More supportive policy environments ahead; more attractive valuations

Transcription

1 Deutsche Bank Markets Research Rating Buy Asia China Company Reuters Bloomberg Exchange Ticker SS CH SHH ` More supportive policy environments ahead; more attractive valuations We expect additional policy supports on property and infrastructure At current attractive valuations, we see as: 1) a cheaper proxy to CSCI (with its stake in CSCI and bigger non-csci construction businesses); and 2) more solid alternative to private developers with its more superior property portfolio from COLI. We also expect positive catalysts from additional government policy supports on property market and infrastructure investment. Increasingly attractive valuations vs. other construction and property names Comparing current valuations of with key construction companies listed on the HK stock market, we see generally trading at meaningfully lower PE and PB, despite its leadership position in the China construction market. For example, is trading at 2015E/16E PE of 8.8x/7.3x, well below the average of 9.9x/8.5x 2015E/16E P/E for the group. Set against the big-cap property developers, now trades at 46% NAV discount, deeper than the group s average of 14%. On PE and PB, is also meaningfully cheaper than the group s average. Compared with other mid-cap developers (which do not have the same quality property portfolio as COLI, which is s subsidiary), s 46% NAV discount is meaningfully deeper than Country Garden (31%), Shimao (37%) and Evergrande (1% premium). Better-than-industry new contracts performance in 1H15 In 1H15, commodity housing new starts in the whole country declined 15.8%, while commodity residential new starts fell 17.3% YoY. However, despite the broad market weaknesses, has been able to achieve better-thanindustry new contracts performance due to the rising market share in the property construction market. As a reference, in 1H15, achieved continued solid performance for its housing construction businesses, with new contracts awarded down only 3.7% YoY meaningfully outperforming the overall market. In addition, new contracts from infrastructure constructions showed a better-than-expected performance, with 11% growth YoY. With this, overall new contracts for in 1H15 were down only 2.1% YoY. In our view, this reflected the strong execution ability of. At the end of 1H15, the total area under construction amounted to msm, up 10.3% YoY. This strong growth in the total area under construction and new starts should allow for continued solid growth in earnings for over the next 2-3 years. Attractive valuations at 42% NAV discount, 8.6x 15E P/E and 7.1x 16E P/E Our new TP of RMB10.97 (lowered from RMB12.18) is based on 10% discount to our NAV of RMB12.19, down from RMB13.53 as we factored in our new estimates for COLI and new assumptions on property constructions. Key risks: unexpected policy/economic volatility, and risks on collection of receivables. Forecasts And Ratios Year End Dec A 2014A 2015E 2016E 2017E Sales (CNYm) 681, , , ,011, ,097,042.3 DB EPS FD (CNY) PER (x) Yield (net) (%) Source: Deutsche Bank estimates, company data Date 7 August 2015 Forecast Change Deutsche Bank AG/Hong Kong Price at 6 Aug 2015 (CNY) 7.11 Price target - 12mth (CNY) week range (CNY) HANG SENG INDEX 24,375 Tony Tsang Research Analyst (+852) tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) jason.ching@db.com Key changes Foo Leung Research Associate (+852) foo.leung@db.com Price target to % Sales (FYE) Net profit(fye) Source: Deutsche Bank Price/price relative 924,725 to 899,195 26,324.4 to 24, /13 2/14 8/14 2/15-2.8% -5.9% Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/ HANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute HANG SENG INDEX Source: Deutsche Bank

2 Model updated:05 August 2015 Running the numbers Asia China Reuters: SS Buy Bloomberg: CH Price (6 Aug 15) CNY 7.11 Target Price CNY Week range CNY Market Cap (m) CNYm 213,300 Company Profile USDm 34,350 China State Construction Engineering Corporation Limited is a state-owned enterprise. The Company engages in housing construction, international building contracting, property development and investment, and infrastructure construction. Price Performance Aug 13Nov 13Feb 14May 14Aug 14Nov 14Feb 15May 15 Margin Trends HANG SENG INDEX (Rebased) E 16E 17E EBITDA Margin Growth & Profitability Solvency EBIT Margin E 16E 17E Sales growth (LHS) ROE (RHS) E 16E 17E Fiscal year end 31-Dec E 2016E 2017E Financial Summary DB EPS (CNY) Reported EPS (CNY) DPS (CNY) BVPS (CNY) Weighted average shares (m) 29,914 30,000 30,000 30,000 30,000 Average market cap (CNYm) 96,221 99, , , ,300 Enterprise value (CNYm) 98, , , , ,077 Valuation Metrics P/E (DB) (x) P/E (Reported) (x) P/BV (x) FCF Yield (%) nm Dividend Yield (%) EV/Sales (x) EV/EBITDA (x) EV/EBIT (x) Income Statement (CNYm) Sales revenue 681, , ,195 1,011,633 1,097,042 Gross profit 80, , , , ,314 EBITDA 38,211 47,544 48,324 57,397 67,875 Depreciation Amortisation EBIT 38,211 47,544 48,324 57,397 67,875 Net interest income(expense) -5,407-7,429-5,614-5,628-5,648 Associates/affiliates 3,598 1, Exceptionals/extraordinaries 2,365 1,937 4,162 4,789 5,536 Other pre-tax income/(expense) Profit before tax 38,799 43,336 46,873 56,557 67,763 Income tax expense 9,465 10,159 11,484 13,857 16,602 Minorities 8,935 10,607 10,617 12,810 15,348 Other post-tax income/(expense) Net profit 20,399 22,570 24,772 29,891 35,813 DB adjustments (including dilution) DB Net profit 20,399 22,570 24,772 29,891 35,813 Cash Flow (CNYm) Cash flow from operations 2,619 24,906 51,518 41,570 52,320 Net Capex -13,551-12,461-16,028-12,440-6,469 Free cash flow -10,932 12,445 35,489 29,130 45,852 Equity raised/(bought back) Dividends paid -16,014-18,395-5,107-5,896-7,044 Net inc/(dec) in borrowings 26,007 37,515 35,787 30,773 28,183 Other investing/financing cash flows 5,837-3,385 7,102-10,328-12,725 Net cash flow 4,898 28,181 73,272 43,680 54,265 Change in working capital -34,447-23,854-23,096-28,641-22,063 Balance Sheet (CNYm) Cash and other liquid assets 123, , , , ,335 Tangible fixed assets 43,197 54,856 65,318 72,114 73,342 Goodwill/intangible assets 11,746 11,873 14,116 15,376 16,437 Associates/investments 105, , , , ,022 Other assets 499, , , , ,380 Total assets 783, ,106 1,062,650 1,201,734 1,328,516 Interest bearing debt 185, , , , ,315 Other liabilities 433, , , , ,180 Total liabilities 619, , , ,761 1,020,495 Shareholders' equity 118, , , , ,202 Minorities 46,527 57,894 68,561 81,421 96,819 Total shareholders' equity 164, , , , ,021 Net debt 61,989 72,503 43,969 31,062 4,980 Key Company Metrics Sales growth (%) nm DB EPS growth (%) na EBITDA Margin (%) EBIT Margin (%) Payout ratio (%) ROE (%) Capex/sales (%) Capex/depreciation (x) nm nm nm nm nm Net debt/equity (%) Net interest cover (x) Source: Company data, Deutsche Bank estimates Net debt/equity (LHS) Net interest cover (RHS) Tony Tsang tony.tsang@db.com Page 2 Deutsche Bank AG/Hong Kong

3 Valuations increasingly attractive Comparing s valuations with H-share construction companies and property developers Comparing the current valuations of with the valuations of the key construction companies listed on the HK stock market, we see generally trading at meaningfully lower PE and PB despite its leadership position in the China construction market. For example, is trading at 2015E/16E P/E of 8.6x/7.1x, well below the average of 9.9x/8.5x 2015E/16E P/E for the group. Set against the big-cap property developers, now trades at 46% NAV discount, deeper than the group s average of 14%. In terms of P/E and P/B, is also meaningfully cheaper than the group s average. Even when compared with other mid-cap developers (which do not have the same quality property development portfolio as COLI, which is s subsidiary), s 46% NAV discount is meaningfully deeper than Country Garden (31%), Shimao (37%), and Evergrande (1% premium). In terms of P/E, is also cheaper than Evergrande. Figure 1: attractive valuations vs. other construction companies and property developers Share price: NAV PE PB Company Ticker 5-Aug Disc E 2016E E 2016E Building Materials China Res Cement 1313.HK Anhui Conch 0914.HK China N Building Materials 3323.HK Average Building Materials Construction Company NWS Holdings 0659.HK N/A N/A China Comm Construction 1800.HK China Railway 0390.HK China Rail Construction 1186.HK BBMG 2009.HK SS % CSCI 3311.HK Average Construction developers Big-cap developers COLI 0688.HK % China Vanke - A SZ % China Vanke - H 2202.HK % CR Land 1109.HK % Poly Real Estate - A SS % Deutsche Bank AG/Hong Kong Page 3

4 China Merchants - A SZ % Average Big-cap developers -14% Mid-cap developers Country Garden 2007.HK % Shimao 0813.HK % Longfor 0960.HK % Evergrande 3333.HK % Average Mid-cap developers Average property developers Source: Company, Bloomberg Finance LP, Deutsche Bank Figure 2: NAV breakdown Figure 3: 2014 reported net profit breakdown Other construction and other businesses, Other construction and other businesses, 28% 43% COLI (0688.HK), 49% COLI (0688.HK), 59% CSCI (3311.HK), 6% CSCI (3311.HK), 8% CSC Real Estate (injected into COLI), 7% Source: Deutsche Bank Source: Deutsche Bank Figure 4: Market value of s stakes in COLI & CSCI as a % of market cap of 120% 110% MV of 's stake in COLI & CSCI as a % of MV of 100% 90% 80% 70% 60% 50% 40% 30% 20% 7/31/2009 7/31/2010 7/31/2011 7/31/2012 7/31/2013 7/31/2014 7/31/201 MV of 's stake in COLI & CSCI as a % of MV of Historical average +1 SD -1 SD Source: Company, Bloomberg Finance LP, HKEX, Deutsche Bank Page 4 Deutsche Bank AG/Hong Kong

5 Figure 5: Relative share price performance of vs. COLI since July 2009 (when was listed) 80% 60% 40% 20% 0% -20% -40% -60% -80% 7/31/2009 7/31/2010 7/31/2011 7/31/2012 7/31/2013 7/31/2014 7/31/ CH COLI 688.HK Figure 6: Relative share price performance of vs. CSCI since July 2009 (when was listed) 350% 300% 250% 200% 150% 100% 50% 0% -50% -100% 7/31/2009 7/31/2010 7/31/2011 7/31/2012 7/31/2013 7/31/2014 7/31/ CH CSCI 3311.HK Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank Better-than-industry new contract performance in 1H15 In 1H15, commodity housing new starts in the whole country declined 15.8% while commodity residential new starts fell 17.3% YoY. However, despite the broad market weaknesses, has been able to achieve better-thanindustry new contracts performances via rising market share in the property construction market. As a reference, in 1H15, achieved continued solid performance for its housing construction businesses, with new contracts awarded down only 3.7% YoY meaningfully outperforming the overall market. In addition, new contracts from infrastructure constructions showed a better-than-expected performance, with 11% growth YoY. With this, overall new contracts for in 1H15 were down only 2.1% YoY. In our view, this reflected the strong execution ability of. At the end of 1H15, the total area under construction amounted to msm, up 10.3% YoY. This strong growth in the total area under construction and new starts should allow for continued solid growth in earnings for over the next 2-3 years. Figure 7: construction segment statistics in 1H15 Value (RMBbn) YoY Growth New contracts awarded % Operational segment Housing construction % Infrastructure construction % Surveying and design % Geographical segment Domestic % Overseas % Project progress ('000 sqm) Area under construction % New starts area % Area completed % Source: Company, Deutsche Bank Deutsche Bank AG/Hong Kong Page 5

6 Figure 8: Major contracts acquired by in Jun 2015 Company Project name City RMB construction 1 China Construction Fourth Engineering Bureau 中国建筑第四工程局 2 Strait Construction and Development Co. 中建海峡建设发展 3 China Construction Third Engineering Bureau 中国建筑第三工程局 4 China Construction Third Engineering Bureau 中国建筑第三工程局 5 China Construction Third Engineering Bureau 中国建筑第三工程局 6 China Construction Second Engineering Bureau 中国建筑第二工程局 7 China Construction Sixth Engineering Bureau 中国建筑第六工程局 8 China Construction Seventh Engineering Bureau 中国建筑第七工程局 9 China Construction Eighth Engineering Bureau 中国建筑第八工程局 贵州贵阳花果园项目 Guizhou 100 福建福州海峡文化艺术中心 PPP 项目 Fujian 35.3 广东珠海市横琴莲邦广场 ( 三 四期 ) 项目 Zhuhai 35 福建泉州星光耀广场二期项目 Fujian 31 陕西西安国际医学中心项目 Xi'an 31 广东深圳坪山新区均田城市更新项目 Shenzhen 30 贵州凯里滨江国际城项目 Guizhou 30 湖北武汉绿地沿江一号项目 Wuhan 30 天津滨海新区文化中心 ( 一期 ) 项目文化场馆项目 Tianjing China Construction First Engineering Bureau 中国建筑第一工程局 贵州义龙新区中国绿岛 南南世界文化艺术会义龙养生创意园 ( 一期 ) 项目 Guizhou China Construction Seventh Engineering Bureau 中国建筑第七工程局 12 China Construction Fifth Engineering Bureau 中国建筑第五工程局 安徽合肥国际动漫城项目 Anhui 23 广东惠州源东国际广场超高层项目 Huizhou 22 Infrastructure construction 1 China Construction Eighth Engineering Bureau 中国建筑第八工程局 2 China Construction Fourth Engineering Bureau 中国建筑第四工程局 3 China Construction Fifth Engineering Bureau 中国建筑第五工程局 4 ( SS) 中国建筑股份有限公司 5 Xinjiang Construction & Engineering (Group) 中建新疆建工 ( 集团 ) 重庆红岩村桥隧 PPP 项目 Chongqing 30 贵州遵义茅台至习酒至土城至赤水公路改扩建项目 Guizhou 29 河北秦皇河滨水新城房建及配套基础设施项目 Binzhou 28.2 江苏徐州三环北路高架快速路项目 Xuzhou 26 河北保定乐凯大街南延项目 Baoding 18.3 Total new contracts amount Total contracts balance/audited operating income in % Source: Deutsche Bank Page 6 Deutsche Bank AG/Hong Kong

7 Financial analysis NAV and earnings revisions Our new TP of RMB10.97 (down from RMB12.18) is based on 10% discount to our NAV of RMB12.19, down from RMB13.53 mainly as we factored in slower assumptions for s property construction business and our new estimates for COLI. For the same reasons, we have revised down our estimated earnings for 2015, 2016 and 2017 by 5.9%, 9.1% and 7.0% respectively. Figure 9: Income statement RMB' E 2016E 2017E Total Revenue 571,515, ,047, ,028, ,195,038 1,011,633,468 1,097,042,274 Cost of Goods Sold (501,835,387) (600,219,835) (699,364,000) (791,636,019) (888,079,225) (957,728,165) Business Taxes and VAT (22,056,947) (24,739,397) (30,891,831) (34,720,979) (39,062,609) (42,360,533) Selling Expenses (1,298,672) (1,662,426) (2,098,826) (2,358,983) (2,653,958) (2,878,023) Administrative Expenses (13,402,257) (14,549,210) (15,605,773) (17,540,162) (19,733,444) (21,399,472) Net Finance Expense (4,125,443) (5,407,200) (7,429,397) (5,613,655) (5,628,382) (5,648,350) Asset Impairment Losses (2,612,599) (1,666,428) (4,524,263) (4,614,748) (4,707,043) (4,801,184) Fair Value Changes 200,979 32,504 (222,120) Profit from Investments 2,995,696 5,373,836 2,321,021 3,017,327 3,620,793 4,344,951 - From JV and associates 2,713,247 3,597,707 1,506, Operating Profit 29,381,205 38,209,834 42,213,564 45,727,821 55,389,601 66,571,498 Non-Operating Gains 950, ,236 1,272,406 1,297,854 1,323,811 1,350,287 Non-Operating Expenses (171,063) (286,470) (149,869) (152,866) (155,924) (159,042) - Losses on non-current assets (22,670) (29,750) (44,296) Pretax Profit 30,160,934 38,798,600 43,336,101 46,872,809 56,557,488 67,762,743 Income Tax (7,384,236) (9,465,135) (10,159,287) (11,483,838) (13,856,585) (16,601,872) Profit after tax 22,776,698 29,333,465 33,176,814 35,388,971 42,700,904 51,160,871 Minority Interests 7,041,462 8,934,953 10,606,847 10,616,691 12,810,271 15,348,261 Reported Net Profit 15,735,236 20,398,512 22,569,967 24,772,279 29,890,632 35,812,610 Dividend 3,150,000 4,290,000 5,160,000 5,152,634 5,978,126 7,162,522 Retained Earnings 12,585,236 16,108,512 17,409,967 19,619,645 23,912,506 28,650,088 Reported EPS - Basic Reported EPS - Fullydiluted DPS Dividend Payout Ratio 20.0% 21.0% 22.9% 20.8% 20.0% 20.0% Source: Company, Deutsche Bank Estimates Deutsche Bank AG/Hong Kong Page 7

8 Figure 10: Balance sheet RMB' E 2015E 2016E 2016E Current Assets Cash and Bank Balances 117,359, ,400, ,069, ,390, ,070, ,335,262 Financial Investments for Trading 1,005, ,102 1,037,762 1,037,762 1,037,762 1,037,762 Notes Receivable 7,188,206 15,686,095 5,355,116 20,681,486 23,267,570 25,231,972 Accounts Receivable 81,164,495 83,593, ,430, ,110, ,754, ,398,065 Prepayments 31,547,131 34,011,021 31,129,012 34,987,559 39,362,523 42,685,768 Interests Receivable 109, , , , , ,664 Dividends Receivable 136,099 16, ,755 20,755 20,755 Other Receivable 16,548,368 18,459,451 24,994,876 28,093,076 31,605,930 34,274,313 Inventory 254,382, ,382, ,273, ,443, ,390, ,571,070 - Including completed but not recognized 78,616,398 94,977,362 95,701, Non-current Assets Expiring in 1 year 8,285,321 10,560,629 26,871,653 13,487,926 15,174,502 16,455,634 Other Current Assets 4,254,692 7,313,566 7,048,189 9,891,145 11,127,968 12,067,465 Total Current Assets 521,981, ,537, ,376, ,299, ,968,195 1,088,233,731 Non-current Assets Available-for-sale Financial Assets 1,389,031 1,320,223 4,968,599 4,968,599 4,968,599 4,968,599 Long-term Receivables 56,152,093 82,392, ,069,116 94,415, ,163, ,704,227 Long-term Equity Investments 23,026,043 21,353,570 23,310,984 23,310,984 23,310,984 23,310,984 Investment Properties 11,565,444 16,939,484 25,267,953 28,400,002 31,951,235 34,648,770 Fixed Assets 16,864,392 20,572,040 22,883,728 29,382,586 31,685,122 29,500,125 Contracts under Construction 4,000,716 5,685,280 6,704,128 7,535,127 8,477,346 9,193,059 Intangible Assets 8,223,272 9,042,215 9,238,538 11,689,535 13,151,235 14,261,550 Goodwill 1,917,273 1,895,453 2,022,401 2,022,401 2,022,401 2,022,401 Expenses to be Amortized 1,036, , , , , ,051 Deferred Taxes 4,409,290 4,831,493 6,021,207 5,624,737 6,786,899 8,131,529 Other Non-current Assets 1,128,723 2,443, ,787 3,596,780 4,046,534 4,388,169 Total Non-current Assets 129,712, ,283, ,729, ,350, ,765, ,282,465 Total Assets 651,694, ,821, ,106,215 1,062,649,784 1,201,733,985 1,328,516,196 Current Liabilities Short-term Debts 27,709,946 21,794,092 21,714,536 31,471,826 35,407,171 38,396,480 Notes Payable 11,080,466 11,122,726 12,514,256 14,065,441 15,824,232 17,160,218 Accounts Payable 182,562, ,948, ,431, ,704, ,430, ,087,814 Deposits from Customers 80,836, ,143, ,344, ,879, ,745, ,556,341 - Including contracts recognized but not completed 14,407,966 16,638,247 22,825,149 22,479,876 25,290,837 27,426,057 Salaries Payable 3,738,218 4,022,124 4,228,591 4,752,739 5,347,038 5,798,470 Taxes Payable 26,101,208 31,872,315 36,939,229 41,517,972 46,709,522 50,653,049 Interests Payable 1,171,495 1,618,632 2,346,399 2,346,399 2,346,399 2,346,399 Dividends Payable 72, , , , , ,252 Other Payables 25,896,171 33,623,382 34,129,378 38,359,831 43,156,475 46,800,031 Non-current Debts Expiring in 1 year 22,353,704 23,723,535 48,648,524 54,678,674 61,515,883 66,709,462 Other non-current Liabilities 4,206,229 10,603,010 8,852,716 9,950,040 11,194,227 12,139,318 Total Current Liabilities 385,729, ,932, ,638, ,261, ,294, ,383,275 Non-current liabilities Long-term Debts 66,984,190 77,677,368 76,124,678 86,124,678 96,124, ,124,678 Bonds Payable 46,750,974 62,195,148 80,064,763 90,064, ,064, ,064,763 Long-term Payables 10,896,859 9,953,636 11,708,493 13,159,801 14,805,347 16,055,313 Specific payables 40,284 36,146 47,318 53,183 59,833 64,885 Deferred Income Expected Liabilities 352, , , , , ,442 Deferred Tax Liabilities 743,578 1,522, ,886 1,874,912 2,262,300 2,710,510 Page 8 Deutsche Bank AG/Hong Kong

9 Other non-current liabilities 641, ,471 8,520,224 9,576,335 10,773,792 11,683,387 Total non-current Liabilities 126,410, ,325, ,554, ,188, ,467, ,111,977 Total Liabilities 512,139, ,257, ,192, ,449, ,761,391 1,020,495,253 Shareholders' Equity Share Capital 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 30,000,000 Share Premium 30,297,634 29,380,282 30,994,465 30,994,465 30,994,465 30,994,465 Reserves 38,740 32,366 22,494 22,494 22,494 22,494 Revenue Reserves 1,023,576 1,573,882 2,252,862 2,252,862 2,252,862 2,252,862 Retained Earnings 39,556,832 56,178,067 73,752,867 93,372, ,285, ,935,106 Foreign Exchanges Reserve 941, , Total Shareholders' Equity 101,858, ,036, ,019, ,639, ,551, ,201,697 Minority Interests 37,695,788 46,526,762 57,894,022 68,560,713 81,420,984 96,819,246 Total Equity 139,554, ,563, ,913, ,199, ,972, ,020,943 Total Capital Employed 651,694, ,821, ,106,215 1,062,649,784 1,201,733,985 1,328,516,196 Net Gearing 56% 62% 61% 37% 26% 10% BV Per Share Source: Company, Deutsche Bank Estimates Figure 11: Cashflow Statement RMB' E 2015E 2016E 2016E Profit after Tax 22,776,698 29,333,465 33,176,814 35,388,971 42,700,904 51,160,871 Asset impairment loss 2,612,599 1,666,428 4,524,263 4,614,748 4,707,043 4,801,184 Fixed assets depreciation 3,194,692 3,616,069 4,477,790 4,800,000 5,500,000 5,500,000 Investment properties depreciation 174, , , Amortization of intangible assets 217, , , Amortization of long-term expenses 235, , , Gains from disposal of non-current assets (133,055) (140,655) (213,734) Finance expenses 5,384,820 6,994,305 7,977,923 5,613,655 5,628,382 5,648,350 Fair value changes (200,979) (32,504) 222, Investment gains (2,995,696) (5,373,836) (2,321,021) (3,017,327) (3,620,793) (4,344,951) Change in deferred tax assets (1,294,063) (535,788) (1,326,150) 396,470 (1,162,162) (1,344,631) Change in deferred tax liabilities (29,743) 340,624 (336,071) 1,084, , ,210 Change in inventory (43,695,902) (60,096,048) (29,466,146) (43,169,666) (48,947,377) (37,180,677) Change in restricted cash (2,720,553) (1,143,000) (2,042,210) Change in accounts receivables (32,214,722) (46,530,675) (69,008,311) (14,679,847) (16,644,558) (12,643,291) Change in accounts payables 53,071,183 73,518,086 78,324,578 33,273,012 37,726,181 28,657,000 Others (1,990,181) 15,413 (96,375) 22,634,825 10,103,593 7,674,741 Adjustment to tax paid ,578,743 5,191,550 3,943,528 Operating Cash Flow 2,393,300 2,618,799 24,906,341 51,517,609 41,570,152 52,320,334 Net Cash Flow from Investment Activities (13,229,633) (8,370,085) (15,466,747) (16,414,654) (21,839,472) (17,128,277) Financing Activities Subtotal financing cash inflows 104,994,683 92,880, ,753,288 37,588,625 32,781,345 29,768,873 Subtotal financing cash outflows (69,443,675) (81,806,144) (93,558,713) (8,370,068) (8,832,443) (10,696,022) Net Cash Flow from Financing Activities 35,551,008 11,074,002 18,194,575 29,218,557 23,948,902 19,072,852 Foreign exchange impacts on cashflow (26,456) (424,618) 546,707 8,950, Change in Cash and Cash Equivalents 24,688,219 4,898,098 28,180,876 73,272,330 43,679,582 54,264,909 Ending Cash and Cash Equivalents 111,851, ,749, ,118, ,390, ,070, ,335,262 Source: Company, Deutsche Bank Estimates Deutsche Bank AG/Hong Kong Page 9

10 Valuation Our estimated NAV is RMB12.19/share As is a property and construction conglomerate, we believe that a NAV-based valuation approach will be more appropriate. Our target price of RMB10.97 is based on a 10% discount to our est. NAV of RMB12.19/share. Our estimated NAV for is calculated by using a sum-of-the-parts methodology, and incorporates the following assumptions: 1) For s stake in COLI (0688.HK), we use our est. NAV for COLI, derived from applying DCF to estimate the value of COLI s development projects by taking the estimated cash inflows from property sales minus outstanding costs, including any outstanding land costs, construction costs, related income taxes and the LAT for each of the projects. 2) For s stake in CSCI (3311.HK), we are using our estimated NAV for CSCI, derived from our DCF analysis. 3) For s own construction businesses, we are applying a P/E multiple of 8x on our 2015E earnings from those businesses. 4) For s financial assets for trading and investment purposes, we are using the latest reported value in the balance sheet. In arriving at the NAV for the company, we take the aggregate estimated value for these business segments of and then subtract its net debt position. Figure 12: Estimated NAV Listed Subsidiaries RMBmn RMB/Share % of NAV % of GAV COLI 178, % 44% CSCI 31, % 8% Construction Businesses 209, % 51% construction 91, % 22% Infrastructure construction and investment 56, % 14% Design and surveying 4, % 1% Others 40, % 10% 192, % 47% Gross Asset Value 408, % 100% Net Debt (42,761) (1.43) -12% -10% NAV 365, % 90% Source: Deutsche Bank Estimates Page 10 Deutsche Bank AG/Hong Kong

11 Investment risks Macro risks Government property tightening measures might be stricter than expected The China property market is dependent not only on economic conditions and the demand-and-supply balance, but also on government policies. At times when the government is tightening its fiscal and monetary policies, especially via administrative measures, there could be volatile moves in housing transaction volumes, housing prices, land prices, and financing available to developers and homebuyers. With this in mind, if the government s property market tightening measures turn stricter than expected, we could see weakerthan-expected sales and a weaker price performance for the property businesses of. Unexpected economic fluctuations in the Chinese economy In our view, any weaker-than-expected performance in the Chinese economy would likely result in weaker housing demand, hence affecting Chinese developers property sales. On the other hand, any overly strong growth in the Chinese economy could raise concerns about overheating and attract tightening measures. Therefore, any unexpected fluctuations in the Chinese economy would likely affect demand and supply in the China property market and the businesses of. Company-specific risks Risks associated with collection of accounts receivable The counterparties of s construction businesses include different government organizations and private parties, and normally construction works are completed before 100% of the cash proceeds are received. Hence, from time to time, depending on the latest macroeconomic conditions and specific financial positions of the counterparties (including government organizations and private enterprises), there could be delays or defaults on the payments to be made to for its construction works completed and delivered. Such delays and defaults, if happened, would affect the profit and cashflows of. Deutsche Bank AG/Hong Kong Page 11

12 Appendix 1 Important Disclosures Additional information available upon request Disclosure checklist Company Ticker Recent price* Disclosure SS 7.11 (CNY) 6 Aug 15 4,7,14,15 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors. Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes. 4. The research analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest in the securities, or derivatives thereof, issued by this company or sovereign. Please contact us if you are interested in further information. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services. Important Disclosures Required by Non-U.S. Regulators Please also refer to disclosures in the Important Disclosures Required by US Regulators and the Explanatory Notes. 4. The research analyst(s) or an individual who assisted in the preparation of this report (or a member of his/her household) has a financial interest in the securities, or derivatives thereof, issued by this company or sovereign. Please contact us if you are interested in further information. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Tony Tsang/Foo Leung Page 12 Deutsche Bank AG/Hong Kong

13 Security Price 7 August 2015 Historical recommendations and target price: ( SS) (as of 8/6/2015) Previous Recommendations Strong Buy Buy Market Perform Underperform Not Rated Suspended Rating Current Recommendations Buy Hold Sell Not Rated Suspended Rating 2.00 *New Recommendation Structure as of September 9, Aug 13 Nov 13 Feb 14 May 14 Aug 14 Date Nov 14 Feb 15 May /09/2014: Upgrade to Buy, Target Price Change CNY /03/2015: Buy, Target Price Change CNY /02/2015: Buy, Target Price Change CNY /04/2015: Buy, Target Price Change CNY /03/2015: Buy, Target Price Change CNY /05/2015: Buy, Target Price Change CNY /03/2015: Buy, Target Price Change CNY8.46 Equity rating key Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ), we recommend that investors buy the stock. Sell: Based on a current 12-month view of total shareholder return, we recommend that investors sell the stock Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell. Notes: 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends) of -10% or worse over a 12-month period Equity rating dispersion and banking relationships % 25 % 38 % 18 % 11 % 13 % Buy Hold Sell Companies Covered Cos. w/ Banking Relationship Asia-Pacific Universe Deutsche Bank AG/Hong Kong Page 13

14 Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at Page 14 Deutsche Bank AG/Hong Kong

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But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. 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The appropriateness or otherwise of these products for use by investors is dependent on the investors' own circumstances including their tax position, their regulatory environment and the nature of their other assets and liabilities, and as such, investors should take expert legal and financial advice before entering into any transaction similar Deutsche Bank AG/Hong Kong Page 15

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