Yum Cha 飲茶. November 14, 2012 TALKING POINTS CHART OF THE DAY NON-BANKS DRIVING CREDIT GROWTH. INDICES Closing DoD% Hang Seng Index 21,188.7 (1.

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1 Yum Cha 飲茶 November 14, 2012 CHART OF THE DAY NON-BANKS DRIVING CREDIT GROWTH INDICES Closing DoD% Hang Seng Index 21,188.7 (1.1) HSCEI 10,230.1 (2.0) Shanghai Composite 2,047.9 (1.5) Shenzhen Composite (1.9) Gold (US$/ounce) 1, Baltic Dry Index Crude Oil, WTI (US$/BBL) 85.3 (0.2) Crude Oil, BRENT (US$/ BBL) (0.7) HIBOR, 3-M (%) SHIBOR, 3-M (%) RMB/USD - mid rate 6.23 (0.0) DIARY NOTES FOR THIS WEEK The growth in corporate bonds, private wealth management and trust fund products is changing the structure of China s credit market, and masking the slowing bank lending. The increase in non-bank financial institutions has a spillover impact on commercial banks, which in many cases hold bonds issued by the trust funds. For the latest quarter, China s banks reported an average 0.97% write-off of non-performing loans (NPLs). China s total banking assets are around RMB6,500bn, so that NPLs are around RMB63bn. Bank provisions against NPLs are ~3% of assets, and if the actual write-offs increased to this level there would be no major impact on bank capital. However, if the NPLs were increased to 5% there could be a need for substantial capital injections, especially as the big banks will need to meet Basel III capital adequacy requirements by the end of Banks are clearly becoming more risk-averse, but in so doing credit is growing elsewhere. TALKING POINTS PROPERTY YUZHOU PROPERTY [1628.HK, HK$1.87] Yuzhou sees increased acquisition opportunity as local small developers face liquidity problems. Management believes they have ample cash on hand (~RMB4bn) after the bond issue of US$250m last month for acquisitions if opportunities arise. New Yuan Loans (YoY) Oct Nov Money Supply M2 (YoY) Oct Entrepreneur Confidence Oct Nov Actual FDI - Oct (Previous 6.8%) CHINA GAS [0384 HK; HK$4.42] - SK Energy & Services purchased ~26.2m of shares of China Gas at a price of HK$4.56 (Total value: HK$119.5m) on Nov 7, taking its stake from ~13.8% to ~14.3%. After the share purchase, SK remains the third-largest shareholder. YINGDE GASES [2168.HK, HK$7.43] - In a meeting with management, we were told 2H earnings have stabilized after the 20% year-on-year (YoY) drop in the 1H, and are expected to be roughly in line with the 2H LIFESTYLE INTERNATIONAL [1212.HK, HK$16.56] - Lifestyle Intl has been given approval by the HKEx to spin-off Lifestyle Properties. The property subsidiary, still to be controlled by Lifestyle Intl, will comprise property investment and development assets. CASABLANCA [2223.HK] IPO FACTSHEET The designs, manufactures and sells branded bedding products in Hong Kong and China.

2 PROPERTY - YUZHOU PROPERTY [1628.HK, HK$1.87] COMPANY VISIT We met management of Yuzhou Property recently. The key takeaways: Fujian province will continue to be the major source of income for Yuzhou in the next five years, accounting for about 60-70% of total revenue. Within Fujian, Xiamen will continue to be the core location given its GDP per capita (RMB69,000 in 2011), which is about 46% higher than Fujian province as a whole. In 1H12, Yuzhou had a market share of 13% in Xiamen, based on gross floor area (GFA) sold. Yuzhou sees very strong housing demand in Fujian, especially among first-time end users in Xiamen. Housing prices in the range of RMB m are most popular in Xiamen. Yuzhou sees increased acquisition opportunity as local small developers face liquidity problems. Yuzhou has limited funding sources compared with bigger players or other listed developers, and banks are less willing to lend to small companies and their potential buyers. Nevertheless, management believes they have ample cash on hand (~RMB4bn) after the bond issue of US$250m last month for acquisitions if opportunities arise. Yuzhou has a total land bank of 6.5m m 2 at the end of September 2012 with about 4.8m m 2 for sale. This provides Yuzhou with 4-5 years of development. Management expects sales to grow at 20-30% p.a., but will exceed that rate this year due mainly to the low base last year. Yuzhou completed its 2012 annual sales target of RMB5bn by September. By the end of October, total contracted sales was RMB5.8bn, up 49% YoY. In addition, average selling price (ASP) for the first 10 months was the second flat month compared with the same period last year. Yuzhou is likely to maintain its gross margin above 40%. Yuzhou has maintained its gross margin at above 40% over the last six years with the latest at 45% in 1H12. This is better than the sector average of about 36%. This illustrates management s ability to secure land bank at relatively low cost. The weighted average unit cost of land bank is RMB1,317/m 2, which is about 15% of contracted ASP in 1H12. Valuation: Currently Yuzhou is trading at 4.7x PE and 0.8x PB versus the sector average of 10.3x and 0.9x, respectively. YUZHOU PROPERTY [1628.HK] Source: Bloomberg

3 CHINA GAS [0384 HK; HK$4.42] SK ITS RAISED STAKE According to HKEx, SK Energy & Services purchased ~26.2m of shares of China Gas at a price of HK$4.56 (Total value: HK$119.5m) on Nov 7, taking its stake from ~13.8% to ~14.3%. After the share purchase, SK remains the third-largest shareholder. Implication: Given that China Gas clearly stated in October that Sinopec and other strategic shareholders may further invest in China Gas through shares or other forms of investment, we think the share purchase by SK could be a move to avoid the potential dilution of its stake in China Gas. While it is too early to estimate the size of the potential new share issuance by China Gas (as we believe it will depend on the scale of the joint venture to be formed by Sinopec and China Gas), we will not be surprised if SK further raises its stake in China Gas. We believe this interest it will offer downside protection to the share price in the near term. We are expecting an announcement on more concrete details regarding the strategic cooperation between China Gas and Sinopec, which should serve as a positive share price catalyst. CHINA GAS [384.HK] Market Cap: US$2,593m; Free Float: 36.32% HK$ E 2013E Revenue (m) 10,212 15,862 22,648 26,207 Net Profit (m) ,172 1,377 EPS (HK$) ROE (%) Yield PER (x) PBR (x) Source: Bloomberg

4 YINGDE GASES [2168.HK, HK$7.43]: COMPANY VISIT 2H FLAT, BUT WELL POSITIONED FOR LONGER TERM We met Yingde Gas management yesterday for an update. 2H earnings have stabilized after the 20% year-on-year (YoY) drop in the 1H, and are expected to be roughly in line with the 2H No significant improvement in merchant sales (11.5% of revenue) nor margins are expected in the 2H. Yingde is the largest supplier of outsourced on-site industrial gases in China with a 37% market share. The company produces nitrogen, oxygen and argon mostly for steel producers (70% of revenue) and chemical companies. Merchant prices are flat with no material pick up in argon largely due to continued weak poly silicon markets. Prices remain at about half (RMB2/Nm 3 ) their levels in Gross margins fell to 31% from 36.8% in the 1H from the 23.6% drop in merchant sales and as electricity costs (67% of COGS) rose 28.5% YoY. Margins have stabilized with the next move in electricity prices not expected until after the current government transition in Beijing. A continuation of the favoured 15% tax rate is expected this year as new projects continue under holiday, although the effective rate will likely increase incrementally in coming years. The company is increasingly looking at chemical factories to balance its portfolio from steel producers. A project to produce hydrogen for Sinopec is expected to begin operation in 2014 at a capex of RMB1.5bn. Longer term, the increasing use of oxygen as an energy source for steel mills is a growth driver, as is the potential market from in-house gas producers. About half of industrial users in China have a captive gas supply which is often inefficiently produced. The captive market, estimated at RMB22bn in 2011 versus an outsourced share of RMB9.4bn is growth field. Yingde operates in 9 provinces, with 14/36 sites in Jiangsu and Shandong, also suggesting further geographic potential. The company s business model, with high capex and a focus on a 14% IRR, doesn t lend itself to a DCF valuation although we think a 12.8x PER is not expensive for a leader in a growth industry. The company is committed to a dividend payout of 20-30% with a repeat of last years 28% expected in YINGDE GASES [2168.HK] Market Cap: US$624m; Free Float: 57.24% RMB E 2013E Revenue (m) Gross Profit GM (%) EBITDA Net Profit (m) Profit margin (%) EPS (HK$) YoY (%) Capex Free Cash Flow Net Cash per share (HK$) Working Capital % of revenue Equity ROE (%) Yield (%) PER (x) PBR (x) Source: CGIHK Research

5 LIFESTYLE INTERNATIONAL [1212.HK, HK$16.56] SPIN-OFF OF NON-CORE PROPERTIES The HKEx confirmed Lifestyle Intl can proceed with the spin-off of Lifestyle Properties. It was reported that Lifestyle Properties will comprise certain existing subsidiaries of Lifestyle Intl, which are engaged in property investment and development but not for the operation of department stores. The extent of the decrease in percentage holding by Lifestyle Intl has not yet been confirmed. A parcel of land in Shenyang is one of the assets to be spun-off, and there was a revision of its value estimation - previously it was booked as HK$850m as of June 2012, on the assumption that the height limit is 30m. However, the height limit was set at 15m due to historical architecture concerns, and it may be re-valued at HK$682m, implying a reduction of 1.4% to Lifestyle Intl s total net asset value. While details of the assets to be spun off have not been disclosed, Lifestyle Intl s investment property portfolio is valued at HK$3.99bn (HK$3.82bn after restating the Shenyang property), equivalent to c.22% of total assets and c.51% of NAV. We believe it is the upper limit of the spin-off asset, since only non-department store focusing properties will be spun-off this time. While the valuation of the spin-off should be revisited with subsequent announcements and the prospectus, we believe it will not have significant impact on Lifestyle Intl s share price, because it will remain the holding company of Lifestyle Properties. One benefit should be more transparency in the company s department store operations and its property business. Lifestyle Intl is trading at 13.1x 2013E PER with 3.1% forward yield, while its historical median PER is 17x and the trough valuation level is 8x forward PER. LIFESTYLE INT L [1212.HK] Market Cap: US$3,557m; Free Float: 27.76% HK$ E 2013E Revenue (m) 4,317 5,132 5,651 6,251 Net Profit (m) 1,408 1,886 1,899 2,107 EPS (HK$) ROE (%) Yield PER (x) PBR (x) Source: Bloomberg

6 CASABLANCA [2223.HK] IPO FACTSHEET Company Background The company is engaged in designing, manufacturing and selling branded bedding products in Hong Kong (48.6% of total revenue in 1H12) and China (47.8%), focusing on the premium and high-end segments. Brands Info: The company s own brands Casablanca (64.1% of total revenue) and Casa Calvin (21.0%) were ranked in the top 3 in their respective market segments in HK and top 10 in the PRC by market share value in Licensed brands (14.4%) include Elle Deco, Centa-Star. Sales Network: As at 30 June 2012, total point of sales (POS) reached 358, 56 from HK and 302 from China. Of which, 203 (73.4% of total revenue) are self-operated while 155 (17.4%) are distributor-operated POS. Key Drivers Consumption upgrade in China. Continuous increase in disposable income for the Chinese population will drive a consumption upgrade, increasing demand for branded and quality products, benefiting sales in the higher-end bedding market. According to Euromonitor, the premium segment is expected to grow at a CAGR of 29.9% and high-end at 28.1% over Sales network expansion. The company plans to open 47 points of sale (POS) to 392 by the end of 2012 and 72 POS to 464 in 2013, representing an annual growth rate of 13.6% in 2012 and and 18.4% in Potential improvement in operation in China. Average revenue per POS per annum in China was HK$350,000, compared with HK$1.8m in HK in 1H12. This suggests room for future improvement of operation efficiency of POS in China, in both revenue and margin term, as the company gradually builds up its scale and brand names in the market. Risk Factors Barrier to entry is low. Several competitors have exhibited regional dominance in different regions in China, potentially limiting the company s growth. Rental and staff cost increases remain a key concern. Use of Proceeds 84.0% (~HK$50.1m) will be used for sales network expansion. 9.0% (~HK5.4m) will be used for upgrade of management information system. 5.0% (~HK3.0m) will be used for brand building activities. 2.0% (~HK$1.2m) will be used for funding of working capital. NB China Galaxy Securities International (Hong Kong) Ltd has an investment banking relationship with Casablanca.

7 DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or estimates contained herein reflects the personal views and opinions of the analysts who prepared this report, such views and opinions may not correspond to the published view of China Galaxy International Financial Holdings Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the judgment of the analyst on the date of this report and are subject to change without notice. Please take note that member companies of China Galaxy International Financial Holdings Limited (including but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers, agents and employees ( the Relevant Parties ) may have an interest in securities of the company or companies referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccuracy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer. COPYRIGHT RESERVED China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: CONTACT US John Mulcahy Eric Tomter, CFA Janus Chan, CFA Wayne Fung, CFA Angela Han Lee Vicky Lai johnmul@chinastock.com.hk erictomter@chinastock.com.hk januschan@chinastock.com.hk waynefung@chinastock.com.hk angelahanlee@chinastock.com.hk vickylai@chinastock.com.hk