail landlords in national retail sales to judge that industry share continues to concentrate in leading companies with stronger products, land banks, and operating capabilities.

Asset mapping & comparison

Structured mapping from thesis to named assets (strengths, weaknesses, peers, risks).

• China Resources Land (1109.HK)

  One of the top Buy-rated picks

  Strengths

  Strong investment property performance, with 1H26 total rental income up 13% YoY; FY25 shopping mall margin of 77%; may recognize more than RMB2bn in revaluation gains related to the Chengdu Mixc mall spin-off.

  Weaknesses

  Development property remains affected by industry-wide declines in revenue recognition, margin pressure, and potential inventory impairments.

  Comparison

  Compared with most developers, CRL has stronger recurring income and a better execution track record, allowing it to better cushion the downturn in development operations.

  Risks

  Failure to sustain sales momentum, margins below expectations, a slowdown in the shopping mall business, reduced dividend stability, and macro and property policy uncertainty.

• C&D International (1908.HK)

  One of the top Buy-rated picks

  Strengths

  Its land bank is relatively young, impairment risk is lower, the urgency to clear completed residential inventory is lower, and the path to margin recovery is clearer.

  Weaknesses

  It remains exposed to risks from weak sector sales and margin compression.

  Comparison

  Compared with developers facing higher inventory pressure, C&D International is more resilient in 1H26 earnings stability.

  Risks

  Slower land acquisition, a sharp deterioration in sales, significant margin compression, deeply discounted equity placement, and JV project risks.

• China Overseas Land & Inv (0688.HK)

  Buy-rated covered name

  Strengths

  Sales prospects are improving, and it is expected to benefit from a sector recovery led by tier-1 cities.

  Weaknesses

  1H25 earnings were stronger than 2H25, making the 1H26 comparison base more challenging.

  Comparison

  It is still regarded as a leading state-owned developer that can benefit from a sector recovery, but its near-term earnings upside is less prominent than that of preferred names CRL and C&D International.

  Risks

  Slower sales momentum, margins below expectations, and macro and property policy uncertainty.

• China Jinmao Group (0817.HK)

  Hold-rated covered name

  Strengths

  It is a high-quality developer and benefits to some extent from the trend of rising market share concentration.

  Weaknesses

  Earnings prospects are uncertain, and the stronger 1H25 base creates greater near-term comparison pressure.

  Comparison

  Compared with the Buy-rated names, upside is smaller, with the report implying about 8.7% upside to the target price.

  Risks

  Contracted sales below expectations, continued impairments, ongoing margin pressure, slower booking pace, and macro and policy uncertainty.

• Yuexiu Property (0123.HK)

  Buy-rated covered name, but with downside risk to 2026 forecasts

  Strengths

  Against a low earnings base, it still has significant earnings uplift potential if tier-1 cities lead the recovery.

  Weaknesses

  1H26 core net profit is expected to decline about 90-95% YoY, with pressure on revenue recognition, JV contributions, and margins.

  Comparison

  The report believes its profit warning has largely been digested by the market, but its short-term forecast risk is higher than that of the preferred names.

  Risks

  Sales and land acquisition below expectations, slow development and sales progress in urban renewal projects, further project impairments, and macro and policy uncertainty.

• Retail landlords covered by HSBC

  Related assets within the property sector with stronger earnings visibility

  Strengths

  The share of covered retail landlords in national retail sales almost doubled from 2021 to 2025, showing market share gains despite weak retail sales.

  Weaknesses

  Valuation upside may still be constrained by weak market sentiment.

  Comparison

  Compared with pure developers, retail landlords have better earnings visibility, but near-term valuation elasticity may be suppressed by sentiment.

  Risks

  Weak retail sales, slower rental growth, and persistently weak valuation sentiment.

Key data

• Yuexiu Property 1H26 core net profit warningDown about 90-95% YoYThe company said the reasons include lower revenue recognition from contracted sales, weaker JV contributions, and ongoing margin pressure.
• Yuexiu Property share price performance after the warningUp 1.6% on July 20, versus a 2.4% rise in the HSI over the same periodThe report therefore judges that weak earnings factors have largely been priced in by the market.
• Month-to-date secondary-home transactions in 10 citiesUp about 7% YoYUsed to support the view of improving liquidity in the mass market.
• Market share of quality developersUp about 1 percentage point versus 2025High-quality developers such as CRL, COLI, and Jinmao continue to gain share, while ASP is also rising.
• CRL 1H26 total rental incomeUp 13% YoYBased on monthly disclosures, the strength of investment properties helps cushion pressure on development property revenue.
• CRL FY25 shopping mall margin77%The high mall margin is seen as a factor that helps ease pressure on development margins.
• Potential revaluation gain for CRL>RMB2bnRelated to the Chengdu Mixc mall spin-off, which the report expects may be recognized in 1H26.
• C&D International target price and upsideHKD19.90; 37.7%Buy maintained, because its younger land bank lowers impairment risk and provides a better path to margin recovery.
• COLI target price and upsideHKD16.50; 20.8%Buy maintained, with the report believing it will benefit from a sector recovery driven by tier-1 cities.
• China Jinmao target price and upsideHKD1.50; 8.7%Hold maintained, as earnings prospects remain uncertain.

Impact & implications

The investment implication of the report is that near-term earnings for real estate developers may still be very weak, but this is not the main pricing issue; more important is identifying which companies can be the first to deliver earnings in the 2027 recovery cycle. HSBC recommends focusing on earnings resilience, cash flow from investment properties, high-end project product strength, quality land banks, and market share gains, rather than simply avoiding the entire property sector.

Risks

• The weakness of 1H26 and FY26 earnings may exceed market expectations.
• Further house price declines could lead to additional inventory impairments and gross margin compression.
• Weak contracted sales may cause continued declines in development property revenue recognition from 2026 to 2028.
• Weaker profit contribution from JV projects.
• Improved secondary-home liquidity may fail to translate into a recovery in new-home demand.
• High-end demand or luxury project sell-through in core cities may fall short of expectations.
• Macroeconomic and property policy uncertainty.
• Weak retail sales may limit the recovery in rents and valuations for retail properties.

What to watch

• The actual scale of impairments and changes in gross margins reported by developers after 1H26 results are released.
• Whether sales improve beyond expectations in 2H26 due to a low base.
• Whether the YoY growth rate of secondary-home transactions in 10 cities can continue.
• Sell-through performance of high-end projects in Hangzhou and other core cities.
• CRL's investment property rental growth, shopping mall margins, and progress in recognizing revaluation gains from the Chengdu Mixc mall spin-off.
• Whether C&D International's younger land bank continues to reduce impairment pressure.
• Earnings forecast revisions for COLI, China Jinmao, and Yuexiu Property after 1H26.
• Whether industry market share continues to concentrate in the Top 10 and high-quality state-owned developers.