Hong Kong. China Property Positive on Physical Market; Neutral on Valuation NEUTRAL. Sector Report 5 December 2012

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1 Hong Kong Sector Report 5 December 2012 NEUTRAL Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk China Property Positive on Physical Market; Neutral on Valuation We re-initiate our coverage on the China property sector with a NEUTRAL. We are positive on the physical market and expect total residential GFA sold for overall China to be flattish in 2013 with a minor uptick in prices. For first and second-tiered cities, we estimate 5-10% property price growth and for lower tiered cities, 0-3% price change over 6-9 months. We are neutral on the sector s valuation after the recent stock price run-up and expect to see some opportunistic equity fund raising over the next six months. Some large-cap names such as Shimao and CR Land are trading close to their historical average valuation and we see more upside in quality small- and mid-caps. Among large caps, our preference is for Longfor due to its robust growth prospects and more urban projects for launch in 2013 vs Expect residential GFA sold to be flattish for China in Over the first ten months of the year, China recorded 700.9m sq m of commodity residential GFA sold. This figure was down 1.2% YoY, but we anticipate that the full year residential GFA sold will be 990m sq m in 2012, an increase of 2.0% YoY. On a value-sold basis, the residential segment was already up 6.6% YoY to CNY3,882b by October. For 2013, we expect GFA sold for the whole of China to be flattish partly due to the lower new start GFA for 10M2012; price growth is likely to affect the appetite of some first time home buyers. Recently, we have seen a return of some upgrader demand (mid- to large- sized units) which should help to stabilise volume for overall China in For the 12 property stocks that we track, we estimate an average YoY growth of 15% in contract sales in 2013, thus outperforming the broader market. Contents Industry Analysis... 3 China Resources Land Country Garden Guangzhou R&F KWG Property Longfor Properties Sino-Ocean Land Sunac China Our view on policy a property policy vacuum from now to March 2013: As with the previous leadership transition periods, no / few major property policies were announced and we believe that from now until next March when the actual handover to the new government will take place, we are likely to be see a vacuum in major property policy. The 18th National Party Congress had set a long-term goal of doubling China s 2010 GDP and per capita income for urban and rural residents by It reiterated the need to lift urbanisation rate, which was only 51.3% last year. Both of these are long-term positives for the property sector. If the Chinese government relaxes its One Child Policy in parts of the country next year, the sector will have another positive catalyst. Company (HKD/Sh) Code Rating Mkt Cap (HKD b) 12/4 Price Target NAV dis (%) Target price Upside (%) GZ R&F 2777 BUY KWG 1813 BUY Longfor 960 BUY Sunac 1918 BUY CR Land 1109 HOLD Country Garden 2007 HOLD (3) Sino-Ocean 3377 HOLD SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

2 China Property Sector Sector s GPM and NPM to bottom in 2013; divergent margin outlook for We project that the seven stocks we cover in this report to have their simple average GPM bottom at 33.8% in 2013 (from 36.0% in 2012) and recover to 35.4% in Underlying NPM of the seven stocks in this report are forecasted to achieve an average of 14.4% in 2013 and a robust 15.5% in We forecast the simple average earnings growth to accelerate from 2013 s 14.7% to 2014 s 22.4% for these stocks. We see risks of potential equity financing in the sector over the next six months. In our view, large-cap stocks such as CR Land (1109 HK) and Shimao (813 HK) are already trading at not far from their historical average discounts and PERs, and could be prime candidates for equity financing in Although many developer stocks have deleveraged and have no immediate need for equity financing, we believe the risk of opportunistic equity financing over the next six months lurks in the China property sector. Country Garden (2007 HK) and Longfor (960 HK) each did a share placement earlier this year, and Guangzhou R&F (2777 HK) is an H-share company; hence, we believe these three companies have minimal equity financing risks. Sector valuation: We believe that the HK-listed universe has factored in the stable property sales volume for 2013; thus, the next re-rating would have to come from price growth, NAV-accretive project acquisitions, or higherthan-expected market-share gain. From a price growth perspective, property stocks with higher first-tiered city exposure such as KWG, Sino- Ocean, and Sunac should have better opportunities to raise prices in Stock selection. In general, we expect mid-cap and quality small-caps to outperform large-cap stocks in the China property sector. Our preferred names in the space are SMid-cap, higher-beta plays: Sunac (1918 HK), KWG (1813 HK) and Guangzhou R&F which we all assign BUY ratings. We believe that various large-caps including CR Land and Shimao are trading at not far from their historical average discounts to NAV and PERs and look fully valued to us. Within the large-cap space, we like Longfor for its robust growth prospects and strong management. We are neutral on Country Garden due to our belief that inventory clearing would take time and next year s preliminary new project launches would mostly come from the non-guangdong areas where margins have been generally lower than the Guangdong projects. We would turn more positive on the company if there are signs of faster de-stocking and if management can manage a more evenly split sales schedule between the first and second half of next year. We have assigned HOLD ratings to CR Land and Sino-Ocean (3377 HK) mainly on valuation grounds. 5 December 2012 Page 2 of 66

3 China Property Sector Industry Analysis We see three key trends emerging and expect that they will persist in (1) Return of upgrader demand. Our recent visits to property sites and some developers October contract sales profiles indicated to us that upgrader demand seems to be returning. While China s physical property market in 2012 has performed better than expected, we believe developers raising of prices in some cities will affect volume sell-through in This means that upgrader demand should play an important role in keeping stable volume for China. Given the lesson learnt from the previous CNY4t rescue package causing property speculation and bubble concerns, we believe the government will be more careful this time around. It should still be self-use demand and genuine upgrader demand that will be directed to digest the supply before speculative demand is allowed to come back. What we saw on our recent visits to Nanjing, Shanghai and Wuxi was an overwhelming percentage of buyers from local districts and a high sellthrough rate for medium-sized units (>90 sq m and <200 sq m) catering to upgrader demand. Vanke, one of China s largest developers, posted October buyer breakdown which shows an uptick in sales of larger sized units as well as more non-first time home buyers. Centaline s secondary market color in November also confirms with our observation that upgrader demand seems to be returning. Centaline s local branches in Zhabei and Luwan districts in Shanghai, for instance, noticed a warming up of the mid-high end segment of the secondary market. (2) Third and fourth tiered cities inventory issue to take time to resolve. Inventory months are generally higher in the third- and fourth-tiered cities due to past aggressive expansions by developers and the relative ease of obtaining presale permits there. Our recent channel checks and project visits suggest that because ASPs in the first and key second cities had slid by 15-25% already in late-2011 and early-2012 with the third and fourth-tiered cities experiencing only seen minor drops, the recent price recovery has not been much observed in lower tiered cities. Shimao, Sino-Ocean, and CR Land, for instance, have raised prices on select projects in the first and second tiered cities by 3%-10% in recent months, and in some cases, more. On the other hand, Country Garden s Chuzhou Europe City in Anhui (which took us ~60 minutes car ride from Nanjing CBD) launched a new batch of fully fitted highrise units at an ASP of CNY3,888 psm last month, vs. 2Q12 s launch price of the same price but for high-rise units without fitting. While we expect this project s price to rise in 2H13 due to the Nanjing portion of the Chuzhou- Nanjing highway to complete by end-2013, we see that Country Garden has not been able to raise prices in this third-tiered city project. Another example is Evergrande introduced an installment payment scheme for its project in Qidong since September (about half of the total buyers since September have chosen this scheme, but this is still less than 10% of total buyers for this year), per channel checks. (3) Price hikes in first and some second-tiered cities to continue. We look for 5-10% ASP growth in the first- and second-tiered cities over the next 6-9 months, and 0-3% ASP growth in the third- and fourth-tiered cities. Moreover, we see urban projects ASP growth potential to continue to exceed that of projects in the suburbs. In our view, if prices rise too fast, the Chinese government is likely to turn to the People s Bank of China (PBOC) to guide banks towards tighter lending on mortgages, higher mortgage rates, and tighter real estate developer loans as means to curb price growth. 5 December 2012 Page 3 of 66

4 China Property Sector We believe the Chinese government will be tolerable of a 0-10% growth in property prices as per capita income is expected to double by 2020 from 2010 which should improve affordability, and progress on the construction and completion of social housing is generally on track. Hence, potential unrest associated with rising property prices would be tamed with rising per capita income and the availability of more social housing to those in need, in our view. If property prices rise more than that, the Chinese government could come out with more curbing measures. We do not expect any changes to Home Purchase Restrictions (HPR) in While first-time home buyers dominated the property sales in 1H12, our recent trips to Wuxi, Nanjing, and Shanghai uncovered a return of more upgrader demand. Access to mortgages remains good, despite lower discount to PBOC rate for first home mortgages. Demand for mid-sized units and a considerable portion of buyers coming from the same district where the project is sited point to better upgrader demand. For instance, Agile s new launch of Nanjing Magnificence last month saw at least 90% of buyers from Nanjing and the majority of buyers from the Jiangning district where the project is located, according to local sales. The price point of ~CNY18-19k psm (postdiscounts) as well as majority unit sizes of sq m also point to upgrader demand, not first-time home buyers. To date, local media indicated that subscription sales exceeded around CNY0.5b, over 50% sell-through rate for this project. A recent CREIS report indicated that over 70m urban households in China live in a property space of less than 30 sq m per person, leaving much more room for upgrader demand. Figure 1: Vanke s sales breakdown by unit size Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Below 90 sq m sq m sq m Above 180 sq m 46% 57% 55% 52% 47% 48% 43% 38% 48% 45% 40% 48% 49% 43% 37% 29% 33% 36% 42% 43% 47% 51% 42% 43% 47% 41% 42% 48% 7% 7% 7% 6% 8% 9% 7% 5% 6% 3% 6% 3% 3% 4% 5% 5% 6% 4% 5% 4% 5% 4% 7% 7% 5% 7% 7% 7% 0% 20% 40% 60% 80% 100% Source: Vanke, Maybank Kim Eng Figure 2: Vanke s sales breakdown by demand Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 First Time Purchase First Time Upgrading Re-upgrading Other Demand 24% 30% 35% 36% 36% 37% 33% 31% 33% 31% 29% 29% 37% 31% Source: Vanke, Maybank Kim Eng 28% 23% 27% 28% 29% 34% 36% 34% 32% 34% 34% 32% 34% 34% 32% 28% 25% 21% 25% 18% 21% 22% 21% 22% 23% 24% 18% 21% 16% 19% 13% 15% 10% 11% 10% 13% 14% 13% 14% 15% 11% 14% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% 5 December 2012 Page 4 of 66

5 China Property Sector Our view on policy a property policy vacuum from now to March 2013 and overall macro is positive: As with the previous leadership transition periods (see chart below), no / few major property policies were announced and we believe that from now until next March when the actual handover to the new government will take place, we are likely to see a vacuum in major property policy. The 18th National Party Congress held early last month had set a long-term goal of doubling China s 2010 GDP and per capita income for urban and rural residents by It also reiterated the need to lift urbanization rate. Using the info from the National Bureau of Statistics of China (NBS) and the United Nations Population Department, CREIS estimates that from F, the average annual increase in China s urban population would be 20m people, similar to from s 21m people per year. Both of these are long-term positives for the China property sector. If the Chinese government relaxes its One Child Policy in parts of the country next year, it will provide another positive catalyst for the sector. Figure 3: MSCI China Index and major policies in China transition periods typically have fewer major policy rollouts 120 Transition Period Transition Period Transition Period Transition Period Reformed of residential housing from housing allocation system to commodity residential housing system Regulation of insurance industry with establishment of CIRC in Nov 1998 Beginning to improve quality of SOE banks' assets by cleaning up toxic assets 1999: Restructuring of China Telecom business into 3 parts China became a member of WTO in Dec 2001 China reduced various tariffs May 03: China set up SASAC Also established CBRC Chinese government rolled out stock market reforms Credit tightening on both mortgage side and real estate loans to developers Idle land policy introduced Wtihdrawal of agricultural tax 2006: "90/70" Policy advocating that at least 70% of total area of residential should be units of 90 sq m or less Nov 08: Gov't announced CNY4 trillion to boost economy and loosened property policies May 08: MII, NDRC and MOF launched 3G licenses and third telecom restructuring Initiation of National Essential Drug System New National 10 policies -- austerity measures targeted at property Wen talked about accelerating hukou reform Jan 11: Shanghai and Chongqing rolled out trials of Interest rate property tax liberalization National 8 policies to curb property price hikes 1Q11: roll out of home purchase restrictions 0 Jan 97 Jan 98 Jan 99 Jan 00 Jan 01 Jan 02 Jan 03 Jan 04 Jan 05 Jan 06 Jan 07 Jan 08 Jan 09 Jan 10 Jan 11 Jan 12 Source: Bloomberg, Company data, NDRC, MOHURD, Soufun, Maybank Kim Eng Figure 4: Average annual increase in China s urban population m people E 2020E 2025E 2030E 2035E 2040E 2045E 2050E Source: China NBS, United Nations Population Division, CREIS, Maybank Kim Eng 5 December 2012 Page 5 of 66

6 China Property Sector Affordability vs absolute price growth. In our opinion, a key metric that the Chinese government would focus on in 2013 would be improving affordability, more than the absolute level of price growth. In recent rhetoric, we have seen the Chinese government indicating in the 18 th Party Congress that property measures will not be loosened. Given the stress on economic growth (rumored next year s GDP growth target is 7.5%), we do not think the property measures would be tightened either, in our base case scenario. Thus, while curbing property price growth is important, we argue that improving affordability is an equally, if not more, important metric for the government. There is no question that grey income is hard to measure in China and hence, actual affordability ratios are difficult to calculate. But China s expectations of strong household income growth allow a bit more tolerance in the absolute percentage of price growth, in our view. Figure 5: Estimated affordability ratio for first time home buyers* Affordability Ratio (%) Mean +1SD -1SD Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 *Ratio is defined as monthly mortgage payment / monthly household income. We assume 90 sq m unit size per household Source: CEIC, Company data, Maybank Kim Eng Supply does not look excessive for 2013 (at least in 1H13) given low new start GFA. Developers could speed up new start in 1H13 given much recent landbanking has been a year of clearing inventory attempts by various developers such as Shimao, Longfor and Evergrande. Within the listed universe, few developers have stepped up new start GFA. Overall China s 10-month cumulative new start GFA for commodity residential dropped by 12.7% YoY to 1.08b sq m, with October posting a 9% YoY drop to 87.3m sq m. Coupled with signs of falling inventory in some first- and second-tiered cities, we therefore expect supply in 1H13 to be relatively tight. We believe developers could speed up new start in 1H13 following their recent landbanking efforts, which could change the supply situation in the latter part of the year. Some developers like Country Garden, Evergrande, CR Land and Longfor have relatively short new start-to-presale cycle; the supply situation could change for late December 2012 Page 6 of 66

7 China Property Sector Figure 6: Continued low monthly commodity residential new start GFA (m sq m) YoY 2012 YoY Jan* Mar May July September November Note: * Jan and Feb numbers are reported as a combined number due to seasonality of Chinese New Year. We assume the new start GFA to be evenly split between Jan and Feb to derive the monthly #. Source: CEIC, Maybank Kim Eng 40% 30% 20% 10% 0% -10% -20% -30% -40% Poor residential land supply during this year overall China residential land supply has been poor. In the first ten months of the year, there has not been a single month where residential GFA supplied for 300 cities in China was higher YoY, per CREIS. Having said that, the decline in residential land supply has moderated from 31-33% YoY in June and July to 7% in October. This factor also contributes to our expectation of tight supply in 1H13. Of the ten key cities we monitor, only Wuhan, Chongqing, and Chengdu posted a YoY rise in residential land supply. Figure 7: Jan-Oct YoY change in residential land supply: down for most major cities 100% 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% Source: CREIS, Maybank Kim Eng Inventory declines for select first tiered cities like Beijing and Guangzhou as well as some top second tiered cities such as Nanjing and Fuzhou. Inventory months in the 14 major China cities that Vanke tracks peaked in February this year at a historical high of 21.6 months and ebbed to 9.5 months in July. Inventory months increased slightly to 10.5 months in October due to new supply in the previous two months but the figure was still below the level in 2Q12. Within the cities that we track, we noticed that top tiered cities like Beijing and Guangzhou saw a noticeable drop in inventory months. The same was also observed in top second-tiered cities such as Fuzhou and Nanjing. 5 December 2012 Page 7 of 66

8 China Property Sector Figure 8: China s Inventory Situation (compared to 2010 monthly units sold) No. of months Mar-11 Jul-11 Oct-11 Mar-12 Nov-12 Note: Red circle means a drop in inventory. Inventory months defined by available for sale units/average monthly units sold in Available for sale includes completed unsold units and uncompleted units with presale permit. Source: CREIS, Maybank Kim Eng Figure 9: China s Inventory Situation (compared to 2011 monthly units sold) No. of months Mar-11 Jul-11 Oct-11 Mar-12 Oct Note: Red circle means a drop in inventory Inventory months defined by available for sale units/average monthly units sold in Available for sale includes completed unsold units and uncompleted units with presale permit. Source: CREIS, Maybank Kim Eng Expect residential GFA sold for overall China to be flattish in Over the first ten months of the year, China recorded 700.9m sq m of commodity residential GFA sold. While this figure was down 1.2% YoY, we expect full year residential GFA sold to be 990m sq m in 2012, representing an increase of 2.0% YoY. On a value sold basis, the residential segment was already up 6.6% YoY to CNY3,882b by October. For 2013, we look for commodity residential GFA sold for the whole of China to be flattish partly due to lower new start GFA seen in 10M2012 and price hikes that will likely affect the appetite of some first-time home buyers. Recently, we have seen a return of upgrader demand (mid- to large-sized units), which should help to stabilise overall sales volume for China in For the twelve listed property stocks that we track, we estimate contract sales to grow 15% YoY on average in 2013 compared to that achieved in 2012, thus outperforming the broader market. 5 December 2012 Page 8 of 66

9 China Property Sector Figure 10: Commodity Residential GFA sold for China (m sq m) YTD YTD YoY (%) 2012 YTD YoY (%) Jan-Feb Mar Apr May June July August September October November December Source: CEIC, Maybank Kim Eng Figure 11: CREIS 100 Cities Price Trend # cities up MoM (LHS) # cities down MoM (LHS) YoY% (RHS) % 7% 6% 5% 4% 3% 2% 1% 0% -1% -2% -3% Source: CREIS, Maybank Kim Eng Figure 12: MoM Price Change for CREIS 100 cities and 10 major cities in China 100 cities (LHS) 10 major cities (LHS) Benchmark rate (RHS, %) 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% Jul 10 Dec 10 May 11 Oct 11 Mar 12 Aug Source: CREIS, Maybank Kim Eng Figure 13: YoY Price Change for CREIS 100 cities and 10 major cities in China 8.0% 100 cities 10 major cities 6.0% 4.0% 2.0% 0.0% -2.0% -4.0% Jun 11 Jul 11 Aug 11 Sep 11 Oct 11 Nov 11 Dec 11 Jan 12 Feb 12 Mar 12 Apr 12 May 12 Jun 12 Jul 12 Aug 12 Sep 12 Oct 12 Nov 12 Source: CREIS, Maybank Kim Eng 5 December 2012 Page 9 of 66

10 China Property Sector For first and second-tiered cities, we estimate 5-10% property price growth and for lower tiered cities, 0-3% price change over the next 6-9 months. Note that these are estimates for the mid- and high-end of the commodity residential segment, which is the crux of the HK-listed China developers we track. For CREIS 100 city price data which covers a broader base (e.g., including lower tiered cities and the low-end of the market), we do not expect it to rise by more 3-4%. CREIS 100 city price data was down 0.2% according to year-to-november data; however, it was up 1.2% from the trough this year. We believe that the 100 city data series tends to underestimate price changes compared to listed developers project price changes. YTD fund raising from the developers in the syndicated loan and debt markets has been very active, prepping the developers for next year. If we look at CEIC s data on sources of funds, except for foreign investment, most other sources of funds for developers are up YoY for the first ten months of the year. Developers are better prepped in the event of less loose credit conditions in 2013 compared to the past few months. NAV growth is a key stock catalyst. We believe the key catalyst to China property stocks performance over the next 6-9 months is the ability of individual developers to grow NAV, either by (1) NAV-accretive acquisitions (in this case, the developers with solid government relationships or those with demonstrated ability to acquire cheap land bank via public methods or M&As or well-timed acquisitions are likely to outperform. We believe Longfor and Sunac fall into this category), or (2) raising ASPs when the environment is conducive. In the second case, we believe developers with high exposure to first and second-tiered centrally located projects would be benefited. Based on #2, Country Garden is likely to have a tougher time in raising prices in the short-term given its considerable exposure to the suburbs. Figure 14: Breakdown of sources of funds to China real estate Domestic loans Foreign inv Self raised Deposits & Advanced Payments Others 100% 11% 11% 10% 8% 7% 12% 90% 17% 20% 17% 20% 19% 17% 16% 80% 70% 36% 37% 38% 39% 43% 36% 30% 28% 23% 28% 26% 26% 27% 60% 50% 40% 27% 28% 28% 29% 30% 33% 32% 31% 39% 30% 31% 37% 41% 41% 20% 10% 23% 22% 23% 24% 18% 18% 20% 19% 19% 20% 17% 15% 16% 0% Source: CEIC, Maybank Kim Eng 5 December 2012 Page 10 of 66

11 China Property Sector Figure 15: Sources of funds to developers have been ample in 10M12, except for a drop YoY in foreign investments CNY b 3,500 3,000 2,500 2,000 1,500 1, M12 YoY % Domestic loans Foreign inv Self raised Deposits & Advanced Payments Others 20% 10% 0% -10% -20% -30% -40% -50% -60% Source: CEIC, Maybank Kim Eng Challenges for developers. What would be some key challenges for developers in 2013? In our view, they are: (1) the ability to gain market share with enough available for sale resources (especially in 1H13, given that most developers did not buy too much land in 1H12), (2) the implementation of cost control measures amid rising land prices and labour costs (see chart below), and (3) the possibility of second- and third-tiered cities raising the bar for presale approval. Historically, first tiered cities have higher standards to be met before a project is qualified for presale application. In Shanghai, for instance, high rise buildings need to be topped up before presale approval can be obtained and high-rises in Guangzhou have to be constructed two-thirds of the way before seeking presale approval. In many lower tiered cities, the standards for presale approval are much more relaxed in practice but our channel checks suggest that there could be changes to raise the bar higher for lower tiered cities (which could negative affect the cashflow of developers). Figure 16: China s land costs in 133 cities on the rise 6,000 5,000 4,000 3,000 2,000 1,000 CNY/sq m site area CNY/sq m of GFA 0 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Source: CREIS, Maybank Kim Eng 5 December 2012 Page 11 of 66

12 China Property Sector Figure 17: Major landbank distribution of developers Agile Hainan, PRD, Nanjing, some suburbs Country Garden PRD, Anhui and North China, mainly suburbs in second and third tiered cities CR Land PBR, YRD, Chengdu, Chongqing, North China Evergrande Nationwide -- lowered tiered cities Glorious Shanghai, Nantong, Tianjin, Hefei, North China GZ R&F Beijing, Tianjin, Guangzhou, Chongqing and Taiyuan KWG Guangzhou, Shanghai, Suzhou, Chengdu Longfor West China, PBR, Fujian Poly Property Guiyang, Wuhan, Nanning, YRD Shimao YRD and PBR Sino-Ocean Beijing, Dalian, North China and Zhongshan Sunac Beijing, Tianjin, Wuxi, Chongqing, YRD SOHO China Beijing, Shanghai, city centre Source: Company data, CREIS, Maybank Kim Eng Potential higher hurdle for presale approval. Although we cannot envisage the China property presale system going away, we do expect many cities to raise the bar on construction progress to meet the requirement for presale permits in 1-3 years time. Hence, we believe it is vital for China developers to go through its major expansion phase with the right geographical footprints in 2013 and Most of the sector has deleveraged. We expect mid-cap and quality small- cap to outperform large-cap stocks in general. Mitigated concerns around the financial health and growth prospects of developers should help quality smalland mid-cap China property stocks to further re-rate, despite the recent rises in share prices. Access to capital has been good YTD, with low rates achieved for debt issued by small-cap stocks Yuzhou and Sunac in the past few months. Compared to its historical valuations, CR Land is trading at 15% discount to NAV (historical average: 20% discount) and at 1.66x 2013 book (historical average: 1.7x forward book). On a PER basis, the stock trades at 15.6x 2013 PER, as compared to its historical average forward PER of 14.9x. On the other hand, Shimao is trading at 36% discount to NAV (historical average: 40% discount) and 7.8x 2013 earnings (historical average: 9.0x). Potential equity financing in the sector over the next six months. In our view, large-cap stocks such as CR Land and Shimao are trading at not far from their historical average discounts and PERs and could be prime candidates for equity financing in Although both stocks have deleveraged and have no immediate need for equity financing, we believe the risk of opportunistic equity financing over the next six months still lurks in China property sector. 5 December 2012 Page 12 of 66

13 China Property Sector Figure 18: Estimated operating cashflow for 2012F (CNYb) Estimated 2012 cash inflow Estimated 2012 cash outflow Sales proceeds Est cash received Our est rental Other (assuming in 2012 from income, hotels cashflow 70%-90% of contract sales & prop outflows for cash from previous management Greentown Others (SG&A, Taxes, Interest, 2012F net operating cashflow Est contract sales Estimated cash Construction Land Estimated net operating Company 2012 collection) year(s) fees inflow premium costs JV projects etc) cashflow Agile NA Country NA 12.0 (1.3) Garden CR Land NA 15.5 (5.4) GZ R&F NA KWG NA 4.2 (0.8) Longfor NA 9.5 (8.2) Sino-Ocean NA Sunac* (0.7) *We estimate attributable contract sales for Sunac though total contract sales should reach CNY 30b. If we exclude net cash outflow for Greentown projects, the net operating cashflow for Sunac is estimated to be positive CNY4.3b for Source: Company data, Soufun, Maybank Kim Eng Estimates From an operating cashflow perspective, we estimate that CR Land and Longfor have the highest negative net operating cashflow for Longfor already did an equity placement as well as a bond in the past two months, which should mitigate any short-term financing risks. Sector Valuation. The China property sector is trading at 1.0x 2013 forward P/B, 0.7 SD below historical average of 1.6x. On a forward PER basis, it is trading at over 7x, which represents 0.6 SD below historical average. While the sector valuation does not look expensive, there has been divergent valuation with largecaps like CR Land and Shimao s current valuation being not far from their own historical average discounts to NAV and PER ratios. Having said that, many small- and mid-cap stocks are still far below their historical averages. With ample liquidity alleviating financial concerns, policy normalization and a more stable property sales environment, we believe some quality small- and mid-cap stocks would re-rate further. Figure 19: China property sector s average forward PER x 9.7 x Jan 06 Mar 06 May 06 Aug 06 Oct 06 Dec 06 Mar 07 May 07 Jul 07 Sep 07 Dec 07 Feb 08 Apr 08 Jul 08 Sep 08 Nov 08 Jan 09 Apr 09 Jun 09 Aug 09 Nov 09 Jan 10 Mar 10 Jun 10 Aug 10 Oct 10 Dec 10 Mar 11 May 11 Jul 11 Oct 11 Dec 11 Feb 12 May 12 Jul 12 Sep 12 Nov x + 1 STD Mean -1 STD Source: Bloomberg, Maybank Kim Eng 5 December 2012 Page 13 of 66

14 China Property Sector Figure 20: China property sector s average forward PB Jan 06 Mar 06 May 06 Aug 06 Oct 06 Dec 06 Mar 07 May 07 Jul 07 Sep 07 Dec 07 Feb 08 Apr 08 Jul 08 Sep 08 Nov 08 Jan 09 Apr 09 Jun 09 Aug 09 Nov 09 Jan 10 Mar 10 Jun 10 Aug 10 Oct 10 Dec 10 Mar 11 May 11 Jul 11 Oct 11 Dec 11 Feb 12 May 12 Jul 12 Sep 12 Nov x 1.6 x 0.8 x + 1 STD Mean -1 STD Source: Bloomberg, Maybank Kim Eng Previous concerns of volatile macroeconomic environment in China and policy uncertainty have affected the discounts on the property sector. We now see lower risk premium as evidenced by low bond yields. Most China developers who have tapped the bond market recently saw overwhelming subscription response and relatively low rates. The table highlights the target discount to NAV we use to derive our fair values for the stocks 15-20% discount for high-quality execution, solid management and low financing costs (e.g., CR Land and Longfor); 25-30% for the leading non-soe developers with good execution and financing costs higher than the former category (e.g., Shimao and Country Garden); 35-45% for tier 2 or 3 developers (e.g., KWG and Sunac); 50% or more for developers with weak balance sheet, corporate governance issues, or unsatisfactory execution. Figure 21: Estimated NAV (HKD) and fair value discount to NAV Estimated Est fair value Change from 12/4 Stock NAV Our est fair value discount (%) (%) stock price (%) Agile CRL Country Garden (3) Evergrande Glorious GZ R&F KWG Longfor Poly Property Shimao Sino-Ocean Sunac Source: Bloomberg, Company data, Maybank Kim Eng Estimates 5 December 2012 Page 14 of 66

15 China Property Sector Figure 22: China valuation table as of December 4, 2012 Share price Mkt Cap (HKD b) YTD Est. Disc to NAV PE P/B Div Yield (%) NAV/ Perf. Share 2008 Current (%) (HKD) trough Disc trough 2012E 2013E 2014E trough 2012E 2013E 2014E 2013E 2014E HK-listed Simple avg -68% -39% % 3.9% Agile % % -48% % 4.3% COLI % % -5% % 2.3% Country Garden % % -23% % 4.9% CR Land % % -15% % 2.0% Not Not Evergrande % 9.0 Not listed -58% listed listed % 6.5% Glorious % 4.1 Not listed -68% Not listed Not listed % 2.7% GZ R&F % % -41% % 5.9% KWG % % -50% % 6.4% Not Not Longfor % 20.4 Not listed -30% listed listed % 2.2% Poly Property % % -49% % 2.5% Shimao % % -36% % 4.1% Sino-Ocean % % -43% % 3.2% Not Not Sunac % 9.0 Not listed -44% listed listed % 3.5% Source: Company data, Bloomberg, T1, Maybank Kim Eng *Consensus #s are used for non-covered companies Figure 23: Our forecasts of China developers margin and ROE outlook - expect KWG and Longfor to have highest underlying net profit margins while Sunac and Longfor to post highest ROE among the 7 stocks in this report 2012F 2013F 2014F 2012F 2013F 2014F 2012F 2013F 2014F (%) GPM GPM GPM Underlying NPM Underlying NPM Underlying NPM ROE ROE ROE CR Land Country Garden GZ R&F KWG Longfor Sino-Ocean Sunac Agile COLI Evergrande Poly Property Shimao Simple Avg Source: Bloomberg, Company data, Maybank Kim Eng *Consensus #s are used for non-covered companies except for 2012 GPM of Evergrande, which is guided to be similar to interim Figure 24: Growth outlook forecast Sunac, Longfor and KWG to provide the best 2013F and 2014F earnings growth prospects among the 7 stocks in this report 2012F 2013F 2012F 2013F 2014F 2012F 2013F 2014F 3-yr Simple (%) Net Gearing Net Gearing Revenue Growth Revenue Growth Revenue Growth Underlying NP Growth Underlying NP Growth Underlying NP Growth Avg UNP Growth CR Land Country Garden GZ R&F (2.1) KWG Longfor Sino-Ocean Sunac Agile COLI Evergrande NA NA Poly Property NA NA Shimao Simple Avg Source: Bloomberg, Company data, Maybank Kim Eng * Net gearing's calculation includes restricted cash. Consensus #s are used for non-covered companies 5 December 2012 Page 15 of 66

16 China Property Sector Figure 25: EV/landbank calculation another valuation methodology shows that Sunac, Sino-Ocean, KWG, and GZ R&F look cheap to us with the EV/landbank figure below or not much above the actual AV of the landbank (HKD m) Country Gdn KWG GZ R&F CR Land Longfor Sino-Ocean Sunac Dec 4, 2012 Stock price # of shares 18, , , , , , ,009.5 Market cap 67,268 15,739 40, ,713 77,511 33,680 15,138 Time Deposit (HKD m) 1,605-5,131 1,384 4,873 did not 520 3,474 2,704 Restricted cash disclose RC Cash on hand 11,679 7,269 10,356 19,784 21,046 14,895 3,260 Gross debt 30,053 20,929 40,416 65,705 36,604 45,933 15,375 Net debt (incl. restricted cash) 13,244 12,276 23,582 45,921 15,038 27,565 9,412 Net debt (excl. restricted cash) 18,374 13,660 30,060 45,921 15,557 31,038 12,115 EV (incl. restricted cash) 80,511 28,015 63, ,634 92,548 61,245 24,550 EV (excl. restricted cash) 85,642 29,399 70, ,634 93,068 64,718 27,253 Attributable Land bank as of interim (m sqm) EV/landbank (incl. restricted cash) (HKD 1,469 3,256 2,249 5,805 2,899 3,078 3,358 psm) EV/landbank (excl. restricted cash) 1,563 3,417 2,477 5,805 2,916 3,252 3,728 Actual AV of landbank (CNY psm), as of 580 2,832 1,600 2,400 1,879 3,062 3,600 interim Actual AV of landbank (HKD psm) 716 3,025 1,975 2,963 2,320 3,780 4,444 > > > > > < < Comparison of EV/landbank (incl. restricted cash) over AV of landbank (%) 105% 8% 14% 96% 25% -19% -24% * Note above number converted to HKD using interim balance sheet and landbank info. EV/landbank an alternative valuation methodology. Our EV/landbank analysis points to cheaper valuation of Sunac, Sino-Ocean, KWG, and GZ R&F. While the market consensus is to use discount to NAV as a primary valuation benchmark, we feel that it is also useful to examine the EV/attributable landbank methodology. First, we derive the enterprise value of a stock (market capitalisation plus net debt) and then divide it by the developer s attributable landbank GFA. We compare this figure to the actual average land cost of the developer s landbank and if the EV/landbank number is lower than the actual average land cost, we would consider the stock to be cheap. We acknowledge that location and quality of landbank varies (e.g., Country Garden s land costs are cheap, so the fact that its EV/landbank is 105% more than its actual land costs might not be alarming), but we find this exercise a simple cross-check against our other valuation metrics. Sunac, KWG and GZ R&F consistently get screened as cheap on the basis of our discount to NAV, PER, and EV/landbank analyses. Figure 26: Scenario Analysis: If stocks were to re-rate to their historical averages, which would have the most upside? GZ GZ R&F, Glorious, Agile, and Evergrande Stock Agile CRL Country Garden Evergrande Estimated NAV (HKD) Current Dis to NAV (%) Historical Avg Dis (%) Stand Dev (%) +1 SD (%) Share Price if re-rate to avg dis Upside from 12/4 Price if re-rate to historical avg Comments We see clarity on whether Chairman will be charged, key leadership roles and improvement on project % -36.6% 21.2% -15.4% % slippages as key Cheap financing and good execution % -20.0% 30.8% 10.8% % CG has already re-rated due to improvement in execution since Pres. Mo joined. Next step is % -19.5% 29.1% 9.6% % destocking Contract sales ASP look to be troughing and corporate % -53.1% 10.6% -40.5% % governance concerns Glorious Stock de-rated partly on ST debt concerns and ex % -60.9% 10.1% -50.8% % Chairman Zhang but we see his step-down as positive GZ R&F % -23.2% 31.5% 8.3% % Gradual de-leveraging and moderate growth KWG % -50.3% 19.0% -31.3% % Need to tackle growth issue Longfor Longfor has re-rated due to strong products, solid % -33.6% 9.9% -23.7% % corporate culture and good management Poly High gearing but a pick-up in sales Property % -43.3% 13.2% -30.1% % Shimao % -40.4% 22.4% -18.0% % Improvement in execution and products Sino-Ocean Continued turnaround story with favorable % -40.8% 20.2% -20.6% % geographical exposure Sunac Sunac has a short listing history since end 2010 and transformed itself with acquisition of stake in nine Greentown's projects in this June % -65.6% 8.8% -56.7% % Source: Bloomberg, Company data, Maybank Kim Eng 5 December 2012 Page 16 of 66

17 China Property Sector Figure 27: Property Stocks forward PER and P/B vs. their historical averages Stock 2013 PER Historical Average -1 SD PER 2013 PB Historical Average -1 SD PB Agile COLI CRL Country Garden Evergrande Glorious GZ R&F KWG Longfor Poly Property Shimao Sino-Ocean Sunac Source: Bloomberg, Company data, Maybank Kim Eng 2013F contract sales target to average around 15% for the sector, by our estimate. Based on our conversations with various developers management and our gauging of their available for sale resources, we believe that Sunac, Longfor and CR Land would post the highest YoY growth in 2013 contract sales. Figure 28: 2013 contract sales expectation we estimate Sunac, Poly Prop, Sino-Ocean, Longfor and CR Land to fetch the highest growth Company Management's soft guidance 2012 contract sales target (CNY b) Our estimate of 2013 contract sales target (CNY b) Agile No target. Expect ~10% higher available for sale resources GFA 31 (3.1 mn sq m) 34 CR Land Aim for 20% or more estimated growth YoY, but initial target could be more conservative Country Garden No target yet but some growth Evergrande Hope for moderate growth but no official target yet GZ R&F At least 10% growth KWG No target yet but some growth Longfor Above sector avg growth Poly HK No target yet but above sector avg growth Sino-Ocean Expect at least 10% YoY growth on achieved figure Sunac Around CNY40 b Figure 29: Monthly 2012 Contract Sales % achieved of Target as of Oct CNY b Jan-12 Feb-12 Mar-12 Apr-12 May-12 Jun-12 Jul-12 Aug-12 Sep-12 Oct-12 Jan- Oct Total 10M YoY (%) 2012 Target Agile* (9) COLI (note #s converted to Rmb) Country Gdn (2) CR Land Evergrande (6) Glorious (19) GZ R&F KWG Property (2) Longfor (3) Poly Property Shimao at least Sino-Ocean Sunac Yuexiu Prop Vanke* *Note: Vanke's is not official target. Agile posted 2012 contract sales GFA target of 3.1m sq m. Sunac's target was revised from CNY22b to CNY30b, and COLI from HKD80 to HKD100b. Shimao's informal target revised to at least CNY40b. Poly's target revised from CNY16b to CNY19b. Source: Company data, Bloomberg, Maybank Kim Eng 5 December 2012 Page 17 of 66

18 China Property Sector Figure 30: Expected Launch Pipeline over November and December 2012 Agile Country Garden COLI CRL GZ R&F KWG Longfor Poly Property Shimao Sino- Ocean Nov Dec Our Comments GZ Science City project is targeted to be launched in Nov/Dec, though the expected launch timing has been delayed. Brand new batch of units from Hainan Clearwater Bay in Dec. The Magnificence Nanjing was launched in Nov and Shenyang should official launch in Nov/Dec, despite soft launched already at an ASP of CNY8k psm. Agile has slipped some launch time and hence, we are less confident in guided project launch timing. In Nov/Dec, expected new launches include a new project in Meizhou, a new project in Shandong, Zhangjiajie Country Garden, Hangzhou Country Garden (Xiasha), Country Garden Hill Lake Bay in Nansha and Tangxia Country Garden Grand Garden. Most of the brand new launches in China have been launched. 2 HK new projects for Nov and Dec are planned. Not much new launch in year-end. Datong project was launched in Nov. Taiyuan Peach Garden is expected to launch in end-2012 or early Tianjin Guangdong Building is still waiting for presale permit and we expect it to be launched in 1Q13 instead. Hainan Lingshui project has soft launched for a while, and officially launched in Oct with slow response. Guangzhou Biological Island Ph 1 (serviced apartments) and Suzhou Emerald might launch next year instead. We estimate Nov contract sales to be relatively high given expected Rmb7-8 b of available for sale resources In Nov/Dec, Poly Aegean Sea in northern Nanning should be launched. Wuhan Poly Park and Shanghai Poly Star Island are expected to be launched. The Suzhou Poly West Bank Villa project should also be launched in 4Q, depending on market response. No brand new project launch in the remainder of the year, as guided during interim results. Launches will go through only if potential sell-through indicated in the current building phase reaches 70% and 50% for new and existing projects respectively. Longgang district's Ocean Express (SO's first project in Shenzhen) is expected to be launched in Dec or 1Q13, and we believe the target is to sell units. Dalian Ocean Midtown (new project) is also slated for 4Q launch. Sunac Beijing Laiguangying (JV with Franshion) and Tianjin Mian Er were launched in Oct, and Beijing sales were especially strong. Sunac also plans to launch Wuxi Yulun Garden Ph 2 and Chongqing APEV project in 4Q, and potentially some resources from JV projects with Greentown. * light color indicates some launches expected and dark color indicates many launches expected. Blank cells indicate not much project launches expected. Source: Company data, Soufun, Maybank Kim Eng estimates Figure 31: Expected Launch Pipeline over 2013 Agile Some of our estimated 2013 new launches The company has soft guided ~10 new projects for launch in We estimate new launches should include Hainan Wenchang project, The Classics Nanjing (Qinhui district), Foshan Xiqiao project and Zhongshan New Project. Country Garden Coastal City in Tianjin, Tangxia Country Garden, and Malaysia project should launch in 2013, and potentially Hill Lake Bay in Xinhui as well as the two projects in Lingao of Hainan. CR Land Likely to include Xian Peidong Project, Wuhan Hongshan Project, Chengdu Jinjiang Project, Nantong Gangjia District and Hangzhou Zhijiang project. GZ R&F For 2013, we expect Tianjin Guangdong Building (office) and Taiyuan Peach Garden to be launched if delayed from 4Q2012. Given R&F is on track to meet its 2012 contract sales target, we believe the company would deliberately shift the launch of the Taiyuan project to 1Q new projects should include Guangzhou Nansha project, Guangzhou J2-5 office, Yangji Village Project (Yuexiu District in GZ), Beijing Daxingpang project, and Hainan Moon Bay or Guangzhou Haizhu project. KWG Longfor Poly Property Sino-Ocean J2-2 office in PRNT in Guangzhou, Shanghai Fengxian project, Hainan Moon Bay, and Foshan JV with SHKP. Suzhou Emerald launch and Biological Island (originally targeted for 4Q12 launch) should launch in 1H13. Various new projects including Hangzhou Aoti project, Chengdu Wuhou project, Qingdao Zhong Cun project, Dalian Donggang, Chongqing Lijia and Yixing Dongjiu New Town are likely. Jinan Poly Center, second Jinan project, Huizhou project, Jiading Deluxe Mansion, and Kunming CBD project. Wuhan Poly Plaza might be sold en-bloc to PE funds or 3rd parties in late 2012 or Few brand new projects are planned for now -- Qingdao Quanzhou project, potentially the office portion of We-Life Tianjin project, and potentially some new acquisitions. Ocean Express in Shenzhen might launch in 1Q13 if delayed from 4Q12. Sunac Pudong Tangzhen (year-end), Suzhou Rose Garden, Beijing Yizhuang, and some JV projects with Greentown are the potential pipeline. Source: Companies, Soufun, Maybank Kim Eng estimates 5 December 2012 Page 18 of 66

19 China Property Sector Figure 32: Landbank GFA Percentage by estimated ASP (CNY psm) <=6,000 6,001-10,000 10,001-20,000 20,001-30,000 >30,000 Agile 22% 39% 25% 8% 5% CR Land 3% 60% 26% 8% 3% Country Garden 76% 23% 1% 0% 0% Glorious 36% 49% 13% 0% 2% GZ R&F 35% 27% 30% 5% 2% KWG 0% 45% 43% 3% 8% Longfor 9% 61% 27% 2% 2% Poly Property 29% 43% 24% 3% 1% Shimao 4% 55% 34% 6% 1% Sino-Ocean 25% 22% 40% 9% 4% Sunac 0% 40% 35% 14% 11% Figure 33: China developers major product types Mid-end residential High-end residential Retail Office Hotel Agile Country Garden CR Land Evergrande Glorious GZ R&F KWG Longfor Poly Property Shimao Sino-Ocean Sunac SOHO China Margins, ROE, and earnings growth. From a margin and ROE outlook, KWG and Longfor should have the highest underlying net profit margin while Sunac and Longfor should post the highest ROE over 2013F and 2014F, by our estimate. In terms of earnings, we forecast Sunac, Longfor and KWG to enjoy the best growth prospects in 2013F and 14F earnings. Stock selection. In general, we expect mid-cap and quality small-caps to outperform large-cap stocks in the China property sector. Our preferred names in the space are SMid-cap, higher-beta plays: Sunac, KWG and Guangzhou R&F which we all assign BUY ratings. We believe that various large-caps including CR Land and Shimao are trading at not far from their historical average discount to NAV and PERs and look fully valued to us. Within the large-cap space, we like Longfor for its robust growth prospects and strong management. We are neutral on Country Garden due to our belief that inventory clearing would take time and next year s new project launches would mostly come from the non-guangdong areas where margins have been generally lower than the Guangdong projects. We would turn more positive on the company if there are signs of faster de-stocking and if management can manage a more evenly split sales schedule between the first and second half of next year. We have assigned HOLD ratings to CR Land and Sino-Ocean mainly on valuation grounds. Risks in 2013 include unexpected change in policy, unfavorable interest rate cycle, and the return of speculators causing the Chinese government to further tighten. 5 December 2012 Page 19 of 66

20 Hong Kong Reinitiating Coverage 5 December 2012 HOLD Share price: Target price: HKD20.20 HKD20.26 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: CRL is an SOE-backed national property developer with a sizeable investment property portfolio including hotels, office, MIXc and Rainbow City malls. It has a long listing history in Hong Kong since 1996 and is majority owned by China Resources Holdings. CRL s China residential projects range from mid-end to high-end. Ticker: 1109 HK Shares Issued (m): 5,827.4 Market Cap (USDm): 15, mth Avg Daily Turnover (USDm): 20.4 HSI: 21, Free Float (%): 32 Major Shareholders: % China Resources Holdings Historical Chart HSI Index Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 9% 29% 38% 61% 62% Relative (%) 10% 17% 21% 47% 44% *Note all stocks pricing date is as of December 4, 2012 closing CR Land 60 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 China Resources Land Good Growth but Fully Valued Although CRL has improved execution in property sales and a solid recurrent income base, we see the stock s valuation as relatively full at 15% discount to our NAV of HKD23.84/sh; potential uncertainty around any equity fund raising with future asset injections next year could weigh on the stock. Whether or not an asset injection would be accretive to the stock depends on the pricing at which asset(s) will be injected and the financing method. Our TP of HKD20.26 is derived from a target discount of 15%, a bit lower than its historical average discount of 20% due to improved execution in both residential and commercial property. High earnings visibility for 2013 and good growth over the next few years. CR Land has secured ~64% of 2013F revenue by October, by our estimate, with ~CNY29b unbooked contract sales for 2013 booking. As of August, it had CNY60.5b of unbooked contract sales, of which ~CNY33.6b is for 2013 and onwards booking (we estimate 70% of that is for 2013 delivery), and we estimate 70% of last two months contract sales were for 2013 booking. We look for 21.0% and 18.8% YoY growth in 2013 and 2014 revenue, respectively and 15.6% and 22.8% YoY growth in underlying net profit for 2013 and Thoughts on asset injection and fund raising. Last Friday, CR Land acquired a 55% stake in total 1.19m sq m GFA- (or 780k sq m above ground) Nanning City Crossing from its parent for HKD2.12b in cash via internal funds. However, as we get closer to 2013, we see uncertainty around next year s asset injection which we believe is likely to include equity financing. Another pipeline project, the 1.76m sq m GFA- Shenzhen Dachong Village, may be a target for injection next year. With land costs and relocation costs of over CNY10b for this project, we are seeing equity finance risk should this be injected. Year-to-mid-November landbanking aggregated to CNY6.99b of total land premium, ~54% of last year s CNY13.03 b (even if we exclude asset injection). CRL only acquired 3.99 m sq m of total GFA, considerably less than 2011 s 6.90 m sq (not factoring asset injection). This week s injection of Nanning asset would add total contract sales of CNY1.23b so far to CR Land s 2012 sales number and boost 2013 sales. Also, we expect saleable resources to rise next year with 2012 s new start GFA to reach 6.5-7m, up from 5.5m sq m last year. No MIXc mall openings in 2013 but many more in The strong rental growth of its investment property and the successful opening of CRH s Nanning MIXc in September with continued good foot traffic of 30 40k/day have reaffirmed investors confidence in CRL s commercial execution. The next wave of significant investment property to commence operation (946k sq m) would come in Next year, CRL plans to see only 281k sq m of investment property start operations two hotels and Hefei and Ganzhou Rainbow Cities. SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

21 China Resources Land Limited Valuation looks relatively full to us. CR Land is trading at 15% discount to our NAV estimate of HKD23.84/sh, 15.6x 2013 EPS (historical average: 14.9x forward PER) and 1.7x 2013 book (historical average: 1.7x forward book), which looks fully valued to us. This compares to COLI and Longfor s 5% and 30% discounts to NAVs, respectively and 10.1x and 10.2x 2013 earnings, respectively. China Resources Land Summary Earnings Table FYE Dec (HKD m) 2011A 2012F 2013F 2014F Revenue 35,795 46,032 55,710 66,210 EBIT 11,740 12,932 14,800 17,850 Net Profit Attributable to SH 8,070 6,524 7,543 9,264 Estimated Underlying Net Profit 5,617 6,524 7,543 9,264 Underlying EPS (HKD) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin (%) Although CRL has improved execution in property sales and a solid recurrent income base, we see the stock s valuation as relatively full at 15% discount to our NAV of HKD23.84/sh. Our TP of HKD20.26 is derived from a target discount of 15%, a bit lower than its historical average of 20% due to improved execution in both residential and commercial property. Year-to-October, CR Land attained CNY41.85b of contract sales (up 53% YoY) with an ASP of CNY10,814psm. It has already exceeded its original contract sales target of CNY40b and we expect 2013 contract sales to be around CNY56-57b. We note that November contract sales should come in at around CNY4b and we expect around CNY3b of contract sales in December, bringing the full year total to CNY48.9b. Due to a rise in new start GFA to 6.5-7m sq m in 2012 from 5.5 m sq m in 2011, we expect a 15% YoY rise in contract sales target to CNY56b. Having said that, CR Land tends to set its initial contract sales target a bit on the conservative side recently. No MIXc mall openings in 2013 but many more in The strong rental growth of its investment property and the successful opening of CRH s Nanning MIXc in September with continued good foot traffic of 30 40k/day have reaffirmed investors confidence in CRL s commercial execution. The retail rents average CNY psm per month on a lettable basis quite a good level. The next wave of significant investment property to commence operation (946k sq m) would come in 2014, including five MIXc developments and two Rainbow City malls completing. Next year, CRL plans to see only 281k sq m of investment property start operations two hotels and Hefei and Ganzhou Rainbow Cities. Strong contract sales and high cash collection ratio should lead to a flattish net gearing in year-end vs. interim. We expect net gearing in Dec-12 to be 65.8%, slightly lower vs. interim s 66.3% and lower than Dec-11 s 75.2%. Thoughts on asset injection and fund raising. Asset injection of the already opened Nanning project was internally funded given CRL s ample cash on hand, as expected. NAV impact was minimal, in our view. However, as we get closer to 2013, we see uncertainty around next year s asset injection which could include equity financing. Whether or not an asset injection would be accretive to the stock depends on the pricing at which asset(s) will be injected and the financing method. Another pipeline project, the 1.76m sq m GFA-Shenzhen Dachong Village, may be a target for injection next year. With land costs and relocation costs of over CNY10b for this project, we are seeing equity financing risk should this be injected. Local media also indicates that CRH has acquired/signed MOUs in Huizhou, Wenzhou, and Shenzhen, further increasing future potential asset injection pipeline to CRL. However, as CRL has become 5 December 2012 Page 21 of 66

22 China Resources Land Limited much larger than before, the discounts at which assets are injected seem to have declined compared to a few years ago. Year-to-mid-November landbanking aggregated to CNY6.99b of total land premium, ~54% of last year s CNY13.03 b (even if we exclude asset injection). CRL only acquired 3.99 m sq m of total GFA, considerably less than 2011 s 6.90 m sq (not factoring asset injection). This week s injection of Nanning asset would add total contract sales of CNY1.23b so far to CR Land s 2012 sales number and boost 2013 sales. Also, we expect saleable resources to rise next year with 2012 s new start GFA to reach 6.5-7m, up from 5.5m sq m last year. Figure 1: CR Land s parent CR Holdings' disclosed landbank Project Acquisition Date Total above ground GFA Usage Attributable GFA Average land cost Shenzhen Bay* Dec ,000 Resi/Office 330,000 N/A Shenzhen Dachong Village NA 1,760,000 Resi/Retail/Office 1,760,000 N/A Jinan Xinglong Project May ,000 Resi/Retail 390,000 2,889 Total 3,049,000 2,792,950 Note: CRH acquired about 160k sq m GFA more for Shenzhen Bay project at 5,414/sq m per channel checks. Some local media also reports that CRH acquired other projects or have signed MOUs with local governments in Huizhou, Wenzhou, and Shenzhen, Sina Figure 2: 2012 ytd landbank acquisitions, as of Nov 15, 2012 Total Consideration (CNY m) Attributable Land Premium (CNY m) Date City Project % Stake Purpose Total Planned GFA (sqm) AV (CNY/sq m) 16-Jan-12 Rizhao City Crossing 100 R/C 560, , May-12 Shenyang Changbai Island Project 100 R/C 333, , Aug-12 Xi'an Peidong New District 51 R/C 1,084, Aug-12 Wuhan Hongshan District 100 R 324, , Sep-12 Wenzhou City Crossing 51 R/C 240, , Sep-12 Chengdu Jinjiang District 100 R 212,000 1,080 5,094 1, Oct-12 Nantong Gangjia District 55 R/C 631, , Nov-12 Kunshan Qianjin West Road 51 R/C 601,000 1,120 1, Total 3,985,400 6,991 1,754 5,294 Source: Company data Maybank Kim Eng Strong contract sales and high cash collection ratio should lead to a slightly lower net gearing in year-end vs. interim. We expect net gearing in Dec-12 to be 65.8%, slightly lower vs. interim s 66.3% and lower than Dec-11 s 75.2%. Having said that, 2012 s net operating cashflow is expected to be negative CN6.7b, by our estimates. However, CR Land has managed very low borrowing costs this year; furthermore, the recent acquisition of 55% interest in Nanning City Crossing from its parent requires cash payment only within six months from the deal completion date (with a low rate of 3-month HIBOR+190 bp from completion date to payment date). Figure 3: Discount to NAV Premium/ 90% Discount to NAV 70% 50% 30% 10% -10% -30% -50% CR Land: Average since 99: -20% -70% -90% Nov 04 Nov 05 Nov 06 Nov 07 Nov 08 Nov 09 Nov 10 Nov 11 Source: Bloomberg, Company, Maybank Kim Eng We assign a HOLD rating to CRL with a TP of HKD20.26/sh, derived from 15% discount to our NAV estimate, 0% upside from here. Our TP implies 15.7x 2013 earnings and 1.7x 2013 book value. 5 December 2012 Page 22 of 66

23 China Resources Land Limited INCOME STATEMENT BALANCE SHEET FY (HKD m) F 2013F 2014F FYE Dec (HKD m) F 2013F 2014F Property development 22,587 31,301 40,776 49,841 58,627 Assets Property investment 1,211 2,094 2,746 3,215 4,469 Inventory of properties 63,141 98,101 99, , ,828 Property management fees Prepaid lease payments Hotel operations ,010 Other investments/inventories Construction, decoration and others 1,079 1,272 1,335 1,402 1,472 Trade and other receivables 24,095 20,957 27,159 33,426 39,726 Turnover 25,729 35,795 46,032 55,710 66,210 Due from customers for contract works 398 1,014 1,014 1,014 1,014 Property dev 15,140 17,149 20,179 Due from subsidiaries and JCEs Property invt 1,565 1,833 2,547 Due from holding companies Property mgmt fees Prepaid taxes 1, Hotel operation Cash and bank balances 12,554 15,368 18,174 19,855 28,261 Construction, decoration and other Current assets 101, , , , ,146 Gross Profit 10,152 14,182 17,542 19,849 23,774 PP&E 3,304 4,070 4,704 5,370 6,069 SG&A (1,750) (3,651) (4,143) (4,568) (5,429) Pre-paid lease payments 844 1,140 1,174 1,209 1,246 Other income/(operating expenses) 530 1,208 (468) (481) (495) Investment properties 21,953 29,589 37,644 43,822 49,611 EBIT 8,933 11,740 12,932 14,800 17,850 Interests in associates ,032 Net interest income (304) (699) (547) (554) (517) Amount due from an associate Gross interest expense (1,106) (1,898) (2,524) (2,598) (2,551) Available for sale investments Capitalised interest 802 1,424 1,893 1,949 1,913 Others 2,477 7,362 7,362 7,362 7,362 Share of P&L of Associates and JCE Deferred Tax Assets of which: from Associates Fixed Assets 30,226 43,827 52,606 59,559 66,219 from JCE 0 (4) Total Assets 131, , , , ,365 Exceptional item 2,938 3,287 Liabilities & Shareholders' Equity Pretax income 11,614 14,373 12,440 14,320 17,467 Trade payables 7,801 15,150 14,530 17,213 20,369 Income taxes (1,753) (2,308) (3,110) (3,580) (4,367) Deposits from pre-sales of properties 21,750 26,648 38,111 44,840 55,032 LAT (1,711) (3,096) (1,868) (2,262) (2,715) Due to customers for contract works Deferred tax (811) (727) (727) (727) (727) Due to fellow subsidiaries 5, Net income 7,339 8,242 6,736 7,752 9,659 Due to holding company 1, Minority interests (1,312) (172) (211) (209) (396) Due to non-controlling interest 797 1,074 1,074 1,074 1,074 Net income attributable 6,026 8,070 6,524 7,543 9,264 Taxes payable 3,387 5,206 6,762 8,609 10,839 Underlying net profit 4,246 5,617 6,524 7,543 9,264 Interest-bearing bank & other borrowings 8,555 22,073 20,700 16,792 15,931 Current liabilities 49,681 71,230 82,255 89, ,323 Interest-bearing bank & other borrowings 8,555 22,073 20,700 16,792 15,931 CASHFLOW STATEMENT Deferred taxation 3,071 4,259 4,986 5,713 6,439 FY (HKD m) F 2013F 2014F Derivatives Operating Activities Long term liabilities 32,476 42,993 45,557 50,341 49,533 Net Income 11,614 14,373 12,440 14,320 17,467 Total Liabilities 82, , , , ,856 Depreciation Shareholders' Equity 46,018 60,316 65,414 71,300 78,647 Share of Results of Associates & JCEs (48) (45) (55) (75) (135) Issued share capital Other operating cashflow 388 1,005 (34) (35) (36) Reserves 45,479 59,734 64,831 70,717 78,065 Fair Value of Investment Properties (2,850) (3,240) Minority interests 3,540 6,046 6,257 6,466 6,862 Changes in working capital: (17,481) (14,274) 3,529 (184) 6,760 Shareholders' funds 49,558 66,362 71,671 77,766 85,509 Mainland Tax Paid (2,558) (3,019) (3,422) (3,995) (4,851) Liabilities & Shareholder's Equity 131, , , , ,365 Payment for Purchase of Shares (120) (220) Capital injected Acquisition of Subsidiary 3,981 FINANCIAL RATIOS CFO (6,831) (5,102) 12,725 10,313 19,500 FY F 2013F 2014F Investing Activities Profitability (%) Acquisition of Subsidiaries & Associates (5) (783) Gross Margin Purchase of PP&E (370) (859) (902) (947) (994) EBIT Margin Purchase of Prepaid Land Lease (1) (39) Net Margin Deposit paid for Non-current Assets (2,477) (4,750) Underlying Profit Margin Increase in Investment Prop (1,317) (2,205) (8,055) (6,178) (5,789) ROA Other investing cashflow 215 (565) Asset turnover CFI (3,955) (9,200) (8,957) (7,125) (6,783) ROE Financing Activities 6 Disposal (Additional. Int.)in Subsidiary 474 (7) Net debt to equity Dividends Paid (1,392) (1,710) (1,427) (1,657) (1,916) Other financing cashflow 2,870 18, (2,396) CFF 1,952 16,385 (963) (1,507) (4,312) Incr./(decr.) in cash &bank balance (8,834) 2,084 2,805 1,681 8,406 Cash& bank balance at beg. of year 19,873 12,554 15,368 18,174 19,855 Effect of FX change 1, Cash and bank balance at the end of yr 12,554 15,368 18,174 19,855 28,261 5 December 2012 Page 23 of 66

24 Hong Kong Initiating Coverage 5 December 2012 HOLD (New) Share price: Target price: HKD3.69 HKD3.58 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: Country Garden is a large China developer with over 57m sq m of landbank as of Sep 2012 and was listed on the Hong Kong stock exchange in Apr Its home base is Guangdong, though its operations span many cities across China. The developer s residential products target the midend of the market and it also operates mid-end hotels. Ticker: 2007 HK Shares Issued (m): 18,229.7 Market Cap (USDm): 8, mth Avg Daily Turnover (USDm): 9.2 HSI: 21, Free Float (%): 23.8 Major Shareholders: % Yang Huiyan Country Garden Destocking Takes Time We see improving contract sales by Country Garden in recent months. However, destocking takes time, especially without taking the direct price cutting route. As of September, estimated completed unsold inventory was ~ m sq m, little changed from interim levels. Initiate with a HOLD and a TP of HKD3.58/share, derived from a 25% discount to our NAV estimate. Preliminary 2013 new project launch pipeline is non-guangdong heavy. By our estimate, there is still a 6-7% GPM gap between Guangdong and non-guangdong projects average GPMs, despite the gap narrowing from previous years. Based on Country Garden s current landbank and our preliminary estimates, much of the 2013 new projects for launch are outside of its homebase Guangdong and are likely to include the Coastal City in Tianjin and Lingao project in Northern Hainan. Its first foray in Malaysia should also be launched next year. A 50:50 sales breakdown target by management in 3-5 years might not be viewed positively by some investors for now. A more even sales split between 1H:2H for next year could address some investor concerns. Country Garden stock has underperformed the overall HK-listed China property sector year-todate. We attribute this partly to its lackluster property sales in 1H12 (down 19% YoY) which has only picked up in 3Q as well as high completed unsold inventory of over 3m sq m. Given management s more constructive stance towards the property market for 2013 compared to the beginning of 2012 when the sales plan for this year was set, we could see a more balanced pipeline between 1H:2H for 2013 which would be welcomed by investors. Historical Chart HSI Index 60 Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Performance: 52-week High/Low Country Garden 1-mth 3-mth 6-mth 1-yr YTD Absolute (%) 9% 33% 28% 28% 33% Relative (%) 10% 21% 11% 14% 15% Strong low-density project execution and good improvement in products, but peripheral location of part of its landbank should lead to below-sector ASP growth in We expect suburban China prices where some of Country Garden s projects are located would recover more slowly than those developers with urban and more 1 st -tier city exposures such as KWG, Sino-Ocean and Sunac. Hence, we see the short-term NAV growth should be better for the latter companies. Country Garden Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 34,748 37,938 46,716 51,252 EBIT 9,548 10,616 12,093 13,241 Net Profit Attributable to SH 5,813 6,181 6,829 7,588 Estimated Underlying Net Profit 5,769 6,126 6,829 7,588 Underlying EPS (CNY) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin (%) SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

25 Country Garden Holdings Company Limited The first wave of product optimization led by President Mo s efforts has been reaped. Since Mr Mo took over at Country Garden in the summer of 2010, he has made operational improvements to the company such as the improvement in construction quality and better staff incentive schemes. Hence, we have seen an improvement in the product and construction execution of Country Garden. We applaud President Mo s proposal for some organizational changes and KPIs. According to President Mo, the proposed plan is to have districts within the organizational structure and this plan has been submitted to the Board of Directors for approval. Under the proposal, district managers and project managers will be held accountable on certain KPIs such as the speed of contract sales, cash collection ratio, and pricing ability. This plan has been put on trial in certain areas and President Mo expects to see evidence of good progress in 2H13 if this proposal is approved and implemented (which we believe it would be) preliminary new project launch pipeline looks non-guangdong heavy to us, and we estimate that, typically, non-guangdong projects have lower GPMs. Looking at the past track record, the divergence between Guangdong and non-guangdong based projects GPMs was very wide with more than a 10% difference at one point, but has recently narrowed down to 6-7%, according to management. Having said that, Guangdong projects GPMs are still noticeably ahead of non-guangdong projects, which we attribute to Country Garden s strong brand name, economies of scale in construction and fitting, and good landbanking execution in its home base will also see its first foray into Malaysia in terms of project launch, and we expect that to go smoothly but the current project size is not big. Nevertheless, the company has guided for more available for sale resources in GFA for The available for sale resources of Country Garden would be ~14-15m sq m for 2012, and our estimate is for this figure to be ~15-18m sq m for Around 2/3 of the total inventory comes from outside Guangdong, with Anhui taking up the largest percentage of non-guangdong inventory, as of September. The company is targeting 50% of sales in the future to come from outside of Guangdong, which is not something investors would applaud, in our view, until the GPM gap between non-guangdong and Guangdong projects further narrow. Having said that, there are some very successful projects outside Guangdong, such as Galaxy Palace in Shenyang whose product offerings and construction quality are impressive to us. Some superstar large, mature projects like Country Garden Phoenix City in Zengcheng will have little GFA left after 2012 bookings, by our estimate Ten Miles Beach in Huizhou and Jurong Country Garden are expected to generate Rmb2-3b of contract sales per year for a few years. As some traditionally more mature and large-sized projects have little GFA left after this year s bookings, Country Garden is nurturing others like Jurong Phoenix City and Huizhou Ten Miles Beach project. In 2011, top 10 projects (by contract sale value) constituted 45.7% of total contract sales; while top 10 projects constituted ~40% of total contract sales up to October 7 th in this year. 5 December 2012 Page 25 of 66

26 Country Garden Holdings Company Limited Figure 1: Top 10 best-selling Country Garden projects by sales value in 2011 and up to Oct 7 th in up to Oct 7th Province Top 10 project name Contracted sales amount (CNY m) Province Top 10 project name Contracted sales amount (CNY m) Guangdong Country Garden Phoenix City, 4,180 Guangdong Country Garden Phoenix City, 2,230 Zengcheng Zengcheng Guangdong Country Garden - Ten Miles 3,630 Guangdong Country Garden - Ten Miles Beach, 2,090 Beach, Huizhou Huizhou Jiangsu Country - Jurong Phoenix City 2,070 Liaoning Country Garden - Galaxy Palace, 1,610 Shenyang Guangdong Country Garden City Garden, 1,780 Guangdong Shaoguan Country Garden 1,050 Foshan Guangdong Heshan Country Garden 1,540 Guangdong Country Garden City Garden, Foshan 1,020 Liaoning Country Garden - Galaxy Palace, 1,530 Anhui Anqing Country Garden 940 Shenyang Guangdong Shaoguan Country Garden 1,300 Guangdong Heshan Country Garden 920 Guangdong Dalang Country Garden 1,290 Jiangsu Country - Jurong Phoenix City 840 Guangdong Xinhui Country Garden 1,230 Guangdong Xinhui Country Garden 770 Hunan Changsha Country Garden 1,180 Guangdong Meijiang Country Garden 660 Total 19,730 Total 12,130 Achieved contract sales 43,200 Target for full year 43,000 Percentage of Top 10 projects of Total 45.7% Percentage of Top 10 projects of Total 28.2% (but ~40% of contract sales up to Oct 7 th ) Figure 2: One of Country Garden s Hainan Lingao Projects (Longbowan) Artists impression Source: Soufun Peripheral location of part of landbank should lead to below-sector ASP growth in Country Garden management expects ~5% ASP growth for its products in 2013, more likely in 2H13. Given its suburban focus, we believe the ASP growth of Country Garden is likely to lag behind that of HK-listed China developers with urban-centric and more 1 st /2 nd tiered cities exposure. Tackling the inventory issue. According to Country Garden, completed and unsold inventory was around m sq m as of September, similar to the interim 2012 levels. Management highlighted two key initiatives to move inventory: 1) upgrade products all completed and unsold high-rise units will be fitted out to enhance their attractiveness and auxiliary facilities and project environment will be improved and 2) increased sales and marketing activities (which caused a rise in SG&A expenses, as revealed in the interim results). Country Garden chose not to go down the path of directly cutting prices to clear its inventory, which would have been a faster way to decrease its inventory, in our view. We understand that management has good intentions behind this tactic, to try not to upset its existing client base. The Anhui Province has the most unsold inventory among the non-homebase provinces, according to President Mo. Recall that back in mid-2010, there were some negative newsflow on Country Garden around potential land violation of an Anhui project. As the Anhui Province constitutes 14% of Country Garden s landbank as of September and is the second largest GFA exposure in the 5 December 2012 Page 26 of 66

27 Country Garden Holdings Company Limited company (after Guangdong), we believe it is very important for the company to clear inventory there in a timely basis. There are a few preliminary signs of improvement: for instance, 94 units of the diamond townhouse inventory at Anqing Country Garden had a sell-through rate of about 90% after some product and greenery ratio upgrades, according to Country Garden. Nonetheless, considering the relatively high level of completed inventory (over 3m sq m), we believe that it would take some time before the inventory shows a meaningful decrease. We do not expect a significant decline by end Based on the inventory breakdown by product type provided by October s analyst briefing with President Mo, semi-attached townhouses constituted 38% of the total inventory, followed by apartments at 34%. Stand-alone townhouses (that are becoming increasingly difficult to find) constituted only 6% of total inventory. Figure 3: Chuzhou Europe City s Exterior Figure 4: Chuzhou Europe City Town Houses Figure 5: Good foot traffic around Chuzhou Europe City s Model Figure 6: Ad for Nanjing part of the Nanjing-Chuzhou Highway to be completed in October 2013 Healthy balance sheet and underlying net profit margin. Country Garden has a healthy balance sheet. We estimate its end-2012 net gearing ratio to be 56.7%. As of September, its weighted average funding cost was 9.95%, lower versus June s 10.31%. Despite a likely dip in GPM in 2013, we believe its underlying net profit margin should still be decent at 14.6% for 2013 and further improve to 14.8% in December 2012 Page 27 of 66

28 Country Garden Holdings Company Limited Operational Updates Management has chosen to upgrade products and engage in sales and marketing activities to move inventory Figure 7: Jun 2012 Inventory Breakdown by Area Figure 8: Jun 2012 Inventory Breakdown by Product Type Guangdong 33% Attached townhouses 10% Retail 11% Stand-alone townhouses 6% Others 1% Semi-attached townhouses 38% Non- Guangdong 67% High-rise and mid-rise apartments 34% Contract sales update and no new specifics on 2013 contract sales outlook. As of late November, Country Garden indicated that it has achieved over CNY40b of contract sales and if we include subscription sales, it would have achieved over CNY43 b, attaining its full-year target of CNY43b (vs. CNY43.2b achieved in 2011). The company admitted that part of the reason for 2012 s skewed 2H launch pipeline was the management s conservative stance on the physical market at the beginning of this year. President Mo indicated that in addition to inventory, there would be about CNY5-8b worth of available for sale resources from 6-8 new projects for sale and another CNY5-8b from the new units of existing projects in 4Q12. More available for sale resources expected for Management expects to reveal specific guidance for 2013 in next year, likely at its annual results announcement in 1Q13. Available for sale resources this year is 14-15m sq m and for next year, there is no target but we estimate there will be ~15-18m sq m of available for sale resources. Country Garden s development cycle is relatively quick, hence, we believe it is easy for the developer to speed up some new starts. Our expectation is for Country Garden to fetch CNY47-50b of contract sales next year. Figure 9: Landbank composition by GFA (as of Sep 2012) Figure 10: Jan-Sep new landbank acquisition breakdown Hunan 6% Jiangsu 6% Hubei 7% Inner Mongolia 7% Liaoning 9% Tianjin 2% Anhui 14% Others 3% Guangdong 46% Malaysia Chongqing 5% 6% Guangdong 8% Anhui 17% Hainan 3% Hubei 24% Jiangsu 37% 5 December 2012 Page 28 of 66

29 Country Garden Holdings Company Limited Striving for a 50:50 ratio between Guangdong and non-guangdong project sales in 3-5 years. Country Garden s landbank as of September was over 57m sq m and about 60% of its new acquisitions were new phases of existing projects. Over the first three quarters of the year, Country Garden acquired 10.97m sqm of landbank at an AV of CNY498 psm. Jiangsu comprised about 37% of the new acquisitions (including new phases of Jurong), followed by Hubei (24%) and Anhui (17%). Within 3-5 years, Country Garden aims to achieve a 50:50 sales contribution for its Guangdong and non-guangdong projects (vs. the YTD ratio of 61:39). President Mo on overall property market and policy: He believes that next year s property prices will be stable with an uptrend. Furthermore, he believes that much of the genuine demand is still being suppressed. Although Country Garden does not expect the government to loosen property measures, it expects the Chinese government to have some new measures to improve the overall Chinese economy after the 18th National Congress of the Community Party. A more buoyant overall economy will have positive ramifications for the property market, according to the company. In our view, property prices will go up over the next 6-9 months; however, suburban locations (where most of Country Garden s projects are located) are likely to lag behind urban exposure and 1 st -tier cities in terms of ASP increases. All in all, we believe Country Garden has good intentions in setting these strategies; we think that it will take time to destock and we do not expect inventory to show a meaningful decline by end Country Garden is trading at 8.0x 2013 PER vs. its historical average of 10.2x. We peg our TP to Country Garden 25% discount to our NAV of HKD4.77/share. We would turn more positive on the name with more signs of de-stocking or better market recovery in suburban China. Figure 11: Country Garden: Discount to NAV 80% 60% 40% 20% 0% -20% -40% -60% -80% Apr 07 Jul Oct Jan Apr Jul Oct Country Garden Jan Apr Jul Oct Source: Bloomberg, Company, Maybank Kim Eng Average Jan Apr Jul Oct Jan Apr Jul Oct Jan Apr Jul Oct December 2012 Page 29 of 66

30 Country Garden Holdings Company Limited INCOME STATEMENT BALANCE SHEET FY (CNY m) F 2013F 2014F FYE Dec (CNY m) F 2013F 2014F Property development 24,638 33,194 36,239 44,734 48,876 Assets Property management fees PUD 23,761 28,370 31,353 31,881 32,921 Hotel operations ,094 1,443 Completed properties held for sale 8,079 12,876 14,946 15,209 15,730 Construction, decoration and others Inventories Turnover 25,804 34,748 37,938 46,716 51,252 Trade and other receivables 12,373 12,535 13,597 16,744 17,369 Property dev 13,598 15,633 16,992 Prepaid taxes 2,388 3,305 3,305 3,305 3,305 Property invt Restricted cash 4,759 4,649 4,156 4,156 4,156 Property mgmt fees Cash and bank balances 5,094 7,744 5,625 8,840 19,556 Construction, decoration and other Current assets 56,661 69,729 73,231 80,383 93,286 Gross Profit 8,351 11,996 13,824 15,851 17,247 PP&E 5,552 8,055 10,691 13,458 16,364 SG&A (1,455) (2,448) (2,921) (3,457) (3,690) Investment properties ,403 1,574 Other operating expenses (287) (301) (316) Intantible assets EBIT 6,896 9,548 10,616 12,093 13,241 Land use rights 1,096 1,326 1,326 1,326 1,326 Net interest income (225) (120) (256) (232) (157) Available for sale investments Interest income P.U.D 17,399 26,551 27,379 27,880 28,869 Interest expenses after capitailization (363) (222) (423) (403) (395) Interests in associates Gross interest expense (1,369) (2,011) (2,817) (2,687) (2,636) Deferred tax assets 1,137 1,299 1,299 1,299 1,299 Capitalised interest 1,006 1,790 2,395 2,284 2,241 Others Share of P&L of (48) Fixed Assets 25,420 37,581 42,017 45,962 50,258 Associates (48) Total Assets 82, , , , ,544 JC Exceptional item Liabilities & Shareholders' Equity Pretax income 6,720 9,607 10,651 12,016 13,314 Trade payables 9,077 12,810 10,570 13,530 14,906 Income taxes (1,484) (2,369) (2,663) (3,004) (3,328) Deposits from pre-sales of properties 21,730 27,865 29,593 31,021 40,973 LAT (873) (1,449) (1,721) (1,871) (1,987) Tax payable 4,023 5,707 7,101 8,637 10,296 Deferred tax (44) Interest-bearing bank & other borrowings 5,185 6,469 7,599 5,911 5,281 Net income 4,318 5,838 6,316 7,190 8,047 Derivative financial instruments Minority interests (27) (25) (134) (360) (459) Convertible bond 1, Net income attributable 4,291 5,813 6,181 6,829 7,588 Current liabilities 42,331 53,772 56,666 60,902 73,261 Underlying net profit attributable 4,174 5,769 6,126 6,829 7,588 Interest-bearing bank & other borrowing 4,680 7,408 7,044 8,990 8,222 Senior notes 8,872 14,204 14,204 14,204 14,204 CASHFLOW STATEMENT Convertible bond 1, FY (CNYm) F 2013F 2014F Deferred government grants Operating Activities 4,318 5,838 10,651 12,016 13,314 Derivative financial instruments Net Income Deferred taxation Depreciation (3,975) (7,416) (7,455) (51) 8,154 Long-term liabilities 14,332 23,472 22,174 24,071 23,255 Changes in working capital: (1,363) (2,868) (2,991) (3,339) (3,656) Total Liabilities 56,663 77,243 78,840 84,974 96,516 Income Tax Paid 1,519 1,691 (217) (155) (230) Shareholders' Equity 24,821 28,990 35,196 39,800 44,997 Other Operating Cashflow 775 (2,487) 275 8,773 17,898 Share capital and premium 15,392 15,382 17,570 17,570 17,570 CFO 4,318 5,838 10,651 12,016 13,314 Other reserves 993 1,368 1,368 1,368 1,368 Investing Activities Retained earnings 8,436 12,240 16,258 20,862 26,060 Acq. of Subsidiaries, Net of Cash 0 0 Proposed final dividend 1,605 2,163 2,225 2,390 2,656 Capital Expenditure (2,066) (2,783) (2,923) (3,069) (3,222) Others 6,832 10,077 14,033 18,472 23,404 Increase in Investment Property (755) (522) (171) Minority interests 597 1,077 1,211 1,572 2,031 Other investing cashflow Shareholders' funds 25,418 30,067 36,407 41,372 47,028 Repayment of Cash Adv from Others 82 Total Liabilities 56,663 77,243 78,840 84,974 96,516 CFI (2,020) (2,629) (3,605) (3,519) (3,321) Financing Activities Capital Contribution-Subs Purchase of Treasury Shares (7) (10) Proceeds from Issue of Convertibles Repurchase of convertible bond (3,372) (585) FINANCIAL RATIOS Proceeds from Borrowings 11,431 16,357 7,234 8,742 5,398 FY F 2013F 2014F Repayments of Borrowings (6,149) (6,619) (6,469) (8,483) (6,795) Profitability (%) Dividends Paid to Equity Owners (267) (1,605) (2,163) (2,225) (2,390) Gross Margin Share Issue Cost 2, Net Margin Change in Restricted Cash Underlying Profit Margin Other financing cashflow (10) (72) (72) ROA CFF 1,835 7,993 1,210 (2,039) (3,860) Asset turnover Increase/(decrease) in cash 590 2,877 (2,120) 3,215 10,717 ROE Cash and bank at beginning of year 4,609 5,094 7,744 5,625 8,840 Net debt to equity Effect of FX change (104) (227) Cash and bank balance at the end of year 5,094 7,744 5,625 8,840 19,556 5 December 2012 Page 30 of 66

31 Hong Kong Reinitiating Coverage 5 December 2012 BUY Share price: Target price: HKD12.44 HKD14.80 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: Guangzhou R&F is a Guangzhou-based developer that Mr Li Sze Lim and Mr Zhang Li founded in 1994 and went public in July, R&F not only targets the mid- and mid-high end residential segment in China, but has considerable investment property exposure (office, retail and hotels). It is an H-share company with a well-recognized brand name in many cities including Guangzhou, Beijing, Chongqing and Taiyuan. Ticker: 2777 HK Shares Issued (m): 3, Market Cap (USDm): 5, mth Avg Daily Turnover (USDm): 9.9 HSI: 21, Free Float (%): 29 Major Shareholders: % Li Sze Lim 33.3 Historical Chart HSI Index GZ R&F Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 22% 36% 24% 77% 103% Relative (%) 24% 25% 7% 63% 84% Guangzhou R&F Returning to Guangzhou Risk-reward skewed to the upside; BUY with a TP of HKD We reinitiate coverage on Guangzhou R&F (2777 HK) with a BUY rating and TP of HKD14.80, based on a 30% discount to our NAV of HKD21.15/share. We see the market had been too bearish towards R&F, given its slow growth and H-share structure which has limited access to funding. But the company has recently taken steps to shed this image, venturing into a new city, Hangzhou, and optimising its product mix. Earnings growth will likely be mild in 2013 but we expect a good 21.0% YoY increase in 2014 as margins should bottom out in Moreover, R&F s reluctance to discount prices much in 1H12 could lead to more saleable resources over these several months, capturing a more buoyant property market. Look beyond In our view, R&F is not completely without growth. While we expect it will miss earnings growth this year and post a mere 5.8% YoY recovery in underlying net profit next year, earnings should see an upswing of 21.0% YoY to CNY5,508m in FY14F, on the back of profit recognition from its Guangzhou Grade A office buildings and some high-margin JV projects. Good new launches lined up for next year. Of the preliminary 7-8 new projects slated for launch in 2013F, at least three are in prime locations compared to just one in 2012 in Guangzhou, R&F s home base where its brand name is more established. They are Yingyao Grade A office in Pearl River New Town, Yangji Village Redevelopment in Yuexiu district where there is little new residential supply, and a project in Nansha district which has been designated the 6 th National Level Economic Development Zone. We believe all these projects should see robust sales when launched. Total saleable resources for 2013 could reach at least CNY70b, and management expects CNY35b or more of contract sales next year. Pick-up in landbanking activities. We view R&F s active landbanking (at reasonable prices to boot) in 2H12 as positive, given that it will bolster saleable resources for the next few years. This should help restore investor confidence in R&F that it is not being complacent. The company surprised the market with its recent foray into a new city, Hangzhou and an YTD landbank in excess of ~CNY4.0b or ~1.5m sq m. GPM and NPM to trough in With the delivery of two social housing projects in Taiyuan and Guangzhou, as well as the booking of mild discounts for some of its projects, we expect R&F s GPM and underlying NPM to hit a trough in 2013 at 36.4% and 13.7%, respectively. This is not unusual for the sector, as several other Chinese developers such as Longfor have also guided for a margin decline next year. We expect R&F s GPM to recover to 39.2% and underlying NPM to recover back to above 15% in SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

32 Guangzhou R&F Properties Company Limited Valuation we still see some upside. We believe the market is well aware of slower growth in R&F given its H-share structure limiting funding channels. Recently, the company demonstrated pro-active developments such as entering a new city Hangzhou and optimizing product mix. We also like R&F s 2013 preliminary project launch pipeline, which includes at least three welllocated projects in Guangzhou. We peg our TP of HKD14.80/share, derived from 30% discount to our NAV of HKD21.15/share. Our TP represents 8.5x 2013 earnings, 7.0x 2014 earnings, 1.4x 2013 book and 1.2x 2014 book. Guangzhou R&F Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 27,370 28,837 33,288 35,272 EBIT 9,482 9,015 9,347 10,902 Net Profit Attributable to SH 4,842 4,630 4,551 5,508 Estimated Underlying Net Profit 4,394 4,303 4,551 5,508 Underlying EPS (CNY) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin (%) Investment positives More Guangzhou-based projects to launch in 2013, which should play to the strength of R&F. We estimate that R&F has lined up 7-8 brand new projects for launch in 2013, more than the likely number of 5 in At least three could be in its home base in Guangzhou, namely, Pearl River New Town J2-5 Grade A office building (Yingyao), Nansha district project and Yuexiu district s Yangji Village project. A fourth Guangzhou project (in Haizhu district) is likely to be launched in 2013 as well. The other 4-5 new projects also scheduled for launch include Hainan Moon Bay, Beijing Daxingpang project and, possibly, Tianjin Guangdong Building (office) or Taiyuan R&F Peach Garden if it were delayed from 4Q12. Against this backdrop, we expect R&F to set its FY13 contract sales target at 10-15% higher than this year s goal of CNY32b. Furthermore, this year s 4m sq m of new start GFA (higher than 2011 s 3.5m sq m) should provide more available-for-sale resources next year. Prime locations to boost sales. The Yingyao Grade A office in Pearl River New Town is another project in R&F s successful Ying series in Guangzhou. Unlike the Yingtong building which was launched in October, Yingyao offers a better view, which should allow it to be priced closer to the ASP for Yingkai building. For another Guangzhou project which we expect to be put up for sale next year, scant new residential supply in Yuexiu district, where the Yangji Village Redevelopment is located, bodes well for sales. The Nansha project also has seen an improvement in buyer sentiment after the Chinese government announced in September that the district will be designated the 6 th National Level Economic Development Zone. We visited all these three projects in Guangzhou and are confident that their prime locations would attract robust sales when they are rolled out. However, we note that the launch pipeline appears skewed towards 2H13. 5 December 2012 Page 32 of 66

33 Guangzhou R&F Properties Company Limited Figure 1: Our expectation of R&F s 2013 project launch pipeline Project Estimated Attributable GFA (sq m) Estimated AV (CNY psm) ASP (CNY psm) Est launch timing Tianjin Guangdong Building 338, ,000 1H13 Taiyuan Peach Garden 334, ,500-6,500 1H13 Guangzhou Nansha project 233,022 1,950 9,200 1H13 Guangzhou J2-5 (Yingyao Office) 155,244 3,500 38,000-42,000 2H13 Guangzhou Yangji Village Project 273,800 8,584 34,000 2H13 Hainan Moon Bay 118,000 1,760 13,000 2H13 Beijing Daxingpang Project 230,700 3,020 14,000 2H13 Figure 2: Yangji Village redevelopment is well-located in Yuexiu district, near Pearl River New Town in Guangzhou Figure 3: Few rival projects near Yangji project an old existing project nearby Pick-up in landbanking activities. R&F has become more active in landbanking in 2H12 after making just one acquisition for CNY0.36b in 1H12 to add to its Xianghe R&F New Town project. This change has been welcomed by the market, which was worried about its lack of growth and its H-share structure that has hampered its fund-raising capability. In recent months, the company paid CNY2.44b for new land parcels in Beijing Majuqiao Town and Guangzhou Nansha project. It also forayed into Hangzhou and acquired two land parcels at reasonable land costs within a short period. By end-november, it has bought land totaling 1.53m sq m of GFA and is still searching for new acquisitions in cities where it has an exposure as well as in other areas. Figure 4: R&F s 2012 landbank acquisitions by end-november Location Total GFA (`000 sq m) AV (CNY psm) Land costs (CNY b) Hubei Xianghe (1H) Beijing Majuqiao Town (2H) 326 5, Guangzhou Nansha (2H) 199 3, Hangzhou Yuhang Project (2H) 88 5, Hangzhou s Second Project (2H) 192 3, Total by end-nov 1,531 2, Source: Company data, Soufun, Maybank Kim Eng 5 December 2012 Page 33 of 66

34 Guangzhou R&F Properties Company Limited Figure 5: An acquisition of R&F in Yuhang District, Hangzhou recently (Red boxes) Figure 6: Another acquisition of R&F in Yuhang District recently (Red box) Figure 7: Yuhang District s planning for future development Source: Maybank Kim Eng 5 December 2012 Page 34 of 66

35 Guangzhou R&F Properties Company Limited Figure 8: GZ R&F s landbank breakdown by GFA City Attributable GFA (sq m) Breakdown (%) Chongqing 5,676, Guangzhou 3,887, Taiyuan 3,199, Huizhou 3,097, Hainan 2,924, Tianjin 2,787, Beijing and Vicinity 2,725,000 9 Chengdu 976,000 3 Harbin 700,000 2 Nanjing 600,000 2 Shanghai and Vicinity 570,000 2 Xian 504,000 2 Datong 392,000 1 Hangzhou 280,000 1 Shenyang 90,000 0 Investment Properties 712,000 2 Total 29,119, *Note: June landbank plus 2H-to-date acquisitions Figure 9: Yingkai office with recent ASPs of >CNY40k/sq m Figure 10: Office showflat in Yingtong building Figure 11: Outside view of Yingtong project Figure 12: Yingxin retail mall, adjacent to Yingtong project GPM and underlying NPM to bottom out in 2013F. We see R&F s GPM and underlying NPM hitting the trough in 2013 at 36.4% and 13.7%, respectively. This will be driven by minor price cuts for some of its developments, as well as the expected delivery of social housing projects in Guangzhou Jinyu Garden and Taiyuan Kuangji next year. However, we expect margins to recover in FY14F. The slide in margins is not unusual for the sector, as several other Chinese developers such as Longfor have guided for a decline in We expect R&F s GPM to recover to 39.2% and underlying NPM to recover back to above 15% in December 2012 Page 35 of 66

36 Guangzhou R&F Properties Company Limited Investment negatives Unattractive landbank in Huizhou, leading to slow sales. R&F s Huizhou JV project with Shimao, Venice Bay, which has a total GFA of ~2.9m sq m, has seen slower-than-expected sales. In the first 10 months of this year, the project garnered only ~CNY144m in total sales, according to management. Venice Bay is ~45 minutes away from Country Garden s Ten Miles Beach in the opposite direction to Shenzhen. Its current location seems unattractive but could improve in the future with infrastructure development (bridge and high speed train) being planned. R&F s Hainan landbank also appears to be underperforming, with all three projects targeted at the tourist trade fetching ~CNY590m over the same period. However, R&F Yingxi Valley in Haikou has reported better sales than Mangrove Bay and R&F Bay Shore. Despite price adjustments in the beginning of the year, sales for the latter two projects have fallen short of expectations. Controversial high dividend payout. Although some investors would rather that R&F retain more earnings to fund its new and existing projects, we do not think it will scale back its dividend payouts much as Chairman Li Sze Lim has said in previous analyst briefings that he is eyeing an eventual 40% payout of R&F s underlying earnings. Low revenue lock-in. We estimate that R&F has only locked in ~40-45% of FY13F revenue, which is low compared to some of its listed peers such as Longfor, Country Garden, and China Vanke. Figure 13: Discount to NAV GZ R&F Average 80% 60% 40% 20% 0% -20% -40% -60% -80% -100% Aug-05 Aug-06 Aug-07 Aug-08 Aug-09 Aug-10 Aug-11 Aug-12 Source: Bloomberg, Company, Maybank Kim Eng Valuation we still see some upside. We believe the market is well aware of R&F s H-share structure limiting its funding channels and expectation for management is not high given some past slippages. Recently, the company demonstrated pro-active developments such as entering a new city Hangzhou and optimizing product mix. We also like R&F s 2013 preliminary project launch pipeline, which includes at least three well-located projects in Guangzhou. We peg our TP of HKD14.80/share to 30% discount to our NAV of HKD21.15/share. Our TP represents 8.5x 2013 earnings, 7.0x 2014 earnings, 1.4x 2013 book and 1.2x 2014 book. Risks The risks to our call include: (1) unexpected policy changes in China, (2) sharp worsening of access to financing, (3) macroeconomic shocks, and (4) slippage in projects. 5 December 2012 Page 36 of 66

37 Guangzhou R&F Properties Company Limited INCOME STATEMENT BALANCE SHEET FY (CNY m) F 2013F 2014F FYE Dec (CNY m) F 2013F 2014F Property development 22,972 25,390 26,595 30,825 32,359 Assets Property investment Properties under development for sale 29,067 33,088 37,247 40,737 37,469 Hotel operations ,024 1,426 Completed properties held for sale 4,768 6,036 7,180 8,140 7,241 All other segments Inventories Inter-segment revenue (90) (99) (102) (105) (108) Trade and other receivables 7,229 7,581 8,690 10,032 10,630 Turnover 24,642 27,370 28,837 33,288 35,272 Tax prepayments 1,548 1,406 1,406 1,406 1,406 Restricted cash 3,514 2,900 2,900 2,900 2,900 Property development 10,693 11,285 12,837 Time Deposits 1,300 Property investment Cash and bank balances 5,654 4,826 5,048 5,397 15,683 Hotel operations Current assets 52,052 57,408 62,783 68,958 75,644 Gross Profit 9,293 11,416 11,440 12,119 13,836 Land use rights PP&E 4,119 4,125 4,329 4,543 4,768 SG&A (1,547) (1,924) (2,163) (2,497) (2,645) Investment properties 12,462 12,688 13,290 13,766 14,300 Other operating expenses (35) (9) (262) (275) (289) Intangible assets EBIT 7,711 9,482 9,015 9,347 10,902 Jointly controlled entities 3,385 3,356 3,356 3,356 3,356 Associates ,705 2,512 Net interest income (863) (1,010) (1,062) (1,139) (1,072) Deferred Tax Assets 923 2,403 2,403 2,403 2,403 Interest income Available for sale financial assets Interest expenses after capitalization (941) (1,139) (1,180) (1,260) (1,274) Trade and other receivables 2,610 2,210 2,210 2,210 2,210 Gross interest expense (1,607) (1,910) (2,145) (2,292) (2,123) Properties held for development Capitalized interest , Fixed Assets 25,365 26,750 27,831 29,687 31,253 Share of results in JCEs and Associates (68) , Total Assets 77,417 84,159 90,614 98, ,897 Exceptional item 1, Pretax income 8,070 9,168 8,801 9,375 10,637 Liabilities & Shareholders' Equity Accruals and other payables 7,845 10,125 7,626 9,279 9,396 Income taxes (1,867) (1,904) (2,288) (2,344) (2,659) Deposits on sale of properties 15,480 14,055 19,474 21,889 30,204 LAT (1,747) (2,430) (1,852) (2,253) (2,366) Taxation payable 4,084 6,504 6,214 6,898 7,542 Net income 4,456 4,835 4,661 4,779 5,612 Short-term bank loans 1, ,118 3,693 3,437 Current portion of long-term bank loans 5,688 9,741 6,178 5,539 5,155 Minority interests (106) 7 (31) (227) (103) Current liabilities 34,594 40,777 43,610 47,299 55,735 Net income attributable 4,351 4,842 4,630 4,551 5,508 Bank loans 20,669 18,285 18,536 19,952 15,975 Est underlying net profit 3,666 4,394 4,303 4,551 5,508 Deferred taxation 2,155 2,364 2,364 2,364 2,364 Long term liabilities 22,824 20,649 20,900 22,316 18,340 PER SHARE DATA Total Liabilities 57,418 61,427 64,510 69,615 74,074 FY F 2013F 2014F R&F Shareholders' Equity 19,788 22,526 25,867 28,566 32,254 EPS (CNY) Issued share capital Underlying EPS Other reserves 4,321 4,316 4,316 4,316 4,316 DPS (total) Retained profits 13,373 16,115 18,893 21,623 25,204 Interim Proposed dividends 1,289 1,289 1,852 1,820 1,928 Final Minority interests BVPS Shareholders' funds 19,999 22,732 26,104 29,031 32,822 Total Shares Outstanding (m) 3,222 3,222 3,222 3,222 3,222 Liabilities & Shareholders' Equity 77,417 84,159 90,614 98, ,897 FINANCIAL RATIOS F 2013F 2014F Profitability Gross Margin Net Margin Underlying Profit Margin ROA Asset turnover ROE ROIC Net debt to equity December 2012 Page 37 of 66

38 Guangzhou R&F Properties Company Limited STATEMENT OF CASHFLOW FY (CNY m) F 2013F 2014F Operating Activities Profit for the year 4,456 4,835 4,661 4,779 5,612 Tax 3,614 4,333 2,288 2,344 2,659 Interest Income (96) (129) (118) (122) (202) Interest Expenses 941 1,139 1,180 1,260 1,274 Provision for amount due from and associate Depreciation Reversal of PP&E Impairment loss on L-T investment Loss on sale of PP&E Provision for doubtful debts 4 1 Amortization of land use rights and intangible assets like goodwill Gain on disposal of a subsidiary (109) (143) Fair value gains on investment properties (1,110) (436) Share of results of associates 47 (118) Share of results of JCE (274) (1,166) (807) Amortization of leasehold Changes in working capital: (1,860) (4,144) (2,857) (42) 13,526 Interest paid (1,597) (1,838) (2,145) (2,292) (2,123) Tax paid (2,677) (3,241) (2,288) (2,344) (2,659) CFO 1, ,693 17,568 Investing Activities (Addition) Reduction in Property and Equipment (1,109) (444) (466) (489) (514) Proceeds from Disposal of Property and Equipment Purchase of intangible assets (94) (18) Decrease in long-term loan receivable (Acquisition) Sale of Subsidiaries Acquisition of additional interests in subsidiaries 6 Cash outflow from disposal of subsidiaries (100) 48 Change in Investment Properties (86) (603) (476) (534) (Investment) Disinvestment in Associates (Investment) Disinvestment in JC Entities (2,455) 421 Increase of Time Deposit (1,300) Interest received CFI (3,512) (1,107) (951) (844) (846) Financing Activities Proceeds from Issue of Shares New (Repayment of) Short-term Bank Loans 1, (1,064) (640) New (Repayment of) Long-term Bank Loans 2, ,416 (3,976) Movement in balance with shareholders Capital Contributions from Minority Shareholders Change in restricted cash (1,292) 2, Dividend paid to R&F shareholders (1,482) (2,193) (1,289) (1,852) (1,820) Dividend paid to minority shareholders CFF 628 1,050 (836) (1,500) (6,436) Increase/(decrease) in cash and bank balance (989) 473 (1,078) ,286 Cash and bank balance at beginning of year 6,642 5,654 6,126 5,048 5,397 Cash and bank balance at the end of year 5,654 6,126 5,048 5,397 15,683 5 December 2012 Page 38 of 66

39 Hong Kong Initiating Coverage 5 December 2012 BUY (New) Share price: Target price: HKD5.44 HKD6.52 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: KWG Property was founded by the Kong family in 1995 and was listed on the HK Stock Exchange in July KWG targets the mid- and mid-high end of the property segment in China and has expanded into many cities such as Shanghai, Chengdu, Suzhou, and Beijing. It is headquartered in Guangzhou and owns various investment property assets including IFP in Pearl River New Town in Guangzhou and various hotels (e.g., Sheraton Four Points in Tianhe and Huadu). KWG also has solid project partners such as HK Land and SHKP. Ticker: 1813 HK Shares Issued (m): 2,893.2 Market Cap (USDm): 2, mth Avg Daily Turnover (USDm): 4.5 HSI: 21, Free Float (%): Major Shareholders: % Kong Jian Min Historical Chart 200 HSI Index KWG Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 12% 31% 20% 75% 108% Relative (%) 14% 20% 3% 60% 89% KWG Property Speeding Up Growth Less dependent on Shanghai. KWG s 2013 launch pipeline will be less dependent on Shanghai where competition has been stiff and some of its past launches saw slow sell-through rates earlier this year. With little growth expected for both earnings and contract sales in 2012, we believe that tackling the growth issue is of utmost importance. Guangdong projects to drive FY13 earnings. We expect KWG to launch 2-3 new projects next year in Guangdong Province, its home base, including our expectation of a delay in Ph 1 of the Biological Island project to next year due to its ability to meet its 2012 sales target. Other two are the J2-2 office project (well-located at the Pearl River New Town in Guangzhou) and Foshan project (in conjunction with SHKP [16 HK], Not Rated), which should receive a solid sales response partly because KWG s brand name is more established in Guangdong. Improving debt profile. In late September, KWG managed to obtain three-year bilateral loans of HKD250m from HSBC and HKD500m from SCB at an estimated cost of 6%. As of end-2011, 51% of its bank loans and senior notes were due within two years. We expect its debt maturity profile to improve. More mindful of product mix. One of the lessons KWG has learnt is the need to adjust its product mix to cater more to genuine first-time home buyer/upgrader demand. Hence, some new projects have smallsized units, including sq m serviced apartments at the Biological Island. Furthermore, its supply of Grade A office strata title units in Guangzhou (Pearl River New Town J2-2) and commercial portion of Fengxian project are subject to commercial presale permit process, not residential. That should alleviate some investor concerns that high-end residential projects might take more time to get presale permits, such as that reported by Guangzhou media. We also like KWG s highquality products and recent pick-up in NAV-accretive landbanking. Initiate with BUY and TP of HKD6.52. We initiate coverage on KWG with a BUY rating and TP of HKD6.52/share, based on a 40% discount to our estimated NAV of HKD10.86/share. Our TP translates to FY13F PER of 6.7x and P/BV of 0.9x (FY14F PER of 5.3x and P/BV of 0.8x). KWG Property Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 10,123 10,562 10,843 13,043 EBIT 3,702 3,310 3,069 3,883 Net Profit Attributable to SH 2,103 1,934 2,289 2,896 Estimated Underlying Net Profit 1,829 1,934 2,289 2,896 Underlying EPS (CNY) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin (%) SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

40 KWG Property Holding Limited Tackling growth issue Less dependent on Shanghai. KWG s 2013 launch pipeline will be less dependent on Shanghai where competition has been stiff and it has seen slow sell-through rates in the past. With little growth expected for both earnings and contract sales in 2012, we believe that tackling the growth issue is of utmost importance to KWG now. KWG is planning to acquire more smaller-sized projects as well as improving asset churns. 3 Guangdong launches for 2013 return to its homebase. We expect KWG to launch three new projects next year in Guangdong Province, its home base, including Phase 1 of the Biological Island project whose launch we expect to be delayed from 4Q. The other two new projects are the J2-2 office project (welllocated at the Pearl River New Town in Guangzhou) and Foshan project (in conjunction with SHKP [16 HK], Not Rated), which should receive a solid sales response partly because KWG s brand name is more established in Guangdong. We expect the three to four other projects to be launched next year to include Shanghai Fengxian project, Hainan Moon Bay, as well as 1-2 Suzhou projects. We believe the Suzhou Emerald development is being delayed from 4Q12 due to management s expectation of better ASPs in Suzhou in 1H13. KWG management estimates full-year 2012 saleable resources to be 1.8m sq m, and we forecast 2013 saleable area could be about 2.30m sq m. Figure 1: Preliminary new project launch schedule for 2013 Total attributable GFA Our est ASP Est land cost Est GPM Project name Under HPR? Estimated timeframe of project ( 000 sq m) (CNY psm) (CNY psm) (%) Guangzhou Biological Island No (serviced apt) Likely 1Q ,000-16,000 1,700 mid-40s Ph 1 (Ph 2 also later in 2013) Suzhou Emerald (Yinshan Yes 1H13 (expected delay ,000 5, Lake) from 2H12) J2-2 office in Guangzhou No (office) ,000 4, Shanghai Fengxian Yes (resi) and No ,000 3, (office) Hainan Moon Bay project No ,000 1, Foshan Lanshi Project (with SHKP) Yes 2H ,200 2, Source: Company data, Soufun, Maybank Kim Eng estimates Restart of landbanking activities to help enhance NAV. After keeping quiet in all of 1H12, KWG restarted landbanking with Biological Island Phase 2 of 84k sq m in July. This was followed by the addition of ~333k sq m in attributable GFA in Shanghai Fengxian, Suzhou Industrial Park and Suzhou Xiangcheng in September. In October, it further acquired ~640k sq m of GFA in Guangzhou s Luogang District at a low AV of CNY800 psm. According to our channel checks, the company has been exploring landbanking opportunities in Beijing, Tianjin, and Ningbo as well. Local press reports suggested that KWG has been on the lookout for opportunities in Shenzhen s special financial zone, Qianhai (where CNY1.5b has reportedly been earmarked for infrastructure and IT development) and Guangzhou Nansha (which was designated the Sixth National Level Economic Development Zone in September). However, any Qianhai acquisition might take some time as the local government would encourage developers to partner up with financial companies. 5 December 2012 Page 40 of 66

41 KWG Property Holding Limited Figure 2: Landbank mix by city, 2009 Figure 3: Landbank mix by city, 2011 More diversified Suzhou 20.0% Beijing 7.0% Hainan 4.0% Guangzhou 50.0% Hainan 8.6% Tianjin 8.4% Beijing 4.0% Shanghai 8.0% Guangzhou 41.7% Chengdu 19.0% Suzhou 12.8% Chengdu 16.5% Figure 4: Landbank mix by city as of October 2012 Figure 5: Pre-sales ASP expansion Hainan 8.6% Tianjin 8.3% Beijing 3.4% Shanghai 10.5% Guangzhou 41.2% 15,000 10,000 5,000 Pre-sales ASP (CNY/sq m) Pre-sales GFA (m sq m) 12,400 13,900 11,400 8, Suzhou 12.3% Chengdu 15.7% H 0.0 Figure 6: Pre-sales target vs actual sales 20.0 Pre-sales target Ahead of sales (5.0) 4% 13% 45% 5% (3.5) * 2012F 2013F** *2011 actual contract sales aggregated to CNY11.5b **2013F pre-sales target is not company guidance, but our own estimate In 2011, KWG fetched only CNY11.5b of contract sales, CNY3.5b below its original target Improving debt profile. In late September, KWG managed to obtain three-year bilateral loans of HKD250m from HSBC and HKD500m from SCB at an estimated cost of 6%, a welcome development. As of end-2011, 51% of its bank loans and senior notes were due within two years. Recent Guangzhou Biological Island visit shows KWG is one of the earliest entrants in the district hence we see the local property market there as less proven but small sized serviced apartment units of around sq m mean low lump-sum per unit. Our recent visit to Guangzhou Biological Island shows that KWG is one of the earliest entrants in the district. In our view, the property market there is not as tested but small-sized serviced apartment units of around sq m would mean a low total cost per unit. These small units are attractive in the 5 December 2012 Page 41 of 66

42 KWG Property Holding Limited current environment, in our view, because nearby buyers of University Town often include people working in the educational sector or technology sector. In late October, we visited KWG s Biological Island project and note that the area has much greenery space, but not much property development. This project will be accessible via Metro line #4 and we believe Biological Island is still in its nascent stage of development. Hence, we do not expect a big-bang launch response, but with low land costs of ~CNY1,700 psm, we estimate KWG could achieve GPMs in the mid-40s for Biological Island Phase 1, with ASPs of CNY15-16k psm. Phase 2 consists of some office space as well. On a Saturday morning, it took us ~30 minutes to go from Pearl River New Town to KWG s project. Potential buyers are likely to be employees or students of nearby universities (including Guangzhou University, Guangzhou University of Technology and Sun Yat-Sen University) and their families, or people who plan to set up companies on the Biological Island. Yuexiu Property has a few projects in the University Town, a district only a few minutes away from the Biological Island by car. We visited Starry Manhon, whose unfitted residential units have an ASP of ~CNY19,000-20,000 psm. The project has seen high sell-through rates since its initial launch in June, selling close to nine out of a total of 10 blocks it launched. There are about 64 units in each block and buyers can choose to a fit-out package for CNY1,800 psm. More mindful of product mix. One of the lessons KWG has learned is the need to adjust its product mix to cater more to genuine first-time home buyer/upgrader demand. Hence, we have seen small-sized units at some of its new projects, including sq m serviced apartments at Biological Island. Furthermore, its supply of Grade A office strata title units in Guangzhou (Pearl River New Town J2-2) and the commercial portion of Shanghai Fengxian project are subject to commercial presale permit process, not residential. That should alleviate some investor concerns that high-end residential projects might take more time to get presale permits, such as that reported by Guangzhou media. We like KWG s high-quality products and recent pick-up in NAV-accretive landbanking and 2014 should see better earnings growth after a lacklustre We forecast a healthy 18.3% YoY growth in underlying net profit for KWG in 2013 and a robust 26.5% YoY growth in 2014, helped by some associate and JV project deliveries including a batch of Guangzhou Riviera serviced apartments at end-2013 and another in 2014, as well as the Amazing Bay JV in Shanghai in Figure 7: KWG s construction underway in Biological Island Figure 8: Greenery on the Biological Island 5 December 2012 Page 42 of 66

43 KWG Property Holding Limited Figure 9: Park near KWG s Biological Island project Figure 10: Map of Biological Island Figure 11: Yuexiu s Starry Manhon in University Town Figure 12: Yuexiu s Starry Manhon Buildings near KWG Valuation: We assign a BUY rating on KWG and arrive at our target price of HKD6.52/share which is pegged at 40% discount to our NAV estimate of HKD10.86/share. Our TP translates to 6.7x 2013 PER and 0.9x forward book. KWG trades at constructive valuation of ~50% discount to NAV, under 6x 2013 PER and 0.8x 2013 book. We still see good upside to this high-beta stock. We believe the counter should restart growth after a lacklustre 2012 and 2013 launch schedule looks good to us with 6-7 new projects, of which we expect three to be located in its homebase in Guangdong. KWG s product quality is high and we believe that 2014 earnings growth is likely to surprise on the upside. Figure 13: Discount to NAV 20% 0% -20% -40% -60% -80% KWG Average -100% Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10 Sep 10 Mar 11 Sep 11 Mar 12 Sep 12 Source: Bloomberg, Company, Maybank Kim Eng 5 December 2012 Page 43 of 66

44 KWG Property Holding Limited INCOME STATEMENT BALANCE SHEET FY (CNY m) F 2013F 2014F FYE Dec (CNY m) F 2013F 2014F Property development 7,221 9,815 10,208 10,403 12,487 Assets Property investment Properties under development for sale 13,730 17,934 18,859 20,770 23,132 Hotel operations Completed properties held for sale 2,554 3,023 3,191 3,540 3,971 Property management fees Due from JCEs Turnover 7,466 10,123 10,562 10,843 13,043 Trade and other receivables 1,727 1,635 2,026 2,080 2,501 Tax Recoverable Property development 4,108 3,864 4,821 Restricted cash 1,528 1,349 1,349 1,349 1,349 Property investment Cash and bank balances 5,276 4,025 4,617 4,479 3,686 Hotel operations Current assets 24,920 28,123 30,199 32,375 34,797 Property management fees Land use rights 866 1,060 1,179 1,356 1,623 Gross Profit 3,098 4,472 4,247 4,030 5,033 PP&E 1,344 1,779 2,215 2,673 3,155 Investment properties 3,462 4,234 5,064 6,308 8,174 SG&A (657) (764) (898) (922) (1,109) Jointly controlled entities 5,435 6,509 6,509 6,509 6,509 Other operating expenses (5) (6) (39) (40) (41) Associates 3,404 1,999 2,094 3,098 4,138 EBIT 2,436 3,702 3,310 3,069 3,883 Deferred Tax Assets Fixed Assets 15,114 16,463 17,942 20,826 24,482 Net interest income 14 (79) (95) (169) (89) Total Assets 40,034 44,586 48,141 53,202 59,278 Interest income Interest expenses after capitalization (20) (125) (158) (234) (118) Liabilities & Shareholders' Equity Gross interest expense (704) (1,166) (1,435) (1,560) (788) Trade payables 1,671 2,935 2,249 2,427 2,853 Capitalized interest 684 1,041 1,277 1, Other payables and accruals 8,745 7,684 7,974 10,088 11,226 Share of P&L of Associates and JCEs 9 (17) 95 1,004 1,041 Due to associates 442 1,082 1,082 1,082 1,082 Associates (2) (5) 95 1,004 1,041 Due to a jointly-controlled entity JC 11 (12) Interest-bearing bank and other borrowings 2,282 3,410 5,360 4,234 5,627 Exceptional item Taxes payable 2,218 3,291 3,907 4,646 5,520 Pretax income 2,508 3,980 3,310 3,903 4,835 Current liabilities 15,432 18,991 21,161 23,065 26,897 Interest bearing bank and other borrowings 10,050 10,425 10,489 11,935 11,925 Income taxes (693) (1,058) (828) (976) (1,209) Deferred revenue LAT (694) (994) (526) (637) (731) Trust financing 1, Deferred tax Deferred taxation Net income 1,282 2,104 1,957 2,290 2,896 Long term liabilities 13,008 11,903 11,967 13,413 13,403 Total Liabilities 28,440 30,893 33,128 36,478 40,300 Minority interests 0 (1) (23) (1) 0 KWG Shareholders' Equity 11,584 13,491 14,789 16,497 18,752 Net income attributable 1,282 2,103 1,934 2,289 2,896 Issued share capital Est underlying net profit 1,246 1,829 1,934 2,289 2,896 Reserves 10,986 12,574 13,928 15,576 17,661 Proposed dividends Depreciation expense (34) (37) (39) (40) (41) Minority interests EBITDA 2,470 3,740 3,349 3,108 3,924 Shareholders' funds 11,594 13,693 15,014 16,723 18,978 Liabilities & Shareholders' Equity 40,034 44,586 48,141 53,202 59,278 Dividends (318) (636) (580) (641) (811) Retained earnings 964 1,467 1,354 1,648 2,085 FINANCIAL RATIOS FY F 2013F 2014F Profitability (%) PER SHARE DATA Gross Margin FY F 2013F 2014F Net Margin EPS (CNY) Underlying Profit Margin Basic ROA Diluted Asset turnover Underlying EPS ROE Basic Net debt to equity Diluted DPS (Total) Interim Final BVPS TSO (m) Basic 2,893 2,893 2,893 2,893 2,893 Diluted 2,893 2,893 2,893 2,893 2,893 5 December 2012 Page 44 of 66

45 KWG Property Holding Limited STATEMENT OF CASHFLOW FY (CNY m) F 2013F 2014F Operating Activities Profit before tax 2,508 3,980 3,310 3,903 4,835 Depreciation, depletion & amortization Other cash flow (3) (223) 1, (282) Interest received Interest paid (663) (1,356) (1,435) (1,560) (788) Corporate income tax paid (433) (745) (579) (683) (846) LAT paid (189) (276) (158) (191) (219) Changes in working capital: 3,031 (997) (1,880) (22) (1,650) CFO 4, ,043 1,120 Investing Activities Purchase of PP&E (383) (452) (4740 (498) (523) Disposal of PP&E 1 1 Acquisition of land use rights (305) (79) (119) (178) (267) Other acquisitions (30) (601) Increase In Investments (4,457) (553) (829) (1,244) (1,866) Disposal of investment properties CFI (5,125) (1,657) (1,422) (1,920) (2,656) Financing Activities New bank loans and senior notes 7,796 4,577 5,424 5,680 5,617 Repayment of bank loans and trust financing (4,118) (4,300) (3,410) (5,360) (4,234) Dividend paid (145) (318) (636) (580) (641) Contributions and acquisitions of non-controlling interests CFF 3,544 (32) 1,378 (260) 742 Increase/(decrease) in cash and bank balance 2,737 (1,223) 592 (137) (794) Cash and bank balance at beginning of year 2,541 5,276 4,025 4,617 4,479 Effect of FX change (2) (28) Cash and bank balance at the end of year 5,276 4,025 4,617 4,479 3,686 Restricted cash at the end of the year 1,528 1,349 1,349 1,349 1,349 5 December 2012 Page 45 of 66

46 Hong Kong Initiating Coverage 5 December 2012 BUY (New) Share price: Target price: HKD14.28 HKD16.30 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: Longfor is a Beijing-headquartered China developer which originated in Chongqing by co-founders Chairlady Wu Yajin and Cai Kui in Longfor s attributable landbank reached m sq m as of June, 2012 and has a broad footprint. It offers a wide range of products including high-rise residential, townhouses, office, retail, and SOHO units. Ticker: 960 HK Shares Issued (m): 5,427.9 Market Cap (USDm): 10, mth Avg Daily Turnover (USDm): 24.0 HSI: 21, Free Float (%): 22.8 Major Shareholders: % Wu Yajun Cai Kui Historical Chart 180 HSI Index Longfor Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Longfor Properties Premium Well-Deserved Initiate with a BUY. Premium is well-deserved for this blue-chip China property company whose high-quality products, strong leadership and financing capability are among the best within the non-soe universe, in our view. Longfor has planned a robust 1H project pipeline (at least 50:50 split over 1H:2H13) and could provide upside surprise to 2013 s contract sales. Furthermore, its low gearing (est 56% as of end-2012) provides flexibility to strategy if the market changes. We believe it will be one of the ultimate large market-share gainers over the next few years. We peg our TP at HKD16.30, derived from 20% discount to NAV estimate of HKD20.38/share. New launches to include more city-center projects. We believe Longfor s lackluster 1H12 contract sales were affected by some less centrally located projects and some sales people attrition to competitors; hence, there was a need to improve its landbank mix. Management s vision extends to the landbanking front, with rapid acquisitions activity of CNY20.6b (or 7.1m sq m of GFA) over the first ten months of the year. This bolsters its warchest at reasonable land costs, especially in light of more urban locations in the new acquisitions. Fast asset turns but high quality products. It is not easy to find midhigh end developers achieving fast asset turns. We see Longfor as one of the few being able to do that. Some convincing evidence is Xian Waft Yard, Xian Crystal Town and Shaoxing Splendor being able to be launched within six months from the land acquisition date. Investment property portfolio to go from good to great. Recurring income from property investments and management fees are estimated to rise from CNY0.77b in 2011 to CNY1.55b in 2014, a strong 3-year CAGR growth of 26%. Longfor has various investment property product series including North Paradise Walk and West Paradise Walk which were initially rolled out in Chongqing and expanded to more cities with success. Very low cost of financing. Longfor issued a 7-year USD 400 m offshore bonds in mid-october at a low rate of 6.875%. Despite a negative operating cashflow being projected for 2012F, the counter has among the lowest cost of borrowing within our non-soe universe. Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 1% 26% 22% 51% 63% Relative (%) 3% 14% 4% 36% 44% SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

47 Longfor Properties Bond covenants are unlikely to be breached though Longfor s Chairlady s ex-husband Mr. Cai might sell down some stake, in our view. Chairman Wu has divorced from Cai and originally their combined stake was 75.6% in early August. Following Longfor s share placement, Wu s latest stake in Longfor (held in a Wu family trust) became 43.2% while Cai s stake (held in a Cai family trust) dipped to 28.7%. If the combined stake of Cai and Wu is below 50.1%, Longfor would breach the covenants in the two bonds. We see that likelihood as very low. Valuation. The stock trades at 30% discount to our NAV estimate of HKD20.38/share and 1.8x 2013F book value, compared to its historical average discount of 32%. However, Longfor s execution and footprint has improved since its IPO, in our view. We believe Longfor scores high on management, execution, and vision and premium is well deserved to many other non-soe developers. Our TP of HKD16.30 is derived from a 20% discount to NAV. Longfor Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 24,150 32,127 40,119 47,046 EBIT 8,445 9,858 11,418 14,047 Net Profit Attributable to SH 6,328 5,196 6,145 7,713 Estimated Underlying Net Profit 4,503 5,196 6,145 7,713 Underlying EPS (CNY) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin Well-timed landbanking YTD to drive fast asset turn. Most of the new land parcels that Longfor acquired YTD are not only well-located, but of project sizes from 150k-500k sq m, facilitating a short development period from acquisition to presales. We expect the sell-through rate of Longfor to pick up from 1H12 s lackluster 48% and further improve in 1H13 given better located projects from 2012 acquisitions as well as more upgrader demand. Strong corporate culture is not easily mimicked by competitors. Among the non-soe companies that we cover, we see Longfor has having one of the strongest corporate culture. Even back when the stock was listed, some investors were already impressed by the deployment of ERP, sophisticated information technology and even human resources system a few years ago. The promotion of many people within the firm, such as Mr. Shao to CEO and Mr. Wei to CFO also demonstrated to us that Longfor is a company that values meritocracy, something which we believe has contributed to the corporate culture. High quality products and attention to details mark many of Longfor s residential projects. The level of returned customers for Longfor s property is relatively high compared to the sector average. We attribute this partly to the company s high quality products and attention to details. Judging by the many projects we visited, Longfor s showflats often create a sense that they have been lived in. Good after-market services also encourage repeated customers; its corporate slogan for you forever well captures its emphasis on customer service. Longfor s Chairlady Wu s divorce is unlikely to cause a breach in bond covenants, in our view. We believe that Longfor s bond covenants are unlikely to be breached though Longfor s Chairlady s ex-husband Cai might sell down some stake. Chairman Wu has divorced from Mr. Cai and originally their combined stake in Longfor was 75.6% in early August. Following Longfor s share placement in September and their divorce, Wu s latest stake in Longfor (held in a Wu family trust) became 43.2% while Cai s stake (held in a Cai family trust) dropped to 28.7%. If the combined stake of Cai and Wu drops below 50.1%, 5 December 2012 Page 47 of 66

48 Longfor Properties Longfor would breach the covenants in the two outstanding bonds. We see that likelihood as very low. Investment property portfolio to go from good to great. Recurring income from property investments and management fees are estimated to rise from CNY0.77b in 2011 to CNY1.55b in 2014, a strong CAGR growth of 26%. Longfor has various investment property product series including North Paradise Walk and West Paradise Walk which were initially rolled out in Chongqing and expanded to more cities with success. We also like Longfor for its wide suite of product offerings, including well-operated commercial property in major cities which could benefit from domestic consumption, but also its demonstrated success in bringing in a good tenancy mix for its retail assets. Figure 1: Discount to NAV 0% -10% -20% -30% -40% -50% Longfor Average -60% Jul 10 Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Source: Bloomberg, Company, Maybank Kim Eng Valuation. In our opinion, the counter deserves a premium and should be valued similar to peers such as CR Land. We peg our TP on Longfor at 20% discount to our NAV estimate, slightly wider than the 15% we apply to CR Land sector leaders with strong execution, solid management and low financing costs. 5 December 2012 Page 48 of 66

49 Longfor Properties INCOME STATEMENT BALANCE SHEET FY (CNY m) F 2013F 2014F FYE Dec (CNY m) F 2013F 2014F Property development 14,597 23,376 31,211 38,851 45,492 Assets Property investment ,124 PUD 31,591 46,197 61,361 66,837 76,672 Property management fees Properties held for sales 3,004 3,019 4,011 4,369 5,011 Others Inventories Turnover 15,130 24,150 32,127 40,119 47,046 Trade and other receivables 2,516 3,344 4,401 5,271 6,072 Property dev 11,164 12,849 15,679 Due from related companies Property inv Taxation recoverable 539 1,081 1,081 1,081 1,081 Property mgmt fees Restricted cash Construction, decoration and others Cash and bank balances 9,863 14,121 10,848 13,018 19,618 Gross Profit 5,097 9,769 11,653 13,614 16,665 Current assets 48,436 68,776 82,910 91, ,860 SG&A (761) (1,352) (1,767) (2,166) (2,588) PP&E Other operating expenses (28) (30) (31) Investment properties 8,041 13,198 15,887 18,115 21,093 EBIT 4,367 8,445 9,858 11,418 14,047 Prepaid lease payments 7,882 6,722 6,722 6,722 6,722 Net interest income (7) (62) (147) (168) (121) Jointly controlled entities 2,464 1,873 1,873 1,873 1,873 Interest income Interests in associates ,568 Interest expenses after capitalization (67) (202) (272) (287) (284) Deferred Tax Assets Gross interest expense (859) (1,541) (1,813) (1,915) (1,895) Deposits paid for acquisition of land use rights 4,274 5,838 5,838 5,838 5,838 Capitalised interest 793 1,339 1,541 1,628 1,610 Available for sale investments Share of P&L of Fixed Assets 23,278 28,484 31,601 34,372 37,963 JC Total Assets 71,713 97, , , ,823 Associates Exceptional item 2,525 2, Liabilities & Shareholders' Equity Pretax income 7,068 11,444 10,135 11,787 14,533 Trade payables, dep. rec d & accrued charges 5,183 6,841 8,414 10,893 12,485 Income taxes (825) (2,067) (2,534) (2,947) (3,633) Deposits from pre-sales of properties 26,292 34,570 36,529 37,291 49,549 LAT (939) (2,087) (1,571) (1,836) (2,280) Taxes payable 2,635 4,788 6,080 7,588 9,454 Deferred tax (287) (370) (370) (370) (370) Due to related parties 1, Net income 5,017 6,920 5,661 6,634 8,250 Interest-bearing bank and other borrowings 2,860 3,580 7,996 7,025 6,097 Minority interests (887) (593) (465) (490) (538) Current liabilities 38,289 50,582 59,822 63,599 78,389 Net inc. attributable to shareholders 4,130 6,328 5,196 6,145 7,713 Interest-bearing bank and other borrowings 2,860 3,580 7,996 7,025 6,097 Underlying net profit attributable to 2,574 4,503 5,196 6,145 7,713 Senior notes 0 4,740 4,740 4,740 4,740 shareholders Deferred taxation 1,594 2,197 2,566 2,936 3,306 Long term liabilities 16,058 22,583 22,747 25,090 24,875 CASHFLOW STATEMENT Total Liabilities 54,348 73,165 82,570 88, ,264 FY (CNY m) F 2013F 2014F Shareholders' Equity 15,980 21,941 29,323 34,429 40,912 Operating Activities Issued share capital Net Income 7,068 11,444 10,135 11,787 14,533 Reserves 15,527 21,487 28,870 33,975 40,459 Depreciation Minority interests 1,386 2,154 2,619 3,108 3,646 Other operating cashflow 0 (2,510) Shareholders' funds 17,366 24,095 31,942 37,537 44,558 Share in Jointly Controlled Entities (183) (324) (424) (537) (608) Liabilities & Shareholder's Equity 71,714 97, , , ,823 Change in working capital (3,048) 3,624 (6,679) 3,661 9,641 Tax paid (1,764) (2,500) (2,812) (3,275) (4,047) CFO 8,478 9, ,665 19,551 FINANCIAL RATIOS Investing Activities FY F 2013F 2014F Additions to prepaid lease (8,311) (7,195) (7,195) (7,195) (7,195) Profitability (%) Additions to investment properties (459) (1,665) (2,689) (2,229) (2,978) Gross Margin Other investing cashflow (3,321) (1,915) (33) (35) (37) EBITDA Margin Dividend received 1 1 EBIT Margin CFI (12,091) (10,774) (9,917) (9,458) (10,210) Net Margin Financing Activities Underlying Profit Margin Issuance of ordinary shares 3, ROA Borrowings obtained 12,588 14,176 7,790 8,998 5,512 Asset turnover Repayments of borrowings (5,031) (7,354) (3,580) (7,996) (7,025) ROE Payment of dividends (324) (516) (902) (1,039) (1,229) Net debt to equity Other financing cashflow (534) (872) Distribution to the investor (24) (88) CFF 6,674 5,346 6,396 (37) (2,741) Incr./(decr0) in cash&bank balance 3,062 4,334 (3,273) 2,170 6,601 Cash & bank bal. at beginning of year 6,802 9,863 14,121 10,848 13,018 Effect of FX changes 0 (76) Cash & bank bal. at the end of year 9,863 14,121 10,848 13,018 19,618 Restricted Cash (499) (406) (406) (406) (406) 5 December 2012 Page 49 of 66

50 Hong Kong Reinitiating Coverage 5 December 2012 HOLD Share price: Target price: HKD5.76 HKD6.08 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: Sino-Ocean is a Beijing-based developer which was founded in 1993 and went public in Hong Kong in The company has considerable exposure to Pan-Bohai Rim but also has projects in Shenzhen, Zhongshan, Shanghai, Chengdu and some other cities. The company s largest shareholder is China Life, followed by Nan Fung. Ticker: 3377 HK Shares Issued (m): 5,847.2 Market Cap (USDm): 4, mth Avg Daily Turnover (USDm): 5.0 HSI: 21, Free Float (%): 56.2 Major Shareholders: % China Life Nan Fung Group Historical Chart 200 HSI Index Sino-Ocean Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 12% 61% 80% 78% 60% Relative (%) 13% 49% 63% 64% 42% Sino-Ocean Land Continued Turnaround with Right Cities Ongoing turnaround but most positives are priced in, HOLD. Sino- Ocean Land s ongoing turnaround suggests room for profitability enhancement and NAV improvement, a trend that will be driven by potential price hikes and continued cost controls. However, given the strong rally in its share price and recent earnings revisions upward by some analysts, we believe most of the positives have been priced in. Good city exposure to spur NAV growth. Dalian, Tianjin and Beijing together make up the highest percentage of Sino-Ocean s attributable landbank, constituting 31%, 14% and 11%, respectively, of the total attributable GFA as of June If we use attributable land costs for the landbank breakdown, Beijing constitutes 29% of Sino-Ocean s landbank, followed by Dalian (25%) and Tianjin (10%). In recent months, the company has raised ASPs in Dalian (eg, Dalian Diamond Bay registered ~5% ASP increase). In Beijing, the price hikes are even more noticeable: the ASP for Ocean LA VIE rose by 10-15% and for Poetry River, 20-25%, from our observation. We like Sino-Ocean s geographical exposure, especially to key first- and second-tier cities, which should help spur price growth. Reaping fruits of commercial property projects. Management has guided for recurring income from investment properties to increase to more than CNY2b by 2016 from just CNY0.34b in The company s commercial property landbank currently stands at ~3.6m sq m, representing 16% of its total landbank. High earnings lock-in rate at close to 78% of FY13 consensus revenue, by our estimate. Sino-Ocean indicated that its unbooked contract sales total ~CNY40b and estimates ~60% of that to be booked in FY13F. Hence, we believe the lock-in rate of FY13 consensus revenue of CNY30.6b is high at close to 78%. Expect FY13 contract sales growth to be at least 10% higher YoY. Even with a better-than-expected contract sales of CNY27.1b (up 5% YoY) over January-October this year, we expect growth in FY13F will be at least 10% higher YoY. While there will not be too many brand new launches next year Qingdao Quanzhou project at an ASP of ~CNY40k psm and part of Tianjin We-Life office strata title sales at an ASP of ~CNY19k psm based on the current landbank management guides that available-for-sale resources should rise from CNY50-55b this year to CNY60-70b next year. In addition, the potential redemption of perpetual subordinated capital securities (USD400m with a distribution rate of 10.25%), which is callable in 2016 could improve Sino-Ocean s profitability. However, this is subject to negotiation with securities holders and market pricing. SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

51 Sino-Ocean Land Holdings Limited Valuation. Sino-Ocean is trading at 43% discount to our NAV estimate of HKD10.13/share. Our TP of HKD6.08 is derived from a 40% discount to our NAV estimate. The TP translates to 10.5x 2013 earnings and 0.8x 2013 book value. Sino-Ocean Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 19,897 25,371 30,008 32,348 EBIT 4,661 5,500 5,782 7,268 Net Profit Attributable to SH, PSS and PCS 2,571 2,703 2,808 3,343 Estimated Underlying Net Profit 2,100 2,703 2,808 3,343 Underlying EPS (CNY) BVPS DPS (HKD) Net Gearing GPM ROE Underlying Net Margin Favorable city exposure with NAV and margin upside Good city exposure to spur NAV growth. Dalian, Tianjin and Beijing together make up the highest percentage of Sino-Ocean s attributable landbank, constituting 31%, 14% and 11%, respectively, of the total as of June If we use attributable land costs for the landbank breakdown, Beijing constitutes 29% of Sino-Ocean s landbank, followed by Dalian (25%) and Tianjin (10%). In recent months, the company has raised ASPs in Dalian (eg, Dalian Diamond Bay registered ~5% ASP increase). In Beijing, the price hikes are even more noticeable: the ASP for Ocean LA VIE rose by 10-15% and for Poetry River, 25%. We like Sino-Ocean s geographical exposure, especially to key first- and secondtier cities, which should help propel price growth and hence, NAV and earnings growth. Among its listed peers, Sino-Ocean is a mid-cap stock with considerable exposure to the Pan-Bohai regional property market. Channel checks suggest that its competitors launches in Beijing have been successful, eg, Franshion and Sunac s Laiguangying project, launched in October, was 100% sold out on the first day. Not an SOE, but China Life helps. Sino-Ocean is not a state-owned enterprise (SOE) per se but it has enjoyed competitive advantages by having China Life on board as its 24.76% stakeholder. The latter provides a cost-of-funding advantage to Sino-Ocean. Given the recent changes to CIRC rulings, we see advantages to the partnership with China Life, given the potential for forming JVs to develop elderly homes and/or commercial property projects (the latter usually require a longer payback period). Insurance firms are now permitted to invest up to 40% of total investment of the project as shareholders loans to commercial projects in which they hold a stake. The maximum limit on investment in real estate has been raised from 10% to 20% of an insurance company s total assets. What s more, even the maximum limit on property-related financial products has been raised from 20% to 60% of total issue. Cash collection ratio for Sino-Ocean was also high, at close to 90% so far this year per management, facilitated by strong relationships with banks. Investment property efforts start to bear fruit. With ~200k-300k sq m of GFA of investment properties to be completed each year, we believe Sino-Ocean will start to reap the fruit of its investments in the next few years. Management has guided for recurring income from investment properties to increase to more than CNY2b by 2016 from only CNY0.34b in 2011, based on the assumption that 50-60% of the commercial properties under development and for future development 5 December 2012 Page 51 of 66

52 Sino-Ocean Land Holdings Limited would be kept for self-use. By year-end, We-Life s 87,000-sq-m commercial project at Beijing s North 4 th Ring Road will open and the committed monthly retail rents stand at ~CNY300 psm. Management expects ~78-79% occupancy rate. Sino-Ocean has also started pre-leasing negotiations with potential anchor tenants for its We-Life project in Tianjin (96.99%, 285k sq m of total GFA). We expect the retail space to fetch a monthly rental of about CNY psm while some office portion is under talks for strata title sales. The well-located and highprofile Pinnacle One JV project with Swire Properties in Chengdu should see 2-3 storeys of retail space open at end-2013, while the opening date for the office portion is slated for Management anticipates 10% underlying NPM (pre-pss [perpetual subordinated capital securities] and PCS [perpetual convertible securities] distribution) as a minimum for the next few years, but is targeting 11% overall. Bloomberg consensus of Sino-Ocean s margin still looks too bearish at 9.1% for 2012, 8.4% for 2013 and 8.7% for Figure 1: Geographical breakdown of Sino-Ocean's attributable landbank as of June 2012 Attributable GFA Total attributable land cost Shenzhen 2.4% Hangzhou 3.7% Shanghai 3.7% Others 19.9% Qinghuangdao 6.8% Zhongshan 7.6% Beijing 10.9% Tianjin 14.3% Dalian 30.6% Shenzhen 2.7% Hangzhou 7.5% Shanghai 9.4% Qinghuangdao 1.6% Zhongshan 2.3% Others 13.0% Dalian 25.1% Beijing 28.9% Tianjin 9.6% Drastic pay cut to be restored. During its interim results briefing in August, Sino-Ocean s management revealed that its senior team, including the CEO and COO, have taken a drastic pay cut to help save costs and navigate the company through a difficult period. For instance, CEO Li Ming s base salary was halved while the COO took a 40% cut in base pay for However, we expect the cut in base pay to be restored in 2013 as it appears that management is able to meet its KPIs for 2012 (including achieving contract sales target, asset turnover ratios, net profit margin level and stock price outperformance vis-à-vis the median of the top 10 market-cap China property stocks listed in Hong Kong). Nevertheless, we think this normalisation may affect future incentives to rein in costs even though management s bonus in the future still hinges on company performance and operational metrics. Management also expects SG&A to be ~6-6.5% of total revenue. Earnings lock-in rate close to 78% of FY13 consensus revenue. Sino-Ocean indicated that its unbooked contract sales total ~CNY40b and estimates ~60% of that to be booked in FY13F. Hence, we believe the lock-in rate of FY13 consensus revenue of CNY30.6b is high at close to 78%. Expect higher contract sales growth. Contract sales growth in FY13F should be at least 10% higher YoY vs Sino-Ocean estimates that it will have ~CNY55b worth of available-for-sale resources in 2012 and ~CN60-70b in We believe such ample resources will perhaps spur contract sales to grow 15-20% YoY in FY13F. Better execution in recent months. We have seen an improvement in sales and product execution of Sino-Ocean in recent months. Over the first ten months of the year, Sino-Ocean posted 2.2 mn sq m of contract sales, up 5% YoY. Our 5 December 2012 Page 52 of 66

53 Sino-Ocean Land Holdings Limited recent visit to Sino-Ocean s high-end Bund Castle project in Shanghai and midend Ocean Express project in Shenzhen also demonstrate good product quality. High PER but partly due to below-sector average NPM. On a discount to NAV and P/BV basis, Sino-Ocean s valuation looks reasonable to us, though it is hardly cheap on a PER basis. However, we realise that this is a function of its below-sector average NPM, partly due to some legacy issues with high cost landbank. We note that in the first ten months of the year, Sino-Ocean did not purchase any new landbank despite some good window for landbanking. While we understand management did not want to repeat its mistake of acquiring some expensive land parcels in 2007, the rising land costs in the past few months make us wonder if Sino-Ocean has missed some good opportunities. Figure 2: Buyer profile of Sino-Ocean projects based on # of units sold 1H12 FY11 Residential First-time home buyers Upgraders First-time home buyers Upgraders High-end (%) Mid-end (%) H12 FY11 Residential With local hukous Without local hukous With local hukous Without local hukous % breakdown Figure 3: Shanghai Bund Castle project's model Figure 4: Bund Castle project's showflat Figure 5: Shenzhen Ocean Express Site Figure 6: Shenzhen Ocean Express Sales Center 5 December 2012 Page 53 of 66

54 Sino-Ocean Land Holdings Limited Figure 7: Sino-Ocean: Discount to NAV 40% 20% 0% -20% -40% -60% -80% Sino-Ocean Average -100% Nov 07 Apr 08 Sep 08 Feb 09 Jul 09 Dec 09 May 10 Oct 10 Mar 11 Aug 11 Jan 12 Jun 12 Source: Bloomberg, Company, Maybank Kim Eng 5 December 2012 Page 54 of 66

55 Sino-Ocean Land Holdings Limited INCOME STATEMENT BALANCE SHEET FY (CNY m) F 2013F 2014F FYE Dec (CNY m) F 2013F 2014F Property development 12,798 17,618 23,062 27,375 29,310 Assets Property investment Deposits for land use rights 18,825 8,188 8,188 8,188 8,188 Property management fees 377 PUD 41,393 65,470 66,733 66,633 68,601 Hotel operations Completed properties held for sale 2,649 3,274 3,337 3,332 3,431 Others 711 1,562 1,718 1,890 2,079 Inventories Turnover 13,721 19,897 25,371 30,008 32,348 Land development cost recoverable 2,439 4,029 4,029 4,029 4,029 Property dev 6,651 6,761 8,272 Financial assets Property inv Trade and other receivables 3,566 5,463 5,769 6,824 7,356 Property mgmt fees Restricted bank deposits 1,057 3,769 3,769 3,769 3,769 Hotel operation Cash and bank balances 13,977 8,648 10,933 12,697 11,976 Construction, decoration and others Current assets 84,393 99, , , ,462 Gross Profit 4,125 6,258 7,378 7,637 9,330 PP&E SG&A (898) (1,596) (1,827) (1,800) (2,006) Land use rights Other operating expenses (51) (54) (57) Investment properties 4,989 5,462 6,573 8,107 9,269 EBIT 3,226 4,661 5,500 5,782 7,268 Goodwill Net interest income (107) (194) (556) (315) (374) Jointly controlled entities 688 1,052 1,168 1,320 1,555 Interest income Interests in associates Interest expenses after capitailiztion (287) (419) (654) (433) (497) Available for sale investments Gross interest expense (1,486) (2,240) (2,615) (2,167) (1,989) Trade and other receivables 3,566 5,463 5,769 6,824 7,356 Capitalised interest 1,199 1,821 1,962 1,734 1,492 Deferred Tax Assets 814 1,503 1,503 1,503 1,503 Share of P&L of (81) Others Associates (72) (3) 0 0 (128) Fixed Assets 8,338 10,332 11,585 13,298 14,596 JC (9) Total Assets 92, , , , ,059 Exceptional item Pretax income 3,853 5,174 5,060 5,619 7,001 Liabilities & Shareholders' Equity Income taxes (1,443) (2,099) (1,265) (1,405) (1,750) Trade payables 10,832 10,175 13,803 17,161 17,658 LAT (403) (1,108) (968) (1,054) (1,236) Deposits from pre-sales of properties 16,235 22,870 21,375 23,663 24,732 Deferred tax Taxes payable 1,991 3,509 4,246 5,054 6,022 Net income 2,439 2,621 2,827 3,160 4,015 Interest-bearing bank and other 9,920 14,482 14,020 10,344 7,653 borrowings Minority interests 5 (50) (124) (353) (672) Current liabilities 38,977 51,036 53,444 56,222 56,065 Net income to PSS, PCS and 2,444 2,571 2,703 2,808 3,343 Interest-bearing bank and other 9,920 14,482 14,020 10,344 7,653 shareholders borrowings Underlying NI to PSS, PCS and 1,869 2,100 2,703 2,808 3,343 Deferred taxation 1,351 1,387 1,387 1,387 1,387 shareholders D&A (32) (49) (51) (54) (57) Long term liabilities 20,628 20,492 21,713 21,379 21,898 EBITDA 3,258 4,710 5,552 5,836 7,324 Total Liabilities 59,605 71,528 75,157 77,601 77,963 Distribution relating to PCS & PSS (204) (591) (737) (737) (737) Shareholders' Equity 31,071 35,268 36,686 38,316 40,458 Profit after PCS & PSS 2,240 1,980 1,966 2,070 2,606 Share capital and premium 20,121 20,231 20,231 20,231 20,231 Underlying net profit after PCS & 1,665 1,509 1,966 2,070 2,606 Shares held for restricted share award (96) (132) (132) (132) (132) PSS scheme PSS 2,533 2,533 2,533 2,533 FINANCIAL RATIOS PCS 5,970 5,969 5,969 5,969 5,969 FY F 2013F 2014F Reserves (227) Profitability (%) Retained earnings 5,302 6,498 7,916 9,545 11,688 Gross Margin Minority interests 2,055 3,489 3,613 3,965 4,637 Net Margin Shareholders' funds 33,126 38,757 40,299 42,282 45,095 Underlying Profit Margin Liabilities & Shareholder's Equity 92, , , , ,059 ROA Asset turnover ROE ROIC Net debt to equity December 2012 Page 55 of 66

56 Sino-Ocean Land Holdings Limited CASHFLOW STATEMENT FY Dec (CNY m) F 2013F 2014F Operating Activities Net Income 2,439 2,621 5,060 5,619 7,001 Depreciation Revaluation Gain on Investment Properties (567) (513) Other Operating Cashflow 1,649 3,389 (18) (33) 16 Change in working capital: (17,390) (8,980) 500 4,697 (1,033) Interest Paid (1,416) (1,995) (2,615) (2,167) (1,989) Income Tax Paid (1,951) (4,072) (1,496) (1,651) (2,018) CFO (17,205) (9,501) 1,482 6,518 2,034 Investing Activities Capital Expenditures (58) (74) (78) (82) (86) Proceeds from Sale of Property 8 7 Purchases of Subsidiaries (580) Prepayment for purchasing equity shares (51) (52) Proceeds from Disposal of Subsidiaries Capital injection to a JCE and associate (200) (533) Deemed capital injection to a jointly co Disposal of JCE Other Investing Cashflow (1,111) (1,534) (1,162) Acquisition of Additional Interests (50) (290) CFI (613) 222 (1,188) (1,616) (1,247) Financing Activities Proceeds from Borrowings 13,406 16,733 15,241 10,010 8,172 Repayments of Borrowings (7,344) (12,346) (14,482) (14,020) (10,344) Shareholders Contributions Proceeds from issuance of convertible se 5,970 Proceeds from issuance of PPS 2,532 Distribution to CB and PPS holders (600) (591) (737) (737) Other Financing Cashflow 2,206 (2,277) 1,823 1,608 1,402 Issue of Shares Pursuant of Exercise 4 2 CFF 14,242 4,044 1,992 (3,139) (1,507) Effect of FX change (67) (95) Increase/(decrease) in cash and bank balance (3,642) (5,329) 2,286 1,763 (721) Cash and bank balance at beginning of year 17,620 13,977 8,648 10,933 12,697 Cash and bank balance at the end of year 13,977 8,648 10,933 12,697 11,976 Restricted Cash 1,057 3,769 3,769 3,769 3,769 5 December 2012 Page 56 of 66

57 Hong Kong Initiating Coverage 5 December 2012 BUY (New) Share price: Target price: HKD5.03 HKD5.84 Karen KWAN karenkwan@kimeng.com.hk (852) Benjamin HO benjaminho@kimeng.com.hk Stock Information Description: Sunac is a fast-growing China property company which started operations in Tianjin in As of October, 2012, it has 35 projects in eight cities. It is majority owned by Chairman Sun Hongbin. Bain Capital and CDH also own stakes in the company. Sunac was listed in Hong Kong in October, Ticker: 1918 HK Shares Issued (m): 3,006.9 Market Cap (USDm): 1, mth Avg Daily Turnover (USDm): 7.1 HSI: 21, Free Float (%): 38.1 Major Shareholders: % Sun Hong Bin Bain Capital 5.99 CDH 4.16 Historical Chart 340 HSI Index Sunac Dec 11 Feb 12 Apr 12 Jun 12 Aug 12 Oct 12 Performance: 52-week High/Low mth 3-mth 6-mth 1-yr YTD Absolute (%) 19% 36% 116% 191% 212% Relative (%) 20% 24% 98% 176% 194% Sunac China Re-Rating Story Is Not Yet Over Initiate with BUY and TP of HKD5.84. We initiate coverage on Sunac China with a BUY recommendation and TP of HKD5.84/share, based on a 35% discount to our NAV estimate of HKD8.99/share and which translates to 4.3x FY13F PER and 1.2x P/BV. Part of the reason of Sunac s low book value was due to the bad market conditions when the company went public (October, 2010). In our view, Sunac s consistent track record should propel the company to become one of the leading second-tiered developers in China. Its re-rating story is therefore not yet over. Even after a strong stock performance YTD, we continue to see good upside to Sunac as it transforms from an off-the-radar name to a fast-growing mid-cap developer. Sunac s acquisition of stakes in 9 of Greentown s projects in June increases visibility of sales growth. Good products usually win. Management s preliminary estimates put the company s FY13 contract sales at around CNY40b, which would translate to 33% YoY growth vs FY12 s upgraded target of CNY30b. If this were to pan out (we have confidence), we believe it would mark one of the highest growth rates in contract sales among the Hong Kong-listed China developers. Attractive partnership with SOEs. Over the past few months, we have seen developers witnessing project launch delays. While it is unclear what has caused some of the delay, Chinese media have reported that some local governments are postponing approval of presale permits for high-asp projects during the leadership transition period. Sunac has formed JVs with SOE-backed Franshion Properties, Gezhouba (A-share) and Poly Real Estate Group (A-share). In our view, an advantage to having SOE-backed companies as partners is the seemingly fewer delays to getting pre-sale permits, as was the case for Sunac and Franshion s Laiguangying project (ASP of ~CNY30k psm). Sunac can also leverage its partners government relationships to acquire high-quality landbank at competitive prices and good bank financing access. GPM to slip, but earnings and ROE to be above sector average. While Bloomberg 2013 consensus for Sunac s GPM looks high to us at 35%, we expect its ROE to stay high at ~30% or above the next few years and above sector average. To date, channel checks suggest that Sunac has raised prices by 10-15% for some of its projects in Beijing and Tianjin. Valuation still cheap despite sharp price rally. Despite the recent rally in stock price, Sunac trades at 44% discount to NAV and 3.7x 2013F earnings. From a small developer off most investors radar screen last to becoming one of the leading second-tiered developers, Sunac stock should outperform the market. Our TP of HKD5.84 is pegged to 35% discount to NAV. Further stake sales by Bain Capital and CDH could create stock price volatility. Nevertheless, we believe this would improve the liquidity of the stock. SEE APPENDIX I FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS

58 Sunac China Holdings Ltd Sunac Summary Earnings Table FYE Dec (CNY m) 2011A 2012F 2013F 2014F Revenue 10,604 18,498 25,389 28,040 EBIT 2,962 4,841 7,160 8,410 Net Profit Attributable to SH 2,356 2,521 3,268 4,228 Estimated Underlying Net Profit 1,749 2,521 3,268 4,228 Underlying EPS (CNY) BVPS DPS Net Gearing (%) GPM (%) ROE (%) Underlying Net Margin (%) Re-rating story is not yet over High-quality landbank. We see very little unattractive landbank for Sunac, with minimal exposure to suburban locations. All of Sunac s landbank is located within first or second tiered cities. In contrast, we note that a number of developers are grappling with problems with respect to their landbank. For example, Guangzhou R&F and Shimao s Huizhou JV project, Fumao Venice Bay, has suffered slow sell-through rates, ditto some of Country Garden s projects in Inner Mongolia, based on our channel checks. Good products usually win. Sunac s management s preliminary estimates put the company s FY13 contract sales target at around CNY40b, which would translate to a 33% YoY growth vs FY12 s upgraded target of CNY30b. If this were to pan out (we have confidence), we believe it would mark one of the highest growth rates in contract sales among Hong Kong-listed developers. In our view, Sunac s contract sales growth next year would be greatly aided by the addition of a 50% interest in nine projects from Greentown, which was acquired in June for ~CNY5,300 psm (very cheap), as well as other recent landbank acquisitions. Also helping are fast start-to-presales period and Sunac s proven ability to price products at a premium. Quick start-to-presales period can be seen, for instance, at its JV project with Franshion (Laiguangying project) whose land was acquired only in December 2011 and launched in October. We estimate that the nine Greentown JV projects would add ~CNY5-7b of attributable contract sales to Sunac in Earnings lock-in estimated to be ~45% of consensus 2013 revenue. As of end-october, we expect Sunac s revenue lock-in for FY13F will be about 45% of consensus estimate, given that as of end-october, it had ~CNY14 b of unbooked contract sales. If we assume 75% for 2013 delivery, then only about CNY10.5b has been locked in 45% of consensus 2013F revenue, lower than some peers like Longfor and China Vanke but in-line with GZ R&F. Attractive partnership with SOEs. Over the past few months, we have seen developers witnessing project launch delays. While it is unclear what has caused some of the delay, Chinese media have reported that some local governments are postponing approval of pre-sale permits for high-asp projects during the leadership transition period. Sunac has formed JVs with SOE-backed Franshion Properties, Gezhouba (A-share) and Poly Real Estate Group (A-share). In our view, an advantage to having SOE-backed companies as partners is the seemingly fewer delays to getting pre-sale permits, as was the case for Sunac and Franshion s Laiguangying project (ASP of ~CNY30k psm). Sunac can also leverage its partners government relationships to acquire high-quality landbank at competitive prices and good bank financing access. The company recently acquired two other developments in conjunction with Poly Real Estate the 309k sq m Beijing Yizhuang project and the 120k sq m Shanghai Senlan project. 5 December 2012 Page 58 of 66

59 Sunac China Holdings Ltd Management indicated that it targets a leveraged IRR of >30% for new acquisitions. Beneficiary of eventual return of upgrader demand. We estimate that ~20-25% of Sunac s buyers are first-time home buyers, while 60-65% are upgraders and 15% are investors. We are seeing a return of upgrader demand from our recent trip to Wuxi and Shanghai and believe that Sunac is a key beneficiary of eventual return of upgrader demand. Good response to Greentown JV projects. Sunac s recent launch of some JV projects in Greentown has met with favorable responses from the market. Its sales capability is evident in helping to raise the prices for some of the projects. For instance, the JV company s Wuxi Yulun Garden saw ASPs of CNY9-9.5k psm in early-2012 and recent ASPs reached CNY k psm. Figure 1: Wuxi Yunlun Garden s showflat Figure 2: Wuxi Yulun Garden Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng Figure 3: Wuxi Comphorwood: Interior of Townhouse Figure 4: Comphorwood s Exterior Source: Company, Maybank Kim Eng Source: Company, Maybank Kim Eng Optimising sourcing and supplier management. During , Sunac established a comprehensive ERP system with the help of its private equity partners, including Bain Capital. We believe the ERP system has facilitated Sunac s fast expansion. To further enhance operational management, its next step would be to set up both a tendering and bidding platform to optimise sourcing and a social network platform to engage customers. 5 December 2012 Page 59 of 66

60 Sunac China Holdings Ltd Investor concerns Potential pre-ipo stake disposal. In China s property sector, we saw Warburg Pincus (WP) recently disposed of 45m Greentown (3900 HK, Not Rated) shares when it exited its investment in the property developer. It sold its 2% stake at HKD9.36/share, a 6% discount to the stock s previous day s closing price. This move could prompt questions about whether certain other private equity funds would similarly sell their stake in China property companies. In the case of Sunac, Bain Capital holds a 5.99% stake and CDH, a 4.16% stake, after the two recent stake disposals in November. These blocks were said to be over-subscribed and the stock has traded well afterwards. The estimated cost of Bain s stake in Sunac, which it acquired from Lehman Brothers in September 2009, was HKD2.02/share. For CDH, the estimated cost was HKD2.4/share. Figure 5: Sunac: PE investors at IPO PE investor Entry time Stake (%) Estimated cost (HKD) # of board members Bain Capital Sep ~ DB Sep CDH Nov ~2.4 1 New Horizon Nov Source: Company, Maybank Kim Eng High net gearing. We forecast Sunac s net gearing to stand at 101% by end- FY12F, lower than end-fy11 s 109% but still above the sector average. Nevertheless, we do not think this will pose a major issue to its fund-raising capability. After all, in this environment of ample liquidity, even a small developer like Yuzhou Properties has managed to raise debt. Vanke recently indicated that it did a trust loan at below 8%. Chairman Sun Hongbin has reiterated that Sunac will not be a low gearing company given its focus on high growth. Hence, we believe investors do not expect Sunac to de-leverage. Valuation. We believe the risk-reward profile of Sunac is still skewed to the upside and initiate coverage with a BUY rating and target price of HKD5.84/share, based on a 35% discount to our NAV estimate of HKD8.99/share. The target discount is in line with that which we assign to top second-tier developers. In recent months, the stock s liquidity has also improved, making it more investable than before. Our TP translates to 4.3x 2013F PER and 1.2x 2013F book value. Figure 6: Discount to NAV Sunac Average +1SD -1SD -40% -45% -50% -55% -60% -65% -70% -75% -80% -85% Oct 10 Jan 11 Apr 11 Jul 11 Oct 11 Jan 12 Apr 12 Jul 12 Oct 12 Source: Bloomberg, Company, Maybank Kim Eng Downside risks to our call. These are (1) overly aggressive landbanking that would stretch Sunac s balance sheet, (2) unexpected policy measures rolled out by the Chinese government, and (3) more potential stake disposal by Bain 5 December 2012 Page 60 of 66