INDUSTRY OVERVIEW RESEARCH BACKGROUND, METHOD AND ASSUMPTIONS. China Index Academy

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1 This industry overview section contains information and statistics that are derived from government publications, data we purchased from China Index Academy and iresearch Consulting Group and publicly available data. We believe that the official government publications and the sources of information used by China Index Academy and iresearch Consulting Group are appropriate, and have taken reasonable care in extracting and reproducing such information. The information and data derived from China Index Academy and iresearch Consulting Group are not commissioned by us or the Joint Sponsors and China Index Academy s information and data can be accessed by all its subscribers. We have no reason to believe that such information is false or misleading or that any fact has been omitted that would render such information false or misleading. The information extracted from the official government publications, the data purchased from China Index Academy and iresearch Consulting Group and the data extracted from publicly available sources have not been independently verified by us, COLI, the Joint Sponsors, any of our or their respective directors, officers, employees, agents or representatives or any other person involved in the Spin-off. The information may not be consistent with other information available from other sources within or outside the PRC, Hong Kong or Macau. None of us, COLI, the Joint Sponsors, any of our or their respective directors, officers, employees, agents or representatives or any other person involved in the Spin-off, make any representation as to the accuracy, completeness or fairness of such information and, accordingly, you should not unduly rely on such information. The Directors confirm that, after due enquiry, there is no material adverse change in the market information since the issue date of the abovementioned sources which may qualify, contradict or adversely impact on the information contained in this section. RESEARCH BACKGROUND, METHOD AND ASSUMPTIONS China Index Academy We purchased the right to use and quote various data from publications by China Index Academy at a total cost of approximately RMB0.4 million and supplemented this with data obtained from public sources. China Index Academy is an independent research institute cofounded by experts, based both domestically and abroad, who integrate research resources such as China Real Estate Index System, SouFun Research Institute, China Villa Index System and China Real Estate TOP10 Research Group. China Index Academy covers the five regions of Northern China, Eastern China, Central China, Southern China and Southwestern China, with subsidiaries distributed across 75 large and medium-sized cities in China. It has a team of more than 500 professional analysts, predominantly out of real estate research institutes in the PRC. The China Property Management Service TOP100 Enterprise Research organised by the China Index Academy has been conducted since China Index Academy derives its rankings of overall strength of property management companies by evaluating each property management company s scale of operation, operational performance and efficiency, quality of services, development potential and social responsibility, among other factors. The parameters and assumptions used by China Index Academy in compiling the publications are based on their own in-house standards. 68

2 iresearch We also purchased the right to use and quote various data from publications by iresearch Consulting Group at a total cost of approximately RMB0.2 million, and supplemented such information with other data from publicly available sources. iresearch Consulting Group was founded in 2002 and has more than 400 employees. It is one of the market leaders in the fields of online marketing, e-commerce, mobile internet, big data and internet finance. iresearch Consulting Group collects data through its online questionnaires, interviews with industry experts and participants, publicly available information and its own research. The parameters and assumptions used by iresearch Consulting Group in compiling the publications are based on their own in-house standards. OVERVIEW OF THE PROPERTY MANAGEMENT INDUSTRY IN THE PRC, HONG KONG AND MACAU History of the Property Management Industry in the PRC, Hong Kong and Macau The PRC: The Shenzhen Special Economic Zone was established in 1980 and the history of the property management industry in the PRC began in 1981, when the first domestic property management company was founded in Shenzhen. Shenzhen s property management industry subsequently became a model for other regions of the PRC, leading to the rapid growth of the industry. Hong Kong: Hong Kong s property management industry dates back to the 1950s. In 1953, more than 50,000 people lost their homes due to a fire in Shek Kip Mei, Kowloon. In order to address the victims basic housing requirements, the Hong Kong government vigorously implemented a public housing programme, and adopted the concept of property management from the United Kingdom, which required developers of public housing to provide management services after completion, leading to the emergence of property management companies in Hong Kong. Macau: In the 1980s, most of the buildings in Macau were low-rise buildings of seven stories or less. Such buildings had small communal areas, lacked common equipment such as elevators, charging pumps, fire-fighting systems and emergency lighting, and did not have management offices. As such, Macau s property management industry remained fairly undeveloped. In the late 1980s, with the rapid development of Macau s economy and rising average income levels, demand for residential buildings grew substantially, leading to numerous construction projects. Additionally, to meet the needs of low-income residents at that time, the Macau government prioritised the construction of affordable public housing. As a result, the development of high-rise buildings spiked and led to the emergence of Macau s property management industry. Overview of Industry Participants According to China Index Academy, the PRC property management industry is highly fragmented. Between 2008 and 2014, the average gross floor area managed by the top 100 property management companies increased from 6.2 million sq.m. to 17.5 million sq.m., representing a CAGR of approximately 18.9%. In 2012, the PRC government implemented various restrictive 69

3 measures to curb the rapid growth of the real estate industry. Despite this, the top 100 property management service companies maintained healthy returns by leveraging their brand recognition and high-quality services. By the end of 2014, the top 100 property management companies managed 95 properties on average, representing a CAGR of approximately 11.3% from In the first half of 2015, the PRC government carried out new stimulus measures over the real estate market, leading to expectations of a recovery in the PRC real estate industry. The chart below shows the average gross floor area and average number of properties under management of the top 100 property management companies from 2008 to 2014: Average Gross Floor Area and Average Number of Properties under Management by Top 100 Property Management Companies ( ) Gross Floor Area (million sq.m.) Number of Properties Average gross floor area under management Average number of properties under management China Index Academy In terms of geographical coverage, the top 100 property management companies have established presence in an increasing number of locations, reaching an average of 24 cities in By increasing the number of managed properties in cities with established regional bases, the top 100 property management companies have expanded their scale of local operations. In addition, a number of the top 100 property management companies are growing from regional to national companies through acquisitions, among other methods. 70

4 Labour-intensive Property Management Services The property management industry in the PRC involves labour-intensive processes for the provision of traditional property management services such as security, cleaning, gardening, landscaping and repair and maintenance services. In addition to manual labour, the industry also has a strong demand for technical and managerial professionals, who play an important role in improving business performance, service quality and future growth. Rising labour costs, utility costs and material costs due to inflation in recent years have increased the cost of providing property management services. The chart below shows the average minimum wage per month in major cities (Beijing, Shanghai, Shenzhen and Guangzhou): Average Monthly Minimum Wages in Major Cities (Beijing, Shanghai, Shenzhen and Guangzhou) ( ) (RMB per month) 1,800 1,600 1,400 1,200 1, CAGR = 12.8% 1,154 1,314 1,543 1, China Index Academy Low Standardisation Rate According to China Index Academy, the PRC s property management industry lacks unified standards for service quality. As a result, the quality of services provided by different property management companies may vary significantly. In an effort to address rising labour costs, certain property management companies took various measures, which have lowered the quality oftheirservices,leadingtoadeclineincustomersatisfaction. Despite the low standardisation in the industry, increasing levels of urbanisation have led residents to develop higher expectations of property management services and expect more value-added services. As such, it is expected that in the near future, property management companies will devote more resources to standardising the quality of traditional property management services and diversifying valueadded service offerings to address residents needs. 71

5 Profitability of Property Management Companies In 2014, the average net profit of the top 100 property management companies increased to RMB31.9 million, representing a year-on-year growth rate of approximately 31.6%. This increase was primarily due to the steady growth of traditional property management services and the accelerated development of community leasing, sales and other services. Average net profit from traditional property management services increased by a year-on-year growth rate of approximately 18.4% from 2013 to RMB11.0 million in 2014 as a result of efforts by property management companies to boost operating efficiency by employing automation, standardisation and centralisation initiatives. Average profit from community leasing, sales and other services increased to RMB21.0 million in 2014, representing a year-on-year growth rate of approximately 39.8%. The top 100 property management companies explored new revenue streams by increasing their use of technological innovations, cloud services, online communication platforms and APP platforms to develop value-added services to improve their operating results. The top 100 property management companies, by expanding their scope of business, have gradually transitioned to a sustainable business model comprising property management services as its core business, as supplemented by community leasing, sales and other services. This business model has helped the top 100 property management companies achieve a steady rate of growth by optimising and integrating internal resources to control operating costs and boost profitability. According to China Index Academy, the average net profit margins of the top 100 property management companies have risen from 5.5% in 2008 to 8.9% in MARKET CONDITIONS AFFECTING THE PROPERTY MANAGEMENT INDUSTRY Increasing Urbanisation and Growing Disposable Income Per Capita The levels of urbanisation and disposable income per capita in the PRC have increased significantly in recent years, which we believe has driven the growth of the PRC s real estate industry. The table below shows a summary of the PRC s urbanisation level and disposable income per capita from 2008 to 2014: Total Population (in millions).. 1, , , , , , ,367.8 Urban Population (in millions) UrbanisationRate(%) % 48.3% 50.0% 51.3% 52.6% 53.7% 54.8% Annual Urban Disposable Income Per Capita (RMB)... 15,781 17,175 19,109 21,810 24,565 26,955 28,844 National Bureau of Statistics of China Increased Land Supply With a high rate of urbanisation and increasing disposable income per capita, the PRC government has increased its land supply over the past few years. New land supply for property purpose (site area) increased from approximately million sq.m. in 2008 to approximately 2,000.0 million sq.m. in 2013, representing a CAGR of approximately 21.6%. The total gross floor area of residential properties under construction in the PRC increased from approximately 2.2 billion sq.m. in 2008 to approximately 5.2 billion sq.m. in 2014, representing a CAGR of 72

6 approximately 15.0%. During the same period, the gross floor area of completed residential properties also increased from approximately million sq.m. in 2008 to approximately million sq.m. in 2014, representing a CAGR of approximately 6.9%. The table below indicates the PRC s new land supply for property development (site area), the gross floor area of residential properties under construction and the gross floor area of completed residential properties from 2008 to 2014: CAGR between 2008 to 2014 New Land Supply for Property Development (million sq.m.) , , , , ,000.0 n.a. n.a. Gross Floor Area of Residential Properties under Construction (million sq.m.) , , , , , , , % Gross Floor Area of Completed Residential Properties (million sq.m.) % National Bureau of Statistics of China and Ministry of Land and Resources TRENDS IN THE PROPERTY MANAGEMENT INDUSTRY Increasing Cost Pressure on Labour-Intensive Property Management Services Since the inception of the PRC s property management services in the 1980s, the industry has involved labour-intensive processes in its traditional services, including security, cleaning, gardening, repair and maintenance services. According to China Index Academy, property management companies relying primarily on such traditional services face a number of operational difficulties. While operating costs have risen with the increased cost of labour, property management fees have not matched this increase, leading to weaker margins. Further, property management companies can no longer depend on the expansion of traditional property management services alone to generate corresponding increases in profitability. Under such circumstances, many property management companies are forced to compromise service quality to maintain their profitability, and to forego new business opportunities to maintain their existing operations. Increasing Standardisation and Automation Standardisation is not only an important tool for property management companies to improve service quality, but also a crucial foundation for the scaleability of operations across new regions. The top 100 property management companies have continuously refined and upgraded their service standards to improve the quality of property management services and plan for regional expansion through this strategy. 73

7 The internet and information technology has played a growing role in property management services in recent years. Property management companies have placed greater emphasis on adopting new technologies to maintain their leading market positions through innovations. The top 100 property management companies have steadily raised their levels of investment in technology, significantly improving the quality of services while successfully controlling labour costs. Diversification and Innovative Services Create New Opportunities According to China Index Academy, residents have increasingly demanded higher-quality traditional property management services as well as new diversified offerings from property management companies. Such demands, together with the increasing pressure from rising costs, have led property management companies to adjust their traditional business model, consolidate their resources and transform their operations to achieve sustainable profitability growth. In particular, property management companies have recognised that their biggest assets are the residents living in the properties they manage and the residents demands represent the most valuable business opportunities. Community leasing, sales and other services not only serve as an additional profit generator, but also support the traditional property management services business. The top 100 property management companies provide comprehensive services through real estate agency and asset management services, e-commerce, consulting services and professional technology services, with significant emphasis on service quality. In the future, the property management industry will undergo significant integration. Aside from certain large platform companies, most property management companies will downsize and specialise in niche areas of service, and property management services will become more heavily specialised. Accelerated Industrial Consolidation After over thirty years of development, the PRC s property management industry now comprisesmorethan100,000companies, most of which however, are excessively fragmented. In recent years, some of the top 100 property management companies have begun to merge with or acquire small- and medium-sized property management companies to improve their strategic position. First, they quickly expand the scale of projects under management through mergers and acquisitions, optimise shareable resources and realise economies of scale to improve their market position. Second, they lower barriers to entry to markets in new regions through regional mergers and acquisitions, which can effectively alleviate cross-regional operation risks, and successfully complete the localisation process in an efficient manner. Third, they expand globally through mergers and acquisitions. According to China Index Academy, mergers and acquisitions is one of the principal ways for property management companies to achieve growth. 74

8 SERVICE QUALITY OF TOP PROPERTY MANAGEMENT COMPANIES Continuously enhancing service quality, with property management service satisfaction remaining high From March 2014 to May 2014, the overall customer satisfaction rate of the top 100 property management companies was approximately 84.9%, and satisfaction rate for each area of service exceeded 80%. Areas of higher satisfaction included basic property management services such as garden landscape maintenance, cleaning, energy saving, fire-fighting safety management, community security and elevator maintenance, all of which exceeded 85%. These high scores indicate the high level of quality of basic property management services. In addition, residents placed more emphasis on paid services and community cultural activities than they did in In particular, the importance residents placed on community cultural activities increased by more than 20%. To help build more cohesive residential communities, the top 100 property management companies often organise various community cultural activities to effectively enhance communication between property residents and the property management company. A higher overall satisfaction rate contributes to timely payment of property management fees, and higher collection rates and renewal rates In 2013, the top 100 property management companies, having established brand recognition and customer loyalty among residents, experience high collection rates of property management service fees and renewal rates of service contracts. In 2013, the top 100 property management companies actively developed community leasing, sales and other services, including community network, community commerce and community finance, to supplement traditional property management services and better serve residents growing demand for community convenience services. In order to enhance brand recognition, certain top 100 companies voluntarily declined to renew contracts with low-quality projects, leading to a decline in contract renewal rates. However, this decline nevertheless improved overall profitability and brand value. High-quality services of the top 100 property management companies contributing to project value preservation and appreciation The top 100 property management companies, through repair and maintenance of hardware facilities and professional support of software operation services, helped property owners maximise the value of their properties. In 2013, China Index Academy s sampling survey on top key cities in the PRC revealed that the average price of second-hand housing under the management of the top 100 companies on average grew at a higher rate than the overall in property prices by %. This suggests that high-quality property management services supports the rise of second-hand housing prices. Similarly, in the leasing market, tenants paid a premium for high-quality services, with the annual average rent higher than industry average by %. COMPETITION Competitive Landscape We compete with our major competitors primarily on scale, branding, profitability and service quality. As at 31 December 2014, there were fewer than 20 property management companies with GFA under management exceeding 50 million sq.m.. 75

9 According to a study conducted by China Index Academy in 2015, as at 31 December 2014, our Company was ranked first as a state-owned property management enterprise, with operations covering the PRC, Hong Kong and Macau. Our Company was also ranked 9th in terms of GFA under management among the top 100 property management companies in Our steady growth helped us earn titles such as the 2015 Top Property Service Enterprises to Watch Out For Capital Markets No. 1 and 2015 China Property Service Top 100 Enterprises Corporate Social Responsibility Top 10 No. 4. Barriers to Entry New entrants must meet certain eligibility criteria under relevant PRC laws and regulations. Please see section entitled Appendix III Regulatory Overview PRC Regulatory Overview Legal Regulations on Enterprises Engaging in Property Management Services. Wedonot believe that there are high barriers to entry in this industry, which contributes to the intense competition. Competitive Strength of our Company Our Company is one of the earliest players in the industry and consequently enjoys a firstmover advantage with high brand recognition and customer loyalty. Our history with COLI Group, a leading property developer in the PRC, has allowed us to leverage the China Overseas brand name to secure our position as an experienced property management service provider for mid- to high-end properties. We also focus on implementing our automation and standardisation strategy to improve service quality while reducing our reliance on manual labour. In addition, we plan to invest more resources in our value-added services segment to better satisfy our customers and also create revenue growth potential. For more information, refer to the section entitled Business Our Competitive Strengths and Business Our Business Strategies. E-COMMERCE OPPORTUNITIES FOR PROPERTY MANAGEMENT Internet Penetration and E-commerce Market Size According to the China Internet Network Information Center ( 中國互聯網絡信息中心 ), the administrative agency responsible for Internet affairs under the Ministry of Industry and Information Technology of the PRC, the PRC s internet user quantity and penetration has steadily increased in recent years. The chart below sets forth the internet penetration rate and the number of Internet users in China from 2008 to 2014: Number of PRC s Internet Users (inmillions) Internet Penetration Rate % 28.9% 34.3% 38.3% 42.1% 45.8% 47.9% China Internet Network Information Center 76

10 E-commerce and Market Growth and Future Development According to iresearch Consulting Group, the PRC s e-commerce transaction value in 2014 reached RMB13.3 trillion, which will continue to grow, although the growth rate will decline slightly. The specific data is shown in the table below: e 2016e 2017e 2018e Size of E-commerce Transactions (RMBintrillions) GrowthRate % 27.2% 24.5% 21.6% 18.7% 16.2% iresearch Consulting Group According to iresearch Consulting Group, the PRC s online shopping transaction value reached RMB2.8 trillion in 2014, representing approximately 10.6% of the total retail sales of consumer goods. This proportion will increase by approximately 2.0% every year for the next four years, based on the increase of the PRC s internet users, changes to their consumption behaviour, as well as a higher degree of transparency and a more secure online shopping environment. The specific data is shown in the table below: e 2016e 2017e 2018e Size of Online Shopping Transactions (RMB in billions).. 1, , , , , ,785.0 GrowthRate % 47.4% 43.1% 33.3% 25.1% 17.0% Online Shopping as a percentage of total value of retailed consumer products % 10.6% 13.5% 16.2% 18.5% 20.0% iresearch Consulting Group 77

11 O2O Market Analysis and Its Effect on the Property Management Industry O2O plays an important role for the future development of traditional property management services, by connecting property management companies and residents through a convenient platform and increasing resident satisfaction by offering services that increase their convenience. In particular, online catering and online leisure and entertainment account for a significant portion of O2O industry. The table below sets forth the breakdown of the O2O industry: e 2016e 2017e 2018e OnlineCatering % 40.2% 42.4% 42.3% 41.7% 41.3% Online Leisure and Entertainment % 27.2% 25.8% 25.4% 25.3% 24.9% OnlineHotel % 26.1% 25.4% 25.5% 25.9% 25.9% OnlineWedding % 1.9% 2.5% 2.9% 3.3% 4.2% OnlineParent-Child % 2.3% 2.1% 2.2% 2.2% 2.3% OnlineBeauty % 2.3% 1.8% 1.7% 1.6% 1.4% iresearch Consulting Group 78