1H21 results were almost a non-event, as they delivered no major surprise. Since hitting the trough in late July, the sector has been range-bound, mostly tracking growth stocks. We are cautious in the near term, as we see minimal sector-specific catalysts. Thus, we expect the sector to stay range-bound till year-end or early Jan-22, when the market starts to trade on FY21 results; by then, outperformance may happen. Before then, upside risk may come from: (1) government reiteration of a positive stance (or even better, actual support measures); (2) a growth stock recovery; and (3) less concern about developers’ liquidity. A significant de-rating, however, is also unlikely, in our view, as the current valuation of a 22x P/E is already close to the trough (21x) in Dec-20. We suggest pair trades on a threemonth horizon. On the long side, we prefer high-quality names with potential catalysts (e.g., M&A/GFA progress), including Country Garden Services, CR Mixc and Shimao Services. For the short side, we suggest Greentown Service (higher risk of target miss) and China Overseas PH (lack of catalysts).

 Sector P/E may be range-bound near-term: The sector currently trades at a 22x 12-month fwd P/E, which is only slightly above the trough (21x) in Dec-20.

We think the sector could trade in a 20-25x P/E range in the next few months due to a lack of catalysts. A re-rating to 30-35x is possible by year-end or early Jan-22, in our view, when investors start to trade on FY21 results. However, a further increase to 35-40x (the previous peak) might be challenging, as investors are pricing in the potential impact of social security, which will likely remain an overhang for a while, until there is more clarity from the government.

 Stick to high-quality names with credible sponsors and low impact from labor costs/social security: Investors have recently raised two concerns: (1) liquidity risk of sponsor developers; and (2) the impact of labor costs (including social security) under the theme of common prosperity. While we think liquidity risk should be limited to a few developers, it could impact sentiment on PMCs with highly leveraged sponsor developers. As for labor cost, while nothing has been announced, we think the concern will remain an overhang for a while. We are cautious on names with a higher potential impact from that, i.e., Greentown Service, China Overseas PH and Poly PS (more).

 Investor appetite has changed this year: We think investors are becoming more selective than last year, and most funds are very concentrated on a few big-cap names with strong sponsors (more). Small-caps have mostly de-rated to <10x (due to low scarcity value now), and they could not pick up meaningfully, even during a sector rally. Meanwhile, companies that rely on third-party bidding for growth (e.g., Ever Sunshine, Jinke, Greentown) have also seen a derating, as we think investors are pricing in the risk of intensified competition for third-party contracts when evaluating growth sustainability.

 Downgrade Evergrande to UW; EG Services and Times Neighborhood to N: We downgrade Evergrande Group to UW and Evergrande Services to N, as we think the negative news flow on Evergrande will linger for longer than expected. We also downgrade Times Neighborhood to N due to a lack of nearterm catalysts (more).