China Real Estate Report 04 Jan 2012

Financial Institutions Group China Real Estate
Physical market to remain challenging against the backdrop of administrative measures, despite broader monetary easing
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Global Research
Divergent cost of capital will be a key differentiator in 2012, in addition to execution Conviction calls on COLI, Longfor and CRL
Derek Kwong* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6629 derekkwong@hsbc.com.hk Michelle Kwok* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6918 michellekwok@hsbc.com.hk Philip Zhong* Analyst The Hongkong and Shanghai Banking Corporation Limited +852 2996 6535 phillipyzhong@hsbc.com.hk Stanley Cheung* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2822 4395 stanleyyccheung@hsbc.com.hk Qi Zhuang* Associate The Hongkong and Shanghai Banking Corporation Limited +852 2996 6590 qizhuang@hsbc.com.hk Ganesh Siva* Associate, Bangalore View HSBC Global Research at: http://www.research.hsbc.com *Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered /qualified pursuant to FINRA regulations. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited
China Real Estate

Looking beyond the policy conundrum
Valuation summary Company Agile COLI CRL Franshion GZ R&F KWG Longfor Shimao Shui On Land SOHO Yanlord* Bbg Price HSBC TP (Disc)/prem __ Core PE __ ticker 30-Dec rating to NAV FY12 FY13 (HKD) (HKD) (%) (x) (x) 3383 HK 688 HK 1109 HK 817 HK 2777 HK 1813 HK 960 HK 813 HK 272 HK 410 HK YLLG SP 7.0 13.0 12.5 1.5 6.1 2.6 8.8 6.6 2.4 5.2 1.0 OW(V) OW(V) OW(V) OW OW(V) OW(V) OW(V) N(V) OW N N(V) 8.4 21.0 17.6 1.9 7.1 4.5 13.3 7.0 2.9 5.4 1.0 (54) (41) (40) (69) (66) (80) (54) (62) (68) (47) (61) 4.1 6.4 8.4 5.1 3.9 3.2 7.2 4.4 7.4 5.9 7.5 3.7 5.6 7.5 4.4 3.4 2.7 5.6 4.0 5.2 3.9 6.9
Physical environment to remain challenging in 2012 despite signs of monetary easing. Sector-specific administrative measures will continue to rein in demand. We expect additional price cuts in early 2012 as developers strive to maintain a decent sell-through rate. Hence we advocate an investment focus on factors beyond the policy uncertainties. Developers face increasingly divergent cost of debt financing, leading to a wide range of cost of capital. Access to debt financing will depend on a developers funding maturity profile, operational capability and balance sheet strength. This will be a key differentiator as developers move to a lower-margin and quick asset turn model. Earnings and NAV estimate revisions are driven by changes in assumptions for property price, contract sales and cost of debt. We forecast residential prices to decline 20% in tier-1 cities and 10% in all others. We expect lower contract sales in 2012-13 as a result. Increasing differential in cost of debt will have a disproportionate impact on earnings. We favour developers with superior execution, proven platform and cost of capital advantage. These are the key factors underpinning our conviction calls on COLI and Longfor, both of which have low cost of capital and highest earnings visibility within their own SOE/non-SOE peer group. We also favour CRL as it has improved its asset turn and has good access to funding, while further asset injection risk has been reduced. From a valuation perspective, we favour KWG given the large discount to the liquidation value and its still manageable liquidity.
* in SGD. Please refer to summary table of changes in ratings, NAVs and target prices on page 4. Source: Bloomberg, HSBC estimates
4 January 2012 Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
Financial Institutions Group China Real Estate 4 January 2012
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Contents
Looking beyond the policy conundrum Company write-ups 6
Agile (3383 HK) China Overseas Land (688 HK) China Resources Land (1109 HK) Franshion (817 HK)
51
52 54 56 58 60 62 64 66 68 70 72
Cost of capital under the limelight 12 Earnings and NAV estimate revisions Downside protection theoretical liquidation value Assessing the cash flow buffer 16 23 26
Guangzhou R&F (2777 HK) KWG Property (1813 HK) Longfor (960 HK) Shimao (813 HK) Shui On Land (272 HK)
Be realistic on policy expectations 32 Key property market data 39
SOHO China (410 HK) Yanlord Land (YLLG SP)
Disclosure appendix Disclaimer
74 77
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Key charts
Market share of key developers (as of November 2011) Developers net gearing (ex-restricted cash) and cash level Weighted cost of debt (as of December 2011)
600 500 400 300 200 100 0
(RMBmn) 8.9% 8.9%
11. 3%
13.8%
20% 15% 10% 5% 0%
120 100 80 60 40 20 0
(RMB bn)
(%)
100% 80%
12% 9%
60% 40% 20% 0% 2005 2006 2007 2008 2009 2010 1H11 Cash -ex .restricted (LHS) Net Gearing (RHS)
6% 3% CO LI CRL
Shui on Land
F rans hion
Longf or
SO H O
Y anlord
2008
2009
2010
2011 Market Share (RHS
Key dev elopers (LHS)
*Key developers include Agile, COLI, CRL, Country Garden, Evergrande, Gemdale, GZRF, KWG, Longfor, Poly (A share), Shimao, Vanke Source: Company data. CEIC
Source: Company data, HSBC * Developers include COLI, CRL, Franshion, SOHO China, Longfor, Shui On Land, GZ R&F, Agile, KWG and Shimao
Source: HSBC estimates
NAV discount chart

60% 40% 20% 0% -20% -40% -60% -80% 2005 2006 2007 2008 2009 2010 2011 Mean
PB chart (x)
5 4 3 2 1 0 97 99 01 03 05 07 09 11
PE chart (x)
60 50 40 30 20 10 0 97 99 01 03 05 07 09 11
% to NAV -1 SD
Source: Company data, HSBC estimates
+1 SD -2 SD
Shim ao
KWG
Agile
R &F
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Changes in ratings, NAVs and target prices ______Rating ______ Old New Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui On Land SOHO Yanlord Simple average OW OW N OW OW OW OW OW OW OW n/a OW(V) OW(V) OW(V) OW OW(V) OW(V) OW(V) N(V) OW N N(V) __________ Forward NAV___________ Old New % Chg 20.5 24.2 24.4 5.4 20.4 15.5 21.5 19.5 8.8 11.6 n/a 15.2 22.1 20.7 4.8 17.8 13.0 19.0 17.5 7.3 9.8 2.4 -26% -9% -15% -12% -12% -16% -11% -11% -17% -16% n/a -14% _________Target discount__________ Old New % Chg -53% 0% -55% -55% -56% -45% -20% -57% -55% -45% n/a -45% -5% -15% -60% -60% -65% -30% -60% -60% -45% -58% 8% -5% 40% -5% -4% -20% -10% -3% -5% 0% n/a 0% __________ Target price ___________ Old New % Chg 9.6 24.2 11.0 2.5 8.9 8.5 17.2 8.4 4.0 6.4 n/a 8.4 21.0 17.6 1.9 7.1 4.5 13.3 7.0 2.9 5.4 1.0 -13% -13% 60% -24% -20% -47% -22% -17% -27% -16% n/a -14% Potential return* 26% 65% 44% 30% 26% 81% 55% 12% 29% 10% 7% ____Implied PE (x) ____ FY12e FY13e 4.9 10.4 11.8 6.4 4.5 5.6 10.9 4.7 9.2 6.1 7.5 7.5 4.5 9.1 10.5 5.5 3.9 4.7 8.5 4.2 6.5 4.0 6.9 6.3
* Potential return equals the percentage difference between the current share price (as of 30 December 2011) and the target price, plus the forecast dividend yield We initiated coverage of Yanlord stock in a separate note (Initiate N(V): In need of a strategic shift, 4 January 2012) Source: HSBC estimates
Changes in core EPS (RMB), 2011-13e Company Agile COLI* CRL* Franshion* GZ R&F KWG Longfor Shimao Shui On Land Soho Yanlord Average
*HKD Source: HSBC estimates
______________________ 2011e _______________________ Old New % Chg 1.35 1.55 0.99 0.22 1.25 0.64 0.84 1.26 0.22 0.18 n/a 1.33 1.51 1.02 0.22 1.20 0.60 0.84 1.25 0.23 0.18 0.59 -1% -3% 3% -2% -4% -6% 0% -1% 3% 0% n/a -1%
______________________ 2012e _______________________ Old New % Chg 1.74 1.65 1.32 0.27 1.20 0.79 1.12 1.35 0.32 0.80 n/a 1.44 1.71 1.26 0.25 1.34 0.69 1.04 1.26 0.27 0.75 0.71 -17% 4% -4% -7% 12% -13% -7% -6% -15% -6% n/a -6%
______________________ 2013e _______________________ Old New % Chg 2.20 2.33 1.55 0.29 1.49 1.06 1.50 1.49 0.41 1.16 n/a 1.59 1.97 1.42 0.29 1.55 0.82 1.33 1.40 0.38 1.14 0.76 -28% -16% -9% 1% 4% -23% -12% -6% -7% -2% n/a -10%
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Valuation summary: China Developers (share price as of 30 December 2011) Company China Developers Agile COLI CR Land Franshion Properties Guangzhou R&F KWG Property Longfor Properties Shimao Property Shui On Land SOHO China Yanlord (SGD) Bbg Ticker 3383 HK 688 HK 1109 HK 817 HK 2777 HK 1813 HK 960 HK 813 HK 272 HK 410 HK YLLG SP HSBC rating OW(V) OW(V) OW(V) OW OW(V) OW(V) OW(V) N(V) OW N N(V) Share price Target price (HKD) (HKD) 6.96 12.98 12.48 1.50 6.14 2.62 8.78 6.63 2.36 5.17 0.96 8.4 21.0 17.6 1.9 7.1 4.5 13.3 7.0 2.9 5.4 1.0 Diff to TP (%) 21 62 41 27 16 72 51 6 23 4 7 Mkt cap (HKDbn) 24 106 72 14 20 8 45 24 14 27 2 12m NAV (HKD/sh) 15.2 22.1 20.7 4.8 17.8 13.0 19.0 17.5 7.3 9.8 2.4 (Disc)/Prem (%) (54) (41) (40) (69) (66) (80) (54) (62) (68) (47) (60) ______Core PE (x)_______ FY12e FY13e 4.1 7.6 9.9 6.0 3.9 3.2 7.2 4.4 7.4 5.9 7.5 3.7 6.6 8.8 5.1 3.4 2.7 5.6 4.0 5.2 3.9 6.9 Yield (%) FY12e 5.9 3.3 3.6 3.1 10.3 7.7 2.8 6.8 4.6 6.0 1.2 PB (x) FY12e 0.8 1.4 1.2 0.5 0.7 0.5 1.7 0.6 0.4 1.2 0.7
Note: OW = Overweight; N = Neutral; UW = Underweight; V = volatile. Source: Bloomberg, HSBC estimates
Contracted sales analysis Company Agile* COLI* CR Land* Country Garden Evergrande Franshion* GZ R&F* KWG* Longfor* Sino Ocean Shui On Land*^ Shimao* SOHO China* Vanke Average# November Sales value RMB m 2,800 2,819 2,740 2,500 1,240 n/a 2,810 806 3,010 2,200 n/a 1,742 n/a 8,290 Change in Sales value m-o-m -15% -51% -15% -43% -86% n/a 37% -6% -31% -19% n/a -22% n/a -20% Change in Sales value y-o-y 0% -38% 4% -29% -81% n/a -37% 61% -26% 0% n/a -51% n/a -36% YT November Sales value RMB m 29,000 67,398 30,070 39,400 79,120 8,800 26,320 10,897 35,640 23,900 6,500 28,457 10,630 115,720 Change in Sales value y-o-y 14% 36% 51% 30% 66% n/a -8% 3% 29% 31% 116% 5% n/a 16% 32% November vs. 1H monthly average 7% -60% 22% -30% -82% n/a 26% -26% -1% 7% n/a -27% n/a -24% -21% November November vs. 2H monthly vs. YT Oct or Nov average Monthly average 7% -49% -21% -35% -86% n/a 11% -9% -16% -6% n/a -44% n/a -22% -28% 7% -56% 0% -32% -84% n/a 20% -20% -8% 1% n/a -35% n/a -23% -24% 2011 Target Sales value RMB m 37,000 68,500 30,000 43,000 70,000 10,000 32,000 15,000 40,000 28,000 10,000 36,000 23,800 140,000 2011 Target Sales % achieved 78% 98% 100% 92% 113% 88% 82% 73% 89% 85% 65% 79% 45% 83% 85% 2011 as of Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov Oct Nov Nov Nov
* Company under coverage ^ Year to October # Average applicable only to the companies announced November 2011 numbers (shaded in grey) Source: Company data, HSBC estimates
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Looking beyond the policy conundrum

Recent RRR cut sparked expectations of policy easing, but administrative measures will remain status
quo in our view; hence operating environment in 2012 should stay challenging
Proven execution ability, balance sheet strength and cost of capital advantage are key differentiating
factors for the winners. We expect to see continual market share gain by the leaders
Despite constructive sector valuation, we do not anticipate a sector-wide rerating. COLI and Longfor
remain our conviction Overweights we are adding CRL to this list
Policy easing or not, should this be the question?

The surprise reserve requirement ratio (RRR) cut in November 2011 sparked expectations of a reversal of months of tightening, and on the surface, this is a positive sign for the physical market and equities alike. News on introduction of tax incentives for home purchases across a number of cities including Beijing also seems to legitimize the belief that easing will have a positive impact on the housing market. The injection of liquidity in the system could see some benefits for the housing market, albeit indirect. However, we believe it is still early days as administrative policies like the Home Purchase Restriction (HPR) will continue to put a cap on
demand, and the operating environment in 2012 will remain challenging. Trading at an average of more than 50% discount to NAV and 5.8x 2012e PE, both more than one standard deviation below their historical mean, conventional valuation metrics have continued to hover around trough levels seen during the 2008 market downturn. Despite the seemingly constructive valuation for the sector overall, we are reluctant to formulate a sector-wide bullish outlook because the verdict is not out yet on the policy front and there remain a multitude of prevailing industry headwinds. While the volatility in global markets and other externalities could in part explain the absolute share price weakness, this is nevertheless
outweighed by the slew of industry-specific uncertainties on the horizon. Continued tight credit conditions (both onshore and offshore): There is a prolonged lag in mortgage disbursements from banks which is putting some pressure on developers cash flow. Shrinkage in corporate lending is also putting pressure on developers cost of credit via onshore trust financing or offshore high yield issues. The key implication is that pre-sales become a more important funding channel for developers. Game theory in the physical market: There are expectations of larger price declines amid shrinking transaction volumes. Price discounting by developers has accelerated since last summer, and there has been a noticeable decline in volume trends since September. This has spread from tier-1
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Property price assumption for 2012
More developers have jumped onto the price discounting bandwagon since September. This is partly in an effort to achieve respectable sales results as they drift behind the required run rate to hit targets. Contracted sales have become a key source of funding the business in the current tight credit environment. In the coming months and particularly in the seasonally quiet 1Q, we believe the price cuts will steepen and spread from tier-1 to tier-2 and then smaller cities around the country. We expect residential prices to fall by 20% in tier1 cities and by 10% in tier-2/3 cities over the next 12 months. To put this into perspective, our projected price falls will bring property prices back to levels seen in 2009. In distinguishing our price outlook for different tier cities, the key factor for consideration is the difference in depth of the secondary markets. We are expecting steeper price corrections in tier-1 cities due to the availability of competitive products in the secondary market. As such, tier-1 cities are more susceptible to inventory build-up and pricing pressure.
Property price assumption for the next 12 months Previous assumption Residential price Tier-1 city Tier-2 city Tier-3 city Retail/office price
cities like Shanghai and Beijing into major tier-2 cities. We believe this will put more pressure on home prices (see new assumptions), particularly from now to end 1Q12. The policy conundrum: The investment case for the sector cannot be based on a policy reversal, as in our opinion, its effect on the housing market will be limited. While on the monetary side the RRR cut could mean the beginning of multiple cuts, thats broad macro implication without considering more sector-specific issues. We believe the central governments stance toward the housing sector is likely to remain hawkish in the foreseeable future. We see the broader monetary easing and other lateral relief like tax incentives as evidence that the core administrative measure HPR will remain firmly in place. From an equity perspective, we believe investment strategy should be based on a base case of policy status quo for the housing sector. As such, we believe companies with proven execution track records particularly under difficult market conditions, strong balance sheets and better access to capital at a lower cost will be in a more advantageous position in 2012.
New assumption -20% -10% -10% 0%
-15% -5% 0% 0%
GAV breakdown by tier cities (%) Agile Properties China Overseas Land China Resources Land Franshion Properties Guangzhou R&F KWG Property Longfor properties Shimao Property Shui On Land SOHO China Yanlord Simple average Weighted average*
Tier 1 20 20 22 24 37 53 25 14 23 100 42 35 30
Tier 2 80 73 65 74 53 47 42 70 77 55 57 60
Tier 3 7 13 2 10 33 16 3 8 10
Total 100 100 100 100 100 100 100 100 100 100 100
*by market capitalisation
Residential price trend Year-end monthly average

6,000 5,000 4,000 3,000 2,000 1,000 0 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12
Source: NDRC, CEIC
(RMB/sqm)
2012e: down 10-15%, back to 2009 level
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The valuation considerations
Current sector valuation has priced in a rather grim outlook
While risk aversion on a high beta sector persists, we argue that current valuation is pricing in an overly grim outlook of the physical market, with NAV discounts and PE both trading on a par to the darkest months of 2008. Our analysis indicates that current share prices are implying an unrealistic one-off ASP decline of 28-50% across all asset classes and all cities, which we find unrealistic. Further, we also find that current share prices are implying a massive devaluation in land banks, as stocks are trading at a 4-39% discount to historical land cost, except developers with stateowned enterprise (SOE) status. Last but not least, the bond market is providing some basis for our argument that the sell-off in equities is overdone. While bond prices are down, the magnitude of solvency risk implied is significantly lower than that reflected in the equity pricing. value. In our view, this metric serves to provide a better gauge to developers tangible net worth, as we strip out all subjective assumptions embedded in traditional NAV estimates such as ASP, timing difference of cash flow and WACC. While there isnt a barrier in the way of continued or further weakness in share prices given the current state of global equity markets, our assessment of stocks theoretical floor values does indicate that shares are well protected on the downside. Of the nine stocks in our analysis, five are trading at or below their respective floor value; thus, current share prices are well protected on the downside from a fundamental standpoint.
Cost of capital will be in the limelight

While the key priority for developers will still be market share gain amid continued industry consolidation, we believe the market will be placing increasing emphasis on developers capital structure and access/cost of capital. On the one hand, the capital intensive nature of the real estate business highlights the importance of prudent balance sheet management, specifically developers ability to withstand unforeseen contracted sales shortfall, given the cyclical and policy sensitive nature of the business. On the other hand, the need to achieve quick asset turnover also implies a strong competitive edge for developers with ready access to funding at a competitive cost. In our view, the ability to secure low cost debt will prove to be an increasingly important investment attribute worth appreciation in the China property sector, particularly as both onshore and offshore credit markets remain tight. Against this backdrop, we argue that we need to account for and reflect a greater range of cost capital in our financial models. For our coverage universe, we have derived cost of capital of between 9% and 15% based on a detailed appraisal of the capital structure and cost. The differing cost of capital will have a minor impact on NAV calculation. Cost of debt will impact the forward margin prospect.
Not revisiting 2009, no V-shape rebound

We do not believe signs of a policy reversal for the housing sector are conclusive, although easing for the broader monetary environment has started. The cooling of housing prices and transactions is the result of administrative measures and monetary conditions, the magnitude of which are unlikely to have put the central government in enough of a comfort zone to unwind. Out of the 121 cities that have publicly announced administrative measures such as HPR and price restrictions, over 40 cities still recorded gains in 2011, and these are mostly tier-2/3 cities. At the same time, over 30 cities are likely to miss their target housing price level. It is therefore not
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Theoretical floor value analysis

We have devised an alternate valuation analysis which we believe is a sound pessimistic scenario analysis, where we employed a step-up discounting approach on capital employed. Note our derived floor values are calculated on a costbasis by taking the summation of all sunk costs that developers have incurred and then netting off their respective net debt to arrive at the floor
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Changes to stock valuation
Stocks for which we have widened the target discounts:
KWG from -45% (+0.5 SD) to -65% (-0.5 SD) to account for the companys slow sales momentum given the continuous delay in new launches. KWG only achieved 73% of its full-year contracted sales target as at November 2011. In our view, the company is likely to miss its 2011 full-year target by about 20%. Longfor from -20% (+1 SD) to -30% (+0.5 SD) as we believe the companys sales momentum will be partially capped while the central governments stance toward the housing sector remains hawkish. We have applied a +0.5 SD target discount for all of our conviction stocks (i.e. Longfor, COLI and CRL) which have proven sales records. Longfor remains the leader of the pack among the non-SOEs. We have fine-tuned the target discount of the following companies, due simply to the increase in market volatility that has led to a wider measure of standard deviation from mean. COLI from 0% to -5% (maintain +0.5 SD) Franshion from -55% to -60% (maintain -1 SD) GZ R&F from -56% to -60% (maintain -1 SD) Shimao from -57% to -60% (maintain -1 SD) Shui On Land from -55% to -60% (maintain -1 SD)
surprising that cities like Zhuhai and Zhongshan placed temporary price restrictions on pre-sales in order to dilute ASP for 2011. Recent media reports suggest that the Ministry of Housing and Construction had asked the cities with HPR expiring at year-end 2011 to extend the measure indefinitely, and many cities have complied so far. As such, we believe investment in the sector in 2012 should be based on the assumption that administrative measures will remain status quo. In our view, there will be no rising tide lifts all boats situation like in 2009. We favour companies with strong balance sheets, superior access to debt funding at competitive costs and proven execution track records, in this order of priority. Hence our conviction OW stocks for the sector are COLI, CRL and Longfor.
Stock for which we have narrowed the target discount:

CRL from -55% to -15% to reflect the strongerthan-expected pick-up in contracted sales momentum in 2H11. Thanks to its SOE background, we expect the absolute advantage in cost of capital to remain intact despite the tight credit environment. In terms of balance sheet management, CRL has deleveraged following the latest round of share issuances to fund the asset injection from the parent company. Given the sheer size of the remaining assets pending for injection, we expect CRL to break the annual asset injection mode in 2012, which should be welcomed by investors.
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% discount to NAV
Where our conviction lies

With the view that administrative measures like HPR will continue to suppress demand for residential properties, we prefer companies with proven sales records, competitive cost of capital and strong balance sheet management.
COLI (688 HK; OW(V); TP HKD21)
COLI 0% -5% -25%
CRL
Longfor
SOHO
Agile
Yanlord
Franshion
R&F
Shimao
Shui On
KWG
-15% -30%
COLI is the leader of the pack in terms of both operations and balance sheet strength. The company was a standout in sales delivery in 2011 amid the governments persistently tight grip on the policy front. With ready access to offshore bank loans from Hong Kong, COLI has the lowest cost of capital in the China property sector.
CRL (1109 HK; OW(V); TP HKD17.6)
-50%
-45%
-45% -55% -60% -60% -60% -60% -65% Disccount to NAV
-75%
Standard deviation below mean
1.0 COLI 0.5 SOHO (0.5) R&F (1.0) (1.5) Standard dev iation below mean
CRL
Longfor Deeper discount to mean Agile Franshion KWG Shimao Shui On Yanlord
CRL has radically improved its slow asset turnover in 2011, by posting 51% y-o-y growth in contracted sales through November 2011. While cost of capital becomes a crucial differentiating factor, we believe its SOE background will allow CRL to enjoy low cost funding. CRL has also deleveraged following the issuance of shares for the latest asset injection. We expect CRL may break its annual asset injection tradition in 2012, given the sheer size of the remaining project, Shenzhen Dachong, in the pipeline. That would be a big positive for CRL, as we argue that the growth by injection model is no longer appropriate for a well-developed company. See
our note Viability of future asset injection a moot point dated 20 September 2011 for further details.
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Longfor (960 HK; OW(V); TP HKD13.3)
Longfors contracted sales momentum has outpaced the sectors, particularly during the summer months that defied the market slowdown. Longfor leads the pack among the non-SOEs in terms of borrowing cost advantage and contracted sales momentum. These are the key reasons behind our conviction.
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Cost of capital under the limelight

The market should pay increasing attention to cost of capital for the sector, amid global equity market
volatility and tight credit conditions

We revise our WACC assumptions by 90-460bp to 9.1-15.3% to account for the sizable difference in
developers cost of capital

Difference in WACC will be reflected in our NAV calculation, and difference in cost of debt will have
forward margin implications
The importance of cost of capital advantage

While consistency in operating cash flow, balance sheet strength preservation and market share gains will continue to be important benchmarks in 2012, we believe the market will place increasing emphasis on cost of capital amid challenging equity markets and credit conditions, both onshore and offshore. We see wide differential among companies under our coverage and believe this will emerge as a key investment consideration in 2012 for the following key reasons: Real estate investment is a capital intensive business
The sectors cost of capital is structurally trending north, as credit has gotten incrementally tighter Wide divergence in cost of capital should be reflected in the value of the underlying assets (NAV) The structural step-up in debt cost will become more apparent, to be reflected in developers P&L For these reasons, we believe developers ability to secure low debt cost will prove to be an increasingly important investment attribute worth appreciation in the China property sector. That said, despite the importance and relevance of developers cost of funding in asset valuation, we believe the market has to an extent neglected this
factor as a fundamental consideration in stock selection so far.
Two considerations: NAV and margins

In terms of valuation, our NAV estimates are directly affected as WACC is a key assumption in DCF analysis which is the foundation of our NAV calculation. In terms of margin, our hypothetical margin analysis highlights how the cost of debt can come into play differently for high and low margin companies. Low margin companies are harder hit when finance cost increases, while the impact on high margin companies is buffered by the reduction in Land Appreciation Tax (LAT).
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Our adjustments to WACC
developers with significant cost of debt advantage and this is owing to the strong support of banks and the syndicated loan market. The equity market has become more volatile, and hence the market adopted beta needs to be adjusted accordingly in order to appropriately calculate the cost of equity.
WACC revision Company Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui on Land SOHO Yanlord* Average Old 10.7% 8.8% 9.0% 9.3% 11.0% 11.0% 9.0% 10.0% 9.5% 9.0% n/a New 15.3% 9.1% 10.2% 10.2% 14.4% 14.2% 13.1% 14.1% 12.9% 10.3% 11.4% Change 4.6% 0.3% 1.2% 0.9% 3.4% 3.2% 4.1% 4.1% 3.5% 1.2% n/a 2.6%
Source: HSBC estimates We initiated coverage of Yanlord stock in a separate note (Initiate N(V): In need of a strategic shift, 4 January 2012)
Estimated weighted cost of debt
12% 9% 6% 3% Longf or SOHO Shui on Land F ranshion Yanlord KWG COLI C RL R &F Shimao Agile
In anticipation of persistent scrutiny on developers balance sheet strength preservation, and increasing divergence in their respective cost of borrowing, we see the need to adjust WACC to appropriately capture the divergence in funding costs following the wave of USD high yield issuances over the past 18 months. We revise our WACC assumptions by 90-460bp to 9.1-15.3%. Agile, Longfor and Shimao are standouts with the biggest WACC adjustments of 410-460bp, affected by both higher beta (cost of equity) and higher cost of debt (reliance on offshore high yields on the debt front). We believe our revised range of WACC assumptions is much wider than what is currently adopted by the market with a spread of 610bp between the lowest and highest WACC for stocks in our coverage universe.
Key reasons behind our WACC revisions:
WACC calculation methodology

In our WACC calculation, we assume a target debt structure of 40% and a corporate tax rate of 25%.
Estimating the cost of equity

This is calculated based on the CAPM formula:
Ke = Rf + ( Rm Rf )
Key assumptions in our calculations include a risk-free rate of 3.5% and equity risk premium of 10%. Company-specific betas are based on weekly calculations of the past three years.
The market has simplistically assumed a relatively tight and generalized WACC range, which we deem as inappropriate as it fails to account for the true costs of borrowing against the rather un-accommodative lending environment. There were sizable differences in developers borrowing costs of some 1,000bp in 1H11 and this spread is unlikely to be reversed. For stocks within our coverage universe, COLI, CRL, Franshion, SOHO and Longfor are
Estimating the cost of debt

In estimating developers cost of debt, we refer to the last reported loan profile and our estimated mark-to-market finance cost of each company. Based on our analysis, we observe that the stocks could be generally categorized into three groups, given the sizable difference in the cost of debt.
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Category 3 stocks (above 10%) key sources of borrowing: Onshore construction loans at a premium above the benchmark rate + offshore syndicated loan + USD high yield bond
Stocks: Agile, GZ R&F, KWG, Shimao
Category 1 stocks (below 7.5%) key sources of borrowing: Offshore HKD bank loans + onshore bank loans at a small premium above the benchmark rate
Stocks: COLI, CRL, Franshion
Putting it together: WACC range of 9.1-15.3%

Our revised WACC range of 9.1-15.3% represents a sizable spread of 610bp between the high end and low end, based on the determined cost of equity and debt. Note that we have assumed a 40% debt-to-asset ratio across the board. In this exercise, we find that COLI has the lowest WACC, while Agile is penalized for its dependence on USD HY issuances and high beta.
This group of developers has ready access to the offshore syndicated loan market, as well as onshore bank loans at a small premium above the benchmark Peoples Bank of China (PBOC) rate. We observe that offshore low-cost borrowing contributes more than 50% of COLIs and CRLs debt profile as of the latest reporting date. Not surprisingly, developers in this group are mainly SOEs, whose parent backings have enhanced credit accessibility with more flexible funding channels. These developers enjoy the lowest cost of borrowing among the three groups of stocks. Category 2 stocks (7.5% to 10%) key sources of borrowing: Onshore construction loans at a reasonable premium above the benchmark rate + offshore syndicated loan + USD high yield bond
Stocks: Longfor, Soho China, Shui On Land, Yanlord
Developers who have stretched balance sheets and limited source of low-cost funding fall into this category. We observe that these developers generally relied more heavily on offshore high yield bond as of their latest report date. We believe their key sources of borrowing are onshore construction loans, but at higher premiums over the PBOC benchmark lending rate.
This group of developers possesses healthy balance sheets, or in the case of Shui On Land is the subsidiary of a HK-based listed company. Developers in this group are able to secure onshore construction loans at reasonable rates, fair access to offshore syndicated loans and sensible issue cost in the offshore high yield bond market.
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WACC calculations Onshore RMB Premium above PBOC (a) Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui On Land SOHO Yanlord
Offshore borrowing cost (b) 9% 3% 4% 7% 9% 9% 7% 9% 9% 8% 7%
Bond / Weight of Weight of notes onshore RMB offshore HKD interest (c) (d) (e) 13% n/a n/a n/a 15% 15% 11% 15% 12% 10% 13% 55% 20% 30% 70% 70% 60% 65% 60% 60% 70% 50% 10% 80% 70% 30% 10% 10% 15% 10% 10% 30% 15%
Weight of offshore HY (f) 35% 0% 0% 0% 20% 30% 20% 30% 30% 0% 35%
WA cost of debt
Debt/ Asset (h) 40% 40% 40% 40% 40% 40% 40% 40% 40% 40% 40%
Revised Risk free Market risk beta rate premium (i) 1.65 1.00 1.10 0.95 1.50 1.45 1.40 1.45 1.30 0.95 1.08 (j) 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% 3.5% (k) 10% 10% 10% 10% 10% 10% 10% 10% 10% 10% 10%
Equity/ Assets (l) 60% 60% 60% 60% 60% 60% 60% 60% 60% 60% 60%
Tax
WACC
(g) = PBOC rate*(1+a)*(d) + (b)*(e)+ (c)*(f) 10.84% 3.40% 5.11% 7.49% 10.76% 11.28% 8.71% 11.28% 9.96% 8.28% 9.60%
(m) 25% 25% 25% 25% 25% 25% 25% 25% 25% 25% 25%
(^) 15.3% 9.1% 10.2% 10.2% 14.4% 14.2% 13.1% 14.1% 12.9% 10.3% 11.4%
40% 0% 10% 10% 40% 40% 20% 40% 30% 20% 15%
^ WACC = (h) * (g) * [1-( m)] + [(j) +(i) * (k)] * (l)
China Developers source of funding
1H09 FY09 1H10 FY10 1H11 FY11* 0%
22.7% 19 .8 % 19 .5 % 17 .3 % 22.7% 15 .4 %
34.8% 4 8 .1% 3 6 .8 % 3 6 .8 % 34.8% 4 1.2 %
4 1.5 % 3 1.3 % 4 3 .0 % 4 4 .8 % 4 1.5 % 4 2 .3 %
Summary of credit rating and access to offshore loans Company Name S&P corporate credit rating Moody's corporate credit rating Ba2/Stable Baa2/Stable Baa2/Stable Baa3/Stable na. Ba3/B1/Stable Ba2/Ba3/Stable Ba3/Stable na. na. Ba2/Negative Access to offshore syndication loans Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes Yes
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10% Bank Loan
20%
30% Foreign Inv estment
40%
50% Equity
60%
70%
80%
90%
100%
Pre-sale proceeds and Mortgage receipt
Agile COLI CR Land Franshion GZ R&F KWG Longfor Shimao Shui On Soho China Yanlord
BB/Stable/-BBB/Stable/-BBB/Stable/-BB+/Stable/-na. BB-/Stable/-BB+/Stable/-BB/Negative/-na. na. BB/Negative/--
Source: CEIC
*As at October-2011
Source: S&P, Moodys, Company data, HSBC estimates
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Earnings and NAV estimate revisions

We lower our 2011-13 EPS estimates by an average of -1%, -6 and -10%, respectively, to reflect
scaled-back contracted sales forecasts and revisions in ASP

Accordingly, we lower our NAV estimate on average by 14% We have adjusted our target NAV discounts for COLI, CRL, Franshion, KWG, Longfor and SOL
Changes in earnings estimates

We lower our 2011-13 EPS forecasts by an average -1%, -6% and -10%, respectively.
Two reasons behind our earnings revisions

Incorporation of our revised property price assumptions: In the coming 12 months, we look for residential prices to decline 20% in tier-1 cities, and decline 10% in both tier-2 and below cites, respectively. Revisions in contracted sales forecasts: Slower-than-expected contracted sales through
November 2011 will see selective developers succumb to the reality of a sales shortfall for 2011. As a result, we adjust our 2011 sales forecast to reflect developers current pace of sales as well as their lack of incentive to overachieve in property sales based on the current state of equity markets. Thus, we also adjust contracted sales for 2012-13 based on more reasonable y-o-y growth rates.
EPS revisions (RMB), 2011-13e Company Agile COLI* CRL* Franshion* R&F KWG Longfor Shimao Shui On Land SOHO Yanlord Average
Note the muted impact on 2011e EPS is mainly attributable to the strong revenue lock-in ratio, which came on the back of sales secured through November 2011 and in 2010. While we estimate 70% of property development revenue has been secured as at November 2011, we do not rule out the possibility that developers push some deliveries into 2012, if both the physical and stock markets continue to weaken from this point.
____________ 2011e _____________ Old New % Chg 1.35 1.55 0.99 0.22 1.25 0.64 0.84 1.26 0.22 0.18 n/a
*in HKD
____________ 2012e _____________ Old New % Chg 1.74 1.65 1.32 0.27 1.20 0.79 1.12 1.35 0.32 0.80 n/a 1.44 1.71 1.26 0.25 1.34 0.69 1.04 1.26 0.27 0.75 0.71 -17% 4% -4% -7% 12% -13% -7% -6% -15% -6% n/a -6%
____________ 2013e _____________ Old New % Chg 2.20 2.33 1.55 0.29 1.49 1.06 1.50 1.49 0.41 1.16 n/a 1.59 1.97 1.42 0.29 1.55 0.82 1.33 1.40 0.38 1.14 0.76 -28% -16% -9% 1% 4% -23% -12% -6% -7% -2% n/a -10%
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Property price assumption for the next 12 months Previous assumption Residential price Tier-1 city Tier-2 city Tier-3 city Retail/office price
New assumption -20% -10% -10% 0%
-15% -5% 0% 0%
1.33 1.51 1.02 0.22 1.20 0.60 0.84 1.25 0.23 0.18 0.59
-1% -3% 3% -2% -4% -6% 0% -1% 3% 0% n/a -1%
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Contracted sales revisions (RMBm) Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui on Land SOHO Yanlord Average Total Total (adjusted*)
Therefore, we fine-tune our 2011 EPS estimate by -1% on average for stocks under our coverage. Higher -6% and -10% EPS revisions are seen in 2012-13, respectively, as we scale back developers contracted sales forecasts.
Theoretical revenue lock-in ratio for 2011-12 Company Carry-fwd Contracted 2011 Rev 2012 Rev unbooked sales thru Lock-in Lock-in revenue 2010 Nov 2011 ratio ratio* (RMBm) (RMBm) 20,000 32,300 21,037 16,672 n/a 7,367 33,800 17,000 2,825 4,500 28,000 67,398 30,070 26,320 8,800 10,897 35,640 28,457 6,500 10,630 100% 100% 100% 100% 100% 100% 100% 100% 100% 100% 60% 100% 84% 75% 27% 92% 100% 51% 42% 69% 70%
FY11 34,900 75,000 31,500 8,148 30,500 11,400 40,000 31,800 7,550 14,500 8,484 n/a 293,782 147,282
Revision (%) -6% 9% 5% 0% -5% -4% -0% -8% -10% 0% n/a -2%
FY12 40,323 89,177 34,624 6,748 32,274 11,455 45,300 31,177 9,966 17,193 9,741 n/a 327,977 158,876
Revision (%) -11% 0% 6% -9% -10% -8% -4% -15% -20% -3% n/a -7%
Implied y-o-y growth (%) 16% 19% 10% -17% 13% -4% 13% -2% 32% 19% 15% 10% 12% 8%
FY13 45,762 106,284 38,432 8,749 40,389 12,393 50,388 34,922 13,446 19,182 11,970 n/a 381,917 186,812
Revision (%) -12% 5% -10% 19% 0% -4% -7% -19% -24% -1% n/a -5%
Implied y-o-y growth (%) 13% 19% 11% 30% 25% 8% 11% 12% 35% 12% 23% 21% 17% 18%
Agile COLI CR Land GZ R&F Franshion KWG Longfor Shimao Shui On Land^ SOHO China Average
*Excluding the consistent players: COLI, CRL and Longfor
Net margin sensitivity analysis on different finance costs Low margin company Average ASP Average construction cost Average land cost Average capitalised interest* Gross Profit Margin Average SG&A to ASP ratio Average LAT to ASP ratio Income tax Net profit margin Sensitivity analysis Assumed 500bp increase in finance cost GP margin LAT to ASP ratio NP margin Assumed 1,000bp increase in finance cost GP margin LAT to ASP ratio NP margin
Typical company 16,000 5,000 4,000 675 40% 7% 7% 25% 18.9%
High margin company
Source: Company data, HSBC estimates * as of November 2011 ^ as of October 2011
Cost of debt implication on profitability

While cost of capital advantage is the key theme in 2012, we also highlight that profitability, as measured by net profit margin, is a function of finance cost. Hence, developers with significant cost of debt advantage are better placed to achieve higher profit margins. Note, however, that cost of debt and net margin do not exhibit a linear relationship, as the LAT provisions increase as net profit margin grows. Indeed, our net margin sensitivity analysis indicates that low margin companies are generally
30% 7% 4% 25% 14.5%
50% 5% 12% 25% 24.8%
25.3% 2.0% 12.2%
Change -4.9% -2.0% -2.3% Change -9.8% -3.9% -4.6%
35.3% 5.7% 16.9%
Change -4.2% -1.3% -2.0% Change -8.4% -2.8% -4.0%
46.4% 9.9% 23.6%
Change -3.5% -1.9% -1.2% Change -7.0% -3.2% -2.8%
20.4% 0.1% 9.9%
31.1% 4.2% 15.0%
42.9% 8.6% 22.0%
*Based on 75% interest capitalisation rate and 24 months of construction loans, interest cost of 5%
Every 1% increase in finance cost Low margin GP margin NP margin

Every 1% reduction in ASP High margin -0.70% -0.23% GP margin NP margin

Typical company -0.80% -0.40%
Low margin Typical company -0.81% -0.19% -0.70% -0.33%
High margin -0.56% -0.27%

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-0.98% -0.46%
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EPS revisions by company
Below we discuss key changes to our EPS estimates by company, noting that all of our revised estimates have incorporated our latest ASP forecasts.
Agile (3383 HK; OW(V); TP HKD8.4)
harder hit when finance cost increases, while the negative impact on high margin companies is relatively muted as margins are buffered by a reduction in LAT.
Development margins trends 2008 Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui on Land SOHO Yanlord Simple avg Wtg avg*
2009 37% 32% 38% 46% 35% 37% 28% 39% 51% 52% 56% 41% 37%
2010 46% 40% 42% 45% 41% 42% 32% 40% 38% 51% 55% 43% 41%
2011e 49% 36% 40% 55% 43% 43% 36% 46% 41% 33% 40% 42% 39%
2012e 45% 33% 38% 42% 33% 37% 33% 40% 47% 49% 44% 40% 37%
2013e 41% 32% 32% 41% 31% 33% 27% 38% 36% 46% 38% 36% 34%
37% 44% 38% 51% 38% 51% 25% 49% 40% 49% 56% 43% 41%
*By market capitalization
With contracted sales continuing to track behind schedule at a 76% run rate through November, Agile will struggle to meet its 2011 full-year target, leading us to lower our 2011 contracted sales forecast by 6% to RMB35bn from RMB37bn. Accordingly, we have scaled down contracted sales for 2012 and 2013 by 11% and 12%, respectively. This is mainly attributable to lower ASP assumptions as the company has reiterated its strategy of value pricing its product to ensure strong sell-through. In addition, its Hainan project will contribute less to the bottom line as the company builds out the comprehensive commercial phase. Hence, we lower our 2012 and 2013 EPS by 17% and 28%, respectively, while leaving 2011 EPS largely unchanged as the bookings have largely been secured.
COLI (688 HK; OW(V); TP HKD21)
Core profit margin trends 2008 Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui on Land SOHO Yanlord Simple avg Wtg avg*
2009 14% 17% 18% 17% 13% 16% 13% 16% 25% 23% 14% 17% 17%
2010 17% 22% 17% 17% 14% 17% 17% 16% 15% 19% 17% 17% 18%
2011e 16% 23% 18% 25% 17% 18% 17% 16% 18% 16% 12% 18% 19%
2012e 17% 20% 17% 17% 13% 23% 16% 13% 20% 24% 12% 18% 18%
2013e 15% 21% 15% 13% 12% 23% 12% 11% 15% 24% 11% 16% 17%
59% 21% 18% 21% 13% 25% 5% 15% 73% 13% 14% 25% 21%
*By market capitalization
Being the leader of the pack in terms of both sales progress and earnings visibility, COLI is on track to meet our EPS forecasts. We revise our 2012 and 2013 EPS forecasts by +4% and -16%, while fine tuning our 2011 EPS forecast by -3%. Larger magnitude of revision in 2013 is mainly due to our ASP revision, given that most of the upcoming sales will be recognised in 2013.
CRL (1109 HK; OW(V); TP HKD17.6)
Similar to COLI, CRL should have no difficulties in achieving the 2011 full-year sales target.
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GZ R&F (2777 HK; OW(V); TP HKD7.1)
Hence, our EPS revisions are mainly reflective of push-back in completion schedule and changes in ASP. The company also has a growing investment property (IP) portfolio expected to contribute about 7% of total revenue in 2011, the highest proportion among large developers. As IP generally carry a higher margin than development properties, they can have a disproportionate impact on the bottom line. Our analysis shows each dollar of the companys property development revenue contributes RMB0.17 to net income, while a dollar of rental revenue can contribute RMB0.43 to the bottom line. Hence we expect the companys IP portfolio to provide some degree of earning resilience. We cut our 2012 and 2013 EPS by 4% and 9% on the back of lower GFA delivery by 5-10% during these periods, respectively.
Franshion (817 HK; OW; TP HKD1.9)
Although the company remains confident of achieving its 2011 full-year contracted sales target of RMB32bn (revised down from RMB40bn in September), we expect the company to achieve 95% by year-end 2011, i.e. RMB30.5bn, down 5% from our previous estimate. Accordingly, we revise our 2011 EPS down by 4%. We also lower 2012 contracted sales by 10% due to the current sales momentum. As we believe that our 2012e EPS reduction was too conservative (see 28 September note OW: Reality bites, but guidance cut manageable), we raise 2012 EPS by 12% to RMB1.34 from RMB1.20. Coming from a low base of contracted sales, we believe GZ R&F could see a rebound in sales in 2013 (w estimate 25% growth). As a result, we raise our 2013 EPS by 4%, despite a reduction in contracted sales in the previous two years.
KWG (1813 HK; OW(V); TP HKD4.5)
2013. We lower our 2012-13 EPS by 13% and 23%, respectively.

Longfor (960 HK; OW(V); TP HKD13.3)
Longfor is firmly on track to meet its 2011 contracted sales target based on the companys sales progress through November. Our 2011 EPS is largely unchanged as Longfor offers the highest theoretical revenue lock-in ratio through 2012. Despite this, we scale down Longfors contracted sales forecasts in both 2012 and 2013 along with other developers in the sector. The revised y-o-y sales growth forecasts of 11-13% are only marginally lower than previous forecasts of 15%. We believe this is justified given the companys demonstrated practice of aggressive price cutting and the resultant 90%+ sell-through rate. Hence, we cut our 2012-13 EPS by 7% and 12%, accordingly.
Shimao (813 HK; N(V); TP HKD7)
Our 2011 EPS is largely unchanged as our forecast captures the latest sales progress following our revision in Patience beginning to bear fruit (20 October 2011). In 2012, we lower our EPS modestly by 7%, as the majority of the 2012 revenue has already been secured, implying minimal impact from our ASP revisions. Our 2013 EPS is largely unchanged, as the effect of the ASP decline is offset by higher contracted sales, mainly from the Qingdao Lanhai Xingang City project.
We lower our 2011 EPS by 6%, the most of stocks in our coverage universe, given that sales through November 2011 are significantly behind schedule. Continuous delays in project launches should see 2011 full-year sales fall short of target by about 20%. Coupled with the companys large exposure in higher tier cities (53% in tier-1, the highest among all developers excluding SOHO), we expect contracted sales to remain flat in 2012 and to log only moderate growth of 8% y-o-y in
Following our latest round of estimate revisions (see Upgrade to OW: But deleveraging will drain growth, 11 October 2011) we leave our 2011 EPS unchanged, but further lower our 2012-13 EPS by 6% and 6%, respectively. These changes are mainly attributable to our 15-20% reduction in contracted sales estimates for 2012-13, as well as changes in ASP.
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Changes in NAV estimates
We revise our 12-month forward NAV estimates by 14% on average for stocks in our coverage universe.
Shui On Land (272 HK; OW; TP HKD2.9)
We lift our 2011 EPS modestly by 3% to reflect the disposal of IP in KIC, which is partially offset by the share issuances from the recent acquisition of Shui On Plaza and Langham Xintiandi. The larger magnitude of EPS cuts in both 2012 (-15%) and 2013 (-7%) mainly reflects the full dilution effect from the issuances. As a reminder, SOL will be issuing 614m shares to fund the acquisitions in October 2011, representing 12% of the pre-issuance share base.
SOHO (410 HK; N; TP HKD5.4)
Adjustments in target NAV discounts

We are widening our target NAV discounts for COLI, Franshion, GZ R&F, KWG, Longfor, Shimao and SOL, while narrowing the discount level for Agile and CRL. Our adjustments are based on developers sales achievement as of November 2011, financial strength assessment, risks associated with general operations, as well as the state of the global economy. We are otherwise maintaining target NAV discounts of other stocks in our coverage universe, given that the qualitative aspects of developers are unchanged since our last sector report published on 10 June 2011 Price cuts may be a blessing in disguise. Note that our target discounts range from half a standard deviation above the mean to one standard deviation below the historical average, which are reflective of the uncertain and slowing residential sales outlook, as well as company-specific factors such as contracted sales progress and financial flexibility. Within our coverage universe, we attach the smallest target discounts to COLI, CRL and Longfor, owing to their superior execution, earnings visibility and cost of capital advantage.
Key reasons behind our NAV revisions:

Incorporation of our revised property price assumptions. In the coming 12 months, we look for residential prices to decline 20% in tier-1 cities, and decline 10% in both tier-2 and below cites. Push back in sales proceeds, as a result the scaled back contracted sales forecasts discussed above. Adaptation of a wider WACC range to more accurately reflect the sizable differences in the cost of debt, especially when comparisons are made between SOEs and non-SOEs. Note that the magnitude of our NAV revisions is small, as more than 70% of most developers GAV estimates are derived from projects in tier-2 and below cities.
With less than 50% sales target achieved as of November, we believe the company will see a slower sales schedule and possibly lower ASP in the coming two years. We therefore reduce our 2012 and 2013 earnings estimates by 6% and 2%, respectively, following our latest update (28 October 2011), OW: Hiccup in commercial sales, but balance sheet strength is a boon).
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Earnings and NAV sensitivity

ASP sensitivity of our earnings and NAV estimates depends on developers geographic landbank exposure. As we have assumed a larger magnitude of price decline in tier-1 cities, developers with higher exposure these regions will be harder hit.
2012e earnings sensitivity to ASP changes
2013e earnings sensitivity to ASP changes
NAV sensitivity to ASP changes (as of December 2011)
F rans hion
F rans hion
G Z R &F
G Z R &F
F rans hion
Shui O n
G Z R &F
Longf or
Longfor
Shim ao
S him ao
KWG
KW G
C OLI
C OLI
Shui O n
Longfor
Shim ao
C O LI
KW G
S oho
Soho
Agile
Agile
CRL
C RL
S OL
0% -10% -20% -30% -40% -50% ASP dow n 10%

0% -10% -20% -30% -40% -50%

ASP dow n 20%
0% -10% -20% -30% -40% -50%
ASP dow n 10%
ASP dow n 20%

ASP dow n 10%
ASP dow n 20%

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Soho
A gile
CRL
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Changes in ratings, NAVs and target prices Company Name Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui On Land SOHO Yanlord Simple average _____ Rating _____ Old New OW OW N OW OW OW OW OW OW OW n/a OW(V) OW(V) OW(V) OW OW(V) OW(V) OW(V) N(V) OW N N(V) _______Forward NAV (HKD) _______ Old New % Chg 20.5 24.2 24.4 5.4 20.4 15.5 21.5 19.5 8.8 11.6 n/a 15.2 22.1 20.7 4.8 17.8 13.0 19.0 17.5 7.3 9.8 2.4 -26% -9% -15% -12% -12% -16% -11% -11% -17% -16% n/a -14% _______ Target discount (%) ________ Old New % Chg -53% 0% -55% -55% -56% -45% -20% -57% -55% -45% n/a -45% -5% -15% -60% -60% -65% -30% -60% -60% -45% -58% 8% -5% 40% -5% -4% -20% -10% -3% -5% 0% n/a 0% ______ Target price (HKD)________ Old New % Chg 9.6 24.2 11.0 2.5 8.9 8.5 17.2 8.4 4.0 6.4 n/a 8.4 21.0 17.6 1.9 7.1 4.5 13.3 7.0 2.9 5.4 1.0 -13% -13% 60% -24% -20% -47% -22% -17% -27% -16% n/a -14% Potential ___ Implied PE by our TP ___ return* FY12e FY13e 26% 65% 44% 30% 26% 81% 55% 12% 29% 10% 7% 4.9 10.4 11.8 6.4 4.5 5.6 10.9 4.7 9.2 6.1 7.5 7.5 4.5 9.1 10.5 5.5 3.9 4.7 8.5 4.2 6.5 4.0 6.9 6.3
* Potential return equals the percentage difference between the current share price (as of 30 December 2011) and the target price, plus the forecast dividend yield We initiated coverage of Yanlord stock in a separate note (Initiate N(V): In need of a strategic shift, 4 January 2012) Source: HSBC estimates
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Downside protection theoretical liquidation value

Traditional valuation metrics are indicating buy signals for most stocks in our coverage universe While we are not bullish on a sector-wide basis, we argue that stocks are well protected on the
downside based on our liquidation value analysis which gives a theoretical floor for share prices
The degree of relative downside protection is dependent on developers landbank geographic
distribution; developers with higher exposure to top-tier cities are better protected
Conventional valuation metrics signal buys

The sectors average NAV discount currently stands at above 50%, based on our revised NAV estimates which employ the revised set of WACC determined in the section - Cost of capital under the limelight
Floor value calculation for stocks under coverage (RMBm) DP-cost (a) IP-cost (b) IP-completed (c) Net debt (d) Floor value (e) = (a+b+c+d) No. of shares (f) Floor value per share (HKD) (g) = (e)/(f) Current share price* (h) Share price above or (below) floor value (g)/(h)-1
Source: DataStream, HSBC estimates
(pg 12). While the current NAV discount level, together with PE, appear constructive from a historical standpoint, there exists the counter argument of NAV estimates being subjective given the sensitivity to different assumptions such as ASP levels and discount rates, although our estimates
already incorporate price cuts nationwide. At the same time, earnings estimates are also susceptible to varying degrees of adjustments given developers flexibility to shift completion schedules. Hence, we believe it is relevant to gauge potential share price downside from the current level, and we do so
COLI 85,511 420 10,934 (20,587) 76,278 8,173 11.0 13.0 18%
CRL 42,518 13,045 24,836 (25,141) 55,259 5,804 11.2 12.5 11%
Franshion 11,662 1,600 14,768 (13,596) 14,435 9,161 1.9 1.5 -19%
GZ R&F 31,452 339 11,532 (26,332) 16,991 3,222 6.2 6.1 -1%
KWG 17,800 1,268 4,132 (12,185) 11,016 2,894 4.5 2.6 -41%
Longfor 38,227 581 4,047 (11,324) 31,530 5,155 7.2 8.8 22%
Shimao 21,781 1,227 14,332 (23,131) 14,210 3,545 4.7 6.6 41%
SOL 19,073 1,341 6,788 (16,468) 10,734 5,212 2.4 2.4 -3%
SOHO 15,235 3,697 7,070 1,386 27,388 5,185 6.2 5.2 -17%
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For development properties, the rule of thumb is to account for costs that have been incurred for projects which are currently on sale or pending for pre-sale, as the sales proceeds have yet to be recognized. For IP under construction, sunk costs are accounted for in a similar manner, based on the projects all-in costs. For completed IP, we value the assets based on an income capitalization approach using gross cap rates of 5-12%. Having identified the cost-based valuation for each of the property components discussed, we apply a haircut to account for the perception that the incremental costs of acquiring new sites have fallen, and that capital values of the completed IP have declined, as market sentiment has deteriorated. The haircuts we apply are 30% and 50% for values attributed to tier-1 and tier-2 cities, respectively, while prospective values for lower-tier cities have been omitted. This is based on the premise that market clearance prices for top-tier cities are more visible and justifiable based on actual market transactions, while price discovery in lowertier cities will become more difficult as transaction volume drops
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through a cost-based valuation method akin to a liquidation analysis.
GAV breakdown by tier cities (%) Agile Properties China Overseas Land China Resources Land Franshion Properties Guangzhou R&F KWG Property Longfor properties Shimao Property Shui On Land SOHO China Yanlord Simple average Weighted average*
Tier 1 20 20 22 24 37 53 25 14 23 100 42 35 30
Tier 2 80 73 65 74 53 47 42 70 77 55 57 60
Tier 3 7 13 2 10 33 16 3 8 10
Total 100 100 100 100 100 100 100 100 100 100 100
Deriving theoretical liquidation value

Our liquidation analysis uses a cost-based valuation metric to minimize assumptions used in typical NAV estimates. This can also be interpreted as the bear-case NAV, or floor value for the stocks. Our calculated floor values are largely reflective of the sunk costs that developers have incurred, which provides a tangible way of measuring a companys net worth. After summation of sunk cost components, we subtract net debt from the aggregate sunk cost to arrive at the final floor value.
*by market capitalisation
After summation of all sunk cost components, we deduct the net debt (as at end-2011) to arrive at the floor value, which should be interpreted as the bear-case NAV. As a side note, we use attributable values for our floor value calculation as we do not believe balance sheet items, presented on a consolidated basis, are appropriate for this exercise.
Key assumptions and remarks:

Sunk costs include both land and construction costs. The sunk costs that we incorporate in the calculation of a developers net worth is dependent on the completion timeline on a project-by-project basis, adjusted by an accountability factor. The accountability factor adjusts for the difference in pre-sales timeline, as value should not be attributed to projects that have commenced pre-sale whereby the proceeds have been captured on the balance sheet.
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Development properties sunk cost analysis Project completion schedule FY11 _______________ Key assumptions ______________ __________ Key components in floor value calculation _________ Period for which Contracted sales Sunk cost Adjustment factor construction cost will be period in sunk cost incurred FY09-11 FY11 & FY10 None 0% Remarks
Since these projects are substantially sold, none of the cost incurred will be accounted for in our floor value as sales have been converted into cash captured on the balance sheet Assuming that half of the projects are sold in FY11 and FY12, respectively, we only incorporate 50% of the incurred costs in our calculation With these projects expected to commence presale in FY12 onwards, construction costs incurred and to be incurred will be fully accounted for in our floor value, given that sales have yet been materialized and recognized
FY12
FY10-12
FY11 & FY12
(incurred construction & land cost)* adj factor
50%
FY13
FY11-13
FY12 & FY13
(incurred construction & land cost)* adj factor
100%
Source: HSBC
Differentiation among developers

Our methodology favours developers with higher exposure to top-tier cities, due to higher visibility on market clearing prices (of both properties and raw sites), given the availability of more frequent and transparent comparable transactions. Visibility deteriorates in the lower-tier cities, which makes it more difficult to grasp the underlying true value. Hence, we expect developers with mostly exposure in higher-tier cities to offer a higher degree of downside protection. Not surprisingly, within our coverage universe, we find four stocks are better placed: namely Franshion, KWG, Shui On Land and Soho China, with current share prices at or below our estimated floor values.
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Assessing the cash flow buffer

Developers balance sheets are constrained amid shrinking transaction volumes and delayed cash
receipts, but the overall liquidity position is still manageable

COLI, Longfor and Agile are financially well equipped to withstand unforeseen contracted sales
shortfall, while SOL and Yanlord are under more balance sheet strain
Cash is king
In the early evolution of the sector (2004-07) much of the markets focus was on a developers ability to expand its landbank based on the premise of the bigger the better. Hence, the market attached a premium to developers with the
China Developers key performance benchmarks Key benchmarks Contracted sales delivery Remarks
strongest purchasing power, resulting in the land acquisition frenzy seen in 2007. During the credit crisis of 2008, developers struggled to recapitalize their balance sheets amid a backdrop of domestic property tightening measures. Investors have since placed increasing emphasis
on contracted sales and cash collection, as they are key determinants of developers cash flow management ability and will be of paramount importance to weather the storm.
Balance sheets constrained, but no liquidity issue

Against the backdrop of shrinking transaction volumes, delayed cash receipts upon contracted sales and a generally difficult financing environment, balance sheet management will be of rising importance for developers in 2012. However, we deduce that the overall liquidity position for the sector will remain manageable. Our core cash flow analysis reveals that COLI, Longfor and Agile are financially well equipped to withstand unforeseen contracted sales shortfall, while Shui On Land and Yanlord are under more balance sheet strain. In this exercise, we have assumed no cash outlay on new site acquisitions
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Market share gain
Consistency in operating cash flow Balance sheet preservation
Cash collection ratio
Contracted sales delivery has become a prerequisite for success, given that contracted sales provides the single most important source of cash inflow. Furthermore, contracted sales also help gauge underlying demand of the physical property market In an environment where the size of the pie is constrained by shrinking transaction volume, developers' performance hinges on their ability to gain market share. In our view, the current policy and credit environment both indicate the likelihood of continual market consolidation, pushing towards to the favour of bigger developers Consistency in operating cash flow ultimately determines developers' ability to withstand unforeseen contracted sales shortfall, and hence a key benchmark to judge financial liquidity While balance sheet preservation is a function of consistency in operating cash flow, year-end gearing levels are also dependent on other factors such as capital outlay spent on acquisition of new projects, which is within the control of developers. This means that prudent balance sheet managers will scale back on acquisition outlays when times are challenging This is a new found metric that only become relevant in recent months owing to delayed mortgage disbursements from banks upon contracted sales. In light of continual tightness in credit, the metric will be under the spot light in 2012
Source: HSBC
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cash collection in 2H11 consists of contracted sales realized from June to November 2011. As banks are generally close to exhausting their loan quota towards the end of the year, disbursement delalys are gradaully lengething to two months. Consequently, we expect cash collection in 1H12 to comprise contracted sales realized in the last two months of 2011 as well as those generated from January to April 2012. We examined the cash collection ratio of each company in 1H11 based on the contract sales amount for the period and the change in presale proceeds from customers recorded on the balance sheet. We noted that COLI recorded a very low cash collection ratio while Yanlords collection ratio exceeded 100%. Discussions with the companies indicated that COLI posted very strong contract sales in May and June 2011, hence much of the cash receipts only came through post 1H11. Yanlord, on the other hand, experienced weaker contract sales in late 1H but collected cash proceeds from stronger year-end 2010 sales, resulting in a cash collection ratio of more than 100%. Looking across the sector, we see an average cash collection rate of 87% for 1H11. Taking into account the longer mortgage disbursement delay, we believe it is prudent to assume a lower cash collection rate of 80% for our cash flow analysis for 1H12. However, for 2H11, as most of the contract sales have already occurred, we assume a cash collection rate of 90%, roughly in line with that of 1H11.
Short-term debt rollover
beyond that already committed. In addition, we assume no significant long-term debt repayment as the sectors bond maturity profile is heavily concentrated in 2014 and beyond.
Cash flow analysis methodology

New factors imperative for consideration
Given the tight credit environment, we incorporate two additional factors in our cash flow analysis: cash collection rate and short-term debt repayment.
Cash collection ratio
We take the conservative assumption that only 50% of developers short-term debt can be rolled over. An exception to this is Franshion. As 60% of the companys short-term debt is entrustment loan fully expected to be rolled over, we assume 50% of the remaining short-term debt, or 80% of the overall short-term debt, will be rolled over.
Estimating end-2011 financial position

Starting from the cash position shown in the companies interim financial statements, we estimate major sources and uses of cash to arrive at the expected cash position for end 2011.
Key sources of cash inflow
Cash generated from contracted sales is not equivalent to headline contracted sales due to delayed mortgage disbursements from banks. Assuming a disbursement delay of one month,
Cash collection ratio (1H11) Company COLI Evergrande KWG Shui On Land Agile SOHO Shimao Sino Ocean Country Garden Longfor GZ R&F CR Land Yanlord Average Ratio* 45% 74% 76% 78% 84% 89% 90% 93% 94% 97% 97% 100% 108% 87%
(1) Cash generated from contracted sales, and (2) Capital generated from fund raising activities. In calculating the cash inflows, we make the following key assumptions and remarks: 2H11 contracted sales is equal to our estimated 2011 contracted sales less 1H11 contracted sales amount We take a 5.5% haircut on the contracted sales to account for the payment of business tax
Source: Company data, HSBC estimates *Cash collection ratio is a rolling measure that may include proceeds from current and prior periods
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SG&A, income tax, finance cost and LAT are based on project value from our proprietary model. Finance cost is taken as the cash interest expense, inclusive of capitalization. LAT is taken as recognized LAT expense from two years prior, reflecting the timing of actual LAT payment. For debt repayment, we assume the cash outflow is equal to 50% of the debt amount under the short-term liability. This assumes the company will be able to roll over the remaining 50% of its short-term bank loans. For dividend payment, we assume the interim dividend announced in 1H will be paid out in 2H. We also assume any dividend payable (declared from prior periods) to be settled in 2H11.
Distribution of straight bond maturity date
2H11 cash collection of 90% across the board, to reflect slow mortgage disbursement from banks, except COLI due to its back-end loaded sales in 1H Decline in contracted sales proceeds in the range of 10-20% in 1H12 50% of construction cost is funded through drawdown of construction loans The other key source of cash inflow is cash generated from fund raising activities, which is based on financing transactions announced.
Key sources of cash outflow
Accounting for each of the aforementioned cash components, we arrive at the expected cash position for 2H11. Most developers have a reasonable cash balance at year-end, when ASP decline and slowing contract sales are accounted for. That said, Shui On Land is showing potential liquidity issues as its ending cash balance may fall substantially from June 2011.
Estimating June 2012 financial position

We employ a similar approach when estimating developers June 2012 financial position. Assuming the current state of the credit environment remains unchanged, and the physical market further deteriorates, we continue to adjust for the delayed contracted sales cash inflow by factoring in an even lower cash collection ratio of 80%.
Major uses of cash include construction cost, land premium payment, finance cost, SG&A expenses, income tax and LAT, debt repayment, dividend payment and other. Each item is derived based on either company guidance or projections based on historical data. In calculating cash outflows, we make the following key assumptions and remarks: Land premium payments are based on committed amount as of June 2011. We assume no additional land acquisitions in our cash flow analysis. Construction cost is based on the projected value from our proprietary model. We also assume 50% of the construction cost is funded via construction loan drawdown.
6,000 5,000 4,000 3,000 2,000 1,000 -
(USDmn)
2012
Source: HSBC Credit Research
2013
2014
2015
2016
2017
2018
2019
2020
2021
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Impact on net gearing
Selective developers are focusing their efforts on deleveraging, mostly done organically via scaled back construction and acquisition. As net gearing can be skewed by investment property or financial instrument revaluation reserves, we stress the importance of true deleveraging via lower net debt or larger shareholders equity due to increased retained earnings. Our cash flow model assumes no revaluation. In addition, with the exception of CRL and SOL, our cash flow model also assumes no equity raising. Hence, the change in cash position provides a glimpse of organic deleveraging. As seen from the ending cash balance position at 1H12, Agile, COLI and Longfor can easily deleverage organically assuming no large land acquisitions. Deleveraging is also feasible for R&F as its cash position at 1H12 should be only marginally lower. On the other hand, it will be more difficult for SOL, Yanlord and KWG to achieve organic deleveraging.
Net gearing (including restricted cash) 2010 Agile COLI CRL Franshion R&F KWG Longfor Shimao Shui On SOHO Yanlord Average 54 23 56 26 89 48 44 76 50 49 47 2011e 58 43 49 30 97 54 61 77 63 70 56 2012e 54 36 45 28 79 56 60 77 63 74 54 2013e 49 33 40 23 75 58 53 63 65 61 48
On a positive note, there is minimal debt repayment risk for the sector, as most maturities are concentrated in 2014 and beyond. This bodes well for developers as sales proceeds could be used solely for working capital purposes to get projects up to speed to the pre-sale stage, without the need to worry about debt repayment.
Contract sales sensitivity

We performed a sensitivity analysis by modelling a drop of 10% and 20% in 1H12 contract sales. This analysis excludes changes to contract sales in 2H 11 as such sales have mostly been locked in. Under the additional strain of lower contract sales the sector leaders, COLI, Agile and Longfor, still manage to improve their cash positions at 1H12 relative to 1H11. SOL and Yanlord should see their liquidity position deteriorate further. In particular, SOL should end up with a negative ending cash balance.
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2H11 cash flow estimates (RMB m) Opening cash balance (at June 2011) 2011 contract sales target HSBCe 2011 contract sales 1H11 achieved contract sales Expected 2H contract sales Cash collection haircut Prop dev proceeds (net of business tax) Other segment income Construction cost Land premium paid SG&A LAT provision t-2 Corporate income tax Interest expenses (cash) Operating cashflow Dividends (cash) Major fund raising Construction loan drawdown ST debt payment Financing cashflow Ending cash balance Change from June 2011
Agile 7,638 37,000 32,800 15,700 17,100 10% 14,544 31 (7,990) (2,208) (890) (496) (948) (814) 1,228 (338) 0 3,995 (2,973) 684 9,550 25%
COLI 15,420 68,500 76,139 42,432 33,707 -5% 33,446 210 (14,153) (13,550) (931) (733) (2,484) (397) 1,407 (1,143) 7,076 (4,262) 1,671 18,498 20%
CRL 15,814 30,000 33,810 13,480 20,330 10% 17,291 837 (9,745) (10,200) (1,006) (376) (1,749) (698) (5,646) (762) 7,200 4,872 (6,770) 4,540 14,708 -7%
Franshion 16,370 10,000 10,000 5,600 4,400 10% 3,742 761 (796) (1,600) (437) (83) (408) (396) 783 (97) 398 (2,693) (2,392) 14,761 -10%
GZ R&F 12,463 32,000 27,600 13,405 14,195 10% 12,073 713 (6,616) (4,460) (759) (411) (644) (1,038) (1,142) (644) 3,308 (3,210) (547) 10,774 -14%
KWG 6,450 15,000 11,815 6,540 5,275 10% 4,486 68 (2,806) (1,500) (419) (176) (292) (490) (1,128) (159) 1,403 (1,352) (108) 5,214 -19%
Longfor 12,626 40,000 41,390 18,260 23,130 10% 19,672 270 (8,764) (6,500) (513) (234) (828) (549) 2,555 (258) 4,382 (2,242) 1,882 17,063 35%
Shimao 12,250 36,000 31,185 14,241 16,944 10% 14,411 395 (7,119) (4,500) (1,112) (277) (888) (1,204) (295) (377) 3,560 (4,038) (856) 11,099 -9%
Shui On Land 4,418 10,000 8,000 5,300 2,700 10% 2,296 414 (1,849) (2,600) (397) (234) (359) (635) (3,362) (218) 2,086 924 (2,853) (61) 995 -77%
SOHO 11,440 23,000 15,000 8,000 7,000 10% 5,954 124 (1,899) (2,100) (202) (541) (160) (172) 1,003 (363) 950 (2,480) (1,893) 10,551 -8%
Yanlord 5,369 11,000 8,500 2,643 5,857 10% 4,981 161 (1,361) (3,095) (285) (671) (307) (506) (1,084) (58) 681 (1,054) (432) 3,853 -28%
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1H12 cash flow estimates (RMB m) Expected 2012 contract sales Cash collection haircut Prop dev proceeds (net of business tax) Other segment income Construction cost Land premium paid SG&A LAT provision t-2 Corporate income tax Interest expenses (cash) Operating cash flow Dividends (cash) Major fund raising Construction loan drawdown ST debt repayment ratio ST debt payment Financing cashflow Ending cash balance Change from June 2011
Agile 20,162 20% 15,242 129 (8,241) 0 (985) (1,243) (1,000) (675) 3,227 (558) 4,121 50% (3,484) 78 12,856 68%
COLI 44,589 20% 33,709 477 (15,254) (8,950) (1,058) (2,018) (2,537) (550) 3,820 (1,306) 7,627 50% (5,669) 652 22,969 49%
CRL 17,312 20% 13,088 1,978 (11,452) (3,200) (1,266) (376) (1,298) (930) (3,457) (1,092) 5,726 50% (5,821) (1,187) 10,064 -36%
Franshion 3,374 20% 2,551 1,572 (2,750) (800) (554) (132) (451) (231) (796) (153) 1,375 20% (2,234) (1,012) 12,953 -21%
GZ R&F 16,137 20% 12,200 1,650 (6,805) (1,700) (1,048) (873) (724) (1,178) 1,521 (773) 3,403 50% (3,259) (630) 11,665 -6%
KWG 5,728 20% 4,330 237 (2,500) (1,500) (373) (347) (334) (573) (1,060) (217) 1,250 50% (1,378) (344) 3,810 -41%
Longfor 22,650 20% 17,123 706 (10,416) (3,054) (628) (832) (999) (541) 1,360 (433) 5,208 50% (3,312) 1,463 19,887 58%
Shimao Shui On Land 15,589 20% 11,785 1,004 (9,052) (3,004) (1,258) (536) (847) (1,409) (3,317) (664) 4,526 50% (3,799) 63 7,846 -36% 4,983 20% 3,767 983 (3,041) (1,000) (430) (108) (325) (784) (938) (322) 2,665 1,521 50% (1,888) 1,975 2,032 -54%
SOHO 8,597 20% 6,499 374 (2,076) (1,300) (369) (1,513) (693) (278) 645 (728) 1,038 50% (1,715) (1,405) 9,790 -14%
Yanlord 4,857 20% 3,672 326 (2,036) (1,650) (320) (635) (409) (618) (1,672) (52) 1,018 50% (868) 98 2,279 -58%
Cash change from June 2011 under stressed contracted sales from base case Projected contract sales in 1H12 Base case 10% decline in contract sales in 1H12 20% decline in contract sales in 1H12
Agile 68% 48% 28%
COLI 49% 27% 5%
CRL -36% -46% -55%
Franshion -21% -22% -24%
GZ R&F -6% -16% -26%
KWG -41% -48% -54%
Longfor 58% 44% 30%
Shimao Shui On Land -36% -46% -55% -54% -63% -71%
SOHO -14% -20% -26%
Yanlord -58% -62% -68%
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Be realistic on policy expectations

Housing sector-specific administrative policies are unlikely to be reversed any time soon, despite
signs of monetary easing

Policy environment is conducive to accelerating industry consolidation Assuming administrative policy status quo in our industry assumptions and stock picking criteria The government wants strong growth and housing affordability
The central governments goal of continued tightening of the real estate sector is to ensure affordable housing for its growing urban population. Along with strong economic growth, reasonable housing prices are a key piece of the governments effort to promote social stability. We expect the government to be more cautious and selective this time given its experience with broad expansionary policies in the aftermath of the global financial crisis when housing prices rose at an unprecedented rate, leading to widespread speculation and discontent across Chinese cities. To the extent that the recent monetary easing may have a contradictory effect on housing affordability, we expect the government to fully utilize other tools to counter this and to protect its success in cooling down a stubbornly strong housing market.
Many tools in the tool box

The government wields many tools to manage the economy. Not surprisingly, the market focuses its attention on the most broad-based tools such as monetary policy. The government will continue to restrict credit access to the developers through bank lending quota as well as measures to deter the flow of entrusted loans and trust loans. The government will continue to shape the banks underwriting policies to promote lower loan-tovalue ratio, a higher proportion of loans to firsttime home buyers, and mortgages for small and medium home purchases. On the structural side, the government will gradually roll out property tax across more cities as the pilot program in Chongqing and Shanghai has proven to be successful. A broad implementation of a properly designed property tax program would
increase holding cost and deter speculation. We believe it is a step in the right direction to diversify local governments funding sources, especially away from traditional land sale revenue. Lastly, while not a market-based measure, HPR remains a potent tool. While many cities face the expiration of HPR at the end of 2011, the central government has stated unequivocally that HPR shall be extended until further notice.
Policy burden here to stay; operation and cost of capital matter more
While macro policies may change, the policy burden on the sector should remain. We believe housing affordability is a long-term goal of the government which is not easily swayed by the undulation of an economic cycle. As such, we argue that while the overall sector may continue to be subdued, the more dynamic players are looking beyond the policy unknown. Instead they
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market share year-to-November reaching 9.2%, as opposed to 5.4% in 2008 and 7.2% at end-2010. Contrary to the broader industry trend with the slowdown in sales volume, consistent delivery in contracted sales has allowed the top-five developers to secure a larger portion of the pie, thereby maintaining their foothold as market leaders characterized by strong operational platforms. Given the nature of HPR, a buyers eligibility to make a purchase may change over time. Hence, a buyer is likely tempted to make a larger and more expensive purchase today rather than follow a traditional path of gradual upgrades over the course of several years. This shift in purchase behaviour leads to greater demand for quality products which are generally associated with large and well known developers. In a pre-sale market, a buyer is making a purchase based solely on a developers reputation as the actual delivery may be several years away. The financial stability of the developer becomes the buyers foremost concern as a cash-strained developer will likely deliver its product late, with poor quality, or fail to deliver all together. Such
are leveraging their lower cost of funding and strong operating platform to increase turnover and gain market share from weaker peers. The sector has matured and has become more competitive, thus fundamentals are more important than ever.
Market share gain still the utmost priority among developers

In light of continual focus on sales delivery and in an environment where the size of the pie is constrained by shrinking transaction volume, developers performance hinges on their ability to gain market share, particularly when credit and policy environments are both pointing to further market consolidation. Indeed, market share gain among the top-five companies that we monitor has continued to dominate, with their aggregate
Contracted sales analysis Oct or Nov Company Agile* COLI* CR Land* Country Garden Evergrande Franshion* GZ R&F* KWG* Longfor* Sino Ocean Shui On Land* Shimao* SOHO China* Vanke Average#
Policy impact will speed consolidation

While it is clear that a continually tightening policy will suppress demand and restrict developers liquidity, it also has the indirect effect of speeding up the market consolidation already under way.
Change in Sales value m-o-m -15% -51% -15% -43% -86% n/a 37% -6% -31% -19% n/a -22% n/a -20%
Change in YT Oct or Nov Sales value y-o-y 0% -38% 4% -29% -81% n/a -37% 61% -26% 0% n/a -51% n/a -36% Sales value RMB m 29,000 67,398 30,070 39,400 79,120 8,800 26,320 10,897 35,640 23,900 6,500 28,457 10,630 115,720
Sales value RMB m 2,800 2,819 2,740 2,500 1,240 n/a 2,810 806 3,010 2,200 n/a 1,742 n/a 8,290
YT Oct or Nov Change in Sales value y-o-y 14% 36% 51% 30% 66% n/a -8% 3% 29% 31% 116% 5% n/a 16% 32%
Oct or Nov vs. 1H monthly average 7% -60% 22% -30% -82% n/a 26% -26% -1% 7% n/a -27% n/a -24% -21%
Oct or Nov
Oct or Nov
2011 Target Sales value RMB m 37,000 68,500 30,000 43,000 70,000 10,000 32,000 15,000 40,000 28,000 10,000 36,000 23,800 140,000
2011 Target Sales % achieved 78% 98% 100% 92% 113% 88% 82% 73% 89% 85% 65% 79% 45% 83% 85%
2011 As of Nov Nov Nov Nov Nov Nov Nov Nov Nov Nov Oct Nov Nov Nov
vs. 2H monthly vs. YT Oct or Nov average monthly average 7% -49% -21% -35% -86% n/a 11% -9% -16% -6% n/a -44% n/a -22% -28% 7% -56% 0% -32% -84% n/a 20% -20% -8% 1% n/a -35% n/a -23% -24%
* Company under coverage
#Average applicable only to the companies announced November numbers
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gravitate toward the same developers with the most financial stability. We have already seen the effect of this in 2011, and this should continue with policy remaining status quo.
concerns drive potential buyers toward the largest and most well capitalized developers. Banks are even more concerned about a developers financial stability as bankruptcy risk is high for many companies in the real estate sector at this point. Given a limited loan quota and a highly risky environment, banks would be well advised to lend to their best customers. Likewise, the banks would also be incentivized to provide mortgages to buyers whom are making their purchases from the strongest developers. The factors discussed above will lead a flight to quality for lenders and buyers alike, which will allow the stronger developers to gain an even greater competitive advantage over their peers. We also believe other industry players, including suppliers, contractors and agents, will also
Market share of key developers (as of November 2011)
Market share of top-five developers (as of November 2011)
600 500 400 300 200 100 0
(RMBmn) 8.9% 8.9%
11. 3%
13.8%
20% 15% 10% 5% 0%
400 300 200
(RMBmn) 5.4% 5.3%
9.2% 7.2%
10% 8% 6% 4%
100 2008 2009 2010 2011
2% 0%
2008
2009
2010
2011 Market Share (RHS
Top 5 (LHS)
Market Share (RHS)
Key dev elopers (LHS)
*Key developers include Agile, COLI, CRL, Country Garden, Evergrande, Gemdale, GZRF, KWG, Longfor, Poly (A share), Shimao, Vanke Source: Company data, CEIC
*Top-five developers (based on contracted sales) include COLI, Country Garden, Vanke, Evergrande and Poly (A share) Source: Company data, CEIC
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Policy summary Date 1Q09 2Q09 Details To encourage the construction of welfare and lower-end-market housing, developers are granted a lower minimum capital ratio of 20% for such homes versus the 30% for other types of commercial housing Ministry of Housing and Urban-Rural Development (MoHURD) publishes a detailed plan outlining annual targets for welfare housing construction through 2011. Ministry of Land & Resources requests local governments to closely monitor land-hoarding situation. Ministry of Land & Resources and NDRC jointly issue policies on land use (based on extension on 2006 regulations), including size limitations on land used for commodity residential developments (< 7 hectares for a small city or town, < 14 hectares for medium-sized cities, and < 20 hectares (300 acres) for large cities) State Council issues four guidelines: (1) increase supply of welfare housing; (2) control speculative purchases; (3) stricter enforcement of existing measures on land auction, land hoarding and pre-sales; and (4) extension of three-year welfare housing construction schedule by one year to 2012 Ministry of Finance, Ministry of Land and Resources, Peoples Bank of China, Ministry of Supervision, Ministry of Audit jointly announce that, the winner of a land auction must post a down payment of 50% immediately with the remaining amount due within one year. A developer is not allowed to participate in any new land auctions if there is outstanding land premium from prior land acquisitions. Exemption year of 5.5% tax of profit being extended to 5 years from 2 years for house resale. Ministry of Finance and Tax Official announced that: For resale of normal residential properties owned less than 5 years, will charge tax based on gain, for all non normal residential properties, will charge tax based on the transaction price. The State Council announces 11 measures: 1. Speed up the construction of low-mid end, small-mid size commercial residential buildings. 2. Increase land supply, especially those allocated for residential developments 3. Differentiate mortgage application according to different situation. 4. Differentiate residential tax according to different situation as well. 5. Reinforce the mortgage risk management. 6. Reinforce the order of property market. 7. Reinforce the management for supply of land and commodity housing sales. 8. Reinforce the market supervision. 9. Increase the construction of affordable housing, targeting by the end of 2012, will solve the problems for 15.4 million low income housing problems. 10. Central government will increase the supportive housing construction; will increase the subsidy of low rental housing in central and west part of China. Local government need to help to solve the problems for low income families. Local government can differentiate treating the execution of land, finance and tax related policy based on its local property market; The State Council announced that for property companies who obtained presale certificated, are required to disclose all the saleable units Central Bank decided to increase the deposit-reserve ratio up by 0.5%, from last weeks statistical number, about 300 billion will be frozen right after the announcement It has been confirmed that ratio of deposit of different commercial banks has been treated differently, for banks with more exposure to property loan are required to have 0.5% higher compared to the level set by central bank 1) SASAC require 78 SOEs to leave property market 2) State Council, 50% down payment, mortgage rate 10% premium to benchmark lending rate for second home buyer; 30% down payment for first home buyer (unit size > 90 sqm GFA) 3) Ministry of Land Resources, released 2010 residential land supply plan, 2010 residential land supply target surged 130% y-o-y, residential land supply for medium-small-size units accounts >40% of total residential land supply. 4) State Council, suspension of third home mortgage, suspended offer mortgage to non-local residence home buyer. 1) Chinas Ministry of Land and Resources has drawn up a list of up to 1,457 idle plots of land pending further investigations. 2) The China Banking Regulatory Commission ordered banks in some areas to run a stress test to gauge the impact of a 50% fall in housing prices. Furthermore, it has reportedly ordered banks to stop offering mortgage loans for 3rd homes in four key cities Beijing, Shanghai, Shenzhen and Hangzhou. 3) Ministry of Housing and Rural Development requested to put together two lists of developers good and bad ones. Stricter measures wrt lending will then be application to developers that fall under the blacklist. 4) Beijing may announce measures to monitor the usage of pre-sales proceeds for developers by setting guidelines on timing and usage of pre-sales proceeds collection. Pre-sales proceeds will first be allocated into an escrow account monitored by regulators and can only be withdraw by phase, depending on development progress. The goal is to allocate the proceeds for construction, rather than land acquisition. 5) Chongqing could be a test point for property tax 6) Restriction on pre-sale proceeds. The notice stated clearly that local governments should establish the regulatory framework for presale proceed and ensure all presale proceeds are deposited in escrow accounts, which are properly monitored by local regulatory authorizes. The proceeds should only be withdrawn for the purpose of construction cost settlement of the same project. 7) On 29-Sep, Ministry of Finance, Chinas Ministry of Land and Resources, Ministry of Housing and Rural Development and State Administration of Taxation have announced a new set of measures. (1) all first-time homebuyers will have to pay at least 30% downpayment, as compared to 20% required for <90sqm flat previously. (2) fund raising restriction (new share and bond issuance, as well as bank borrowing) on developers hoarding land and purposely delaying construction (3) Local government should limit the maximum number of flat purchase per each household. (4) Suspension of the third and subsequent mortgages. (5) Suspension of mortgages to non-residents if 1-yr tax proof cannot be provided. (6) Speeding up LAT review and settlement. (7) Accelerating the pre-launch of property tax. (6) Review the land supply progress of every city. 1) On 7-Oct, Shanghai government has announced new policies in response to Central governments call. (1) Each family could buy only 1 additional home. (2) Raising provision LAT rate. For projects having ASP >100% higher than last years average in the vicinity, provisional LAT tax rate of 5% is applied. For those having ASP higher than last years average by <100%, 3% tax rate is applied. If the projects ASP is less than last years average, the provisional LAT tax rate would remain unchanged at 2%. (3) Mortgage down-payment on all first home purchases will be 30% or above. All mortgages for 3rd or subsequent home purchases should be suspended. (4) For project <30k sqm, the whole project should be pre-sale in one batch. Projects >30k sqm could apply for pre-sale permit by batches, with every batch no less than 30k sqm. 2) Central government urged local authorities to investigate the application of direct price control on soaring property prices
35
12/17/09 12/23/09 01/10/10
01/11/10 01/12/10 01/29/10 2Q10
3Q10
4Q10
Source: State Council, HSBC
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Policy summary (contd) Date 4Q10 Details
On 19-Dec, Ministry of Land Resources announced that local land authorities must report the land transaction within 2 days if: (1) the total consideration or accommodation value (per sqm) set a new high record in the city, or (2) the transaction price has >50% premium above reserved price . Cities and counties should not provide land for high-end housing for the rest of 2010 if they had not provided >70 percent of total land supply to shantytown renovation, the construction of affordable homes and medium-priced commercial housing for the year. The Ministry of Land Resources also reiterated that land hoarders are not eligible to acquire lands through tenders or auctions. 4Q10 On 30 Dec, the Ministry of Land Resources released a list of 26 idle sites, along with the names of the parent companies that own the lands. The construction works were scheduled to commence in 1993 to 2005. The Ministry reiterated that companies that have not commenced construction more than a year post-acquisition will be subject to a penalty, while companies that have left the land idle for more than two years will see the land confiscated. The Ministry also reiterated that land hoarders are not eligible to participate in land auctions or tenders. 1Q11 1. Local city and provincial governments have to set an annual price growth target for new flats. 2. Accelerate the construction of public housing. 3. Local residents could purchase one additional property only. Local families that already owned 2 or more units are prohibited from additional home purchase. Foreigners are not allowed to buy additional home. 4. Individuals are subject to sales tax if they re-sell the flats within five years. The total consideration would be taxable. 5. The execution of the LAT rules should be strictly enforced. 6. Down payment for second homes shall not be less than 60% of the property value. 7. Mortgage rates for second homes shall not be lower than 1.1x benchmark rate 8. Land supply for social housing, shanty house redevelopment and commodity developments of small-to-medium sized units shall not be lower than 70% of total land supply. 9. Land sites which have been idle for two or more years will be reclaimed 01/20/11 PBoC raised RRR by 50bp 01/18/11 Purchase Limit Policy implemented in Kunming 01/21/11 Purchase Limit Policy implemented in Jinan 01/26/11 New eight measures: (1) raise the minimum down-payment for second and above homes to 60%; (2) ban the purchase of second homes in all major cities, including all tier-1 cities and most tier-2 and tier-3 cities; (3) strictly implement the 5.5% business tax on the sales proceeds of properties with holding of less than five years; 4) require local governments to set price control target and to effectively manage the land supply and constructions of public housing. 01/27/11 Shanghai and Chongqing have introduced property taxes. Chongqing will levy property tax on villas owned by individuals; luxury, stand-alone homes, and newly purchased high-end homes are taxed at three different rates: 0.5%, 1% and 1.2%. Shanghai will levy a temporary 0.6% tax on second homes newly bought by Shanghai resident families and first homes newly bought by non-resident households. It may cut the rate to 0.4% for properties whose transaction prices are lower than twice the ASPs of last year. 02/01/11 Shanghai issued a new strict version of purchase limit policy 02/12/11 Purchase Limit Policy implemented in Nanning 02/24/11 PBoC raised RRR by 50bp 2/16/2011- More cities, including Beijing, Guangzhou, Nanjing, Taiyuan, Ningbo etc., announced the implementation details of their purchase limit policy 2/24/2011 03/07/11 Premier WEN said to start construction of affordable housing, urban regeneration units up to 10mn units in 2011 03/11/11 35 cities has announced housing purchase limit 03/12/11 Ministry of Land and Resources required on-going land auction price shall never above history high level 03/22/11 NDRC(National Development and Reform Commission) announced one price for one unit, developers are not allowed to charge additional cost beside the listed price. Developers can sell properties at discount, but additional increase for asking price need to be reported in advance. 03/23/11 NDRC (National Development and Reform Commission) announced to lower or cancel some transaction cost: including inheritance, bequeath, transfer between spouse, exempt transaction cost for low-rental, public-rental housing, 50% off for price-restricted housing and urban regeneration housing. It also required to regulate the cost for construction related fees, cost for environment valuation, agency cost for biding activities. 03/25/11 PBoC raised RRR by 50bp 03/28/11 Beijing provision LAT rate increased to 2%/5% from 1%/2% 03/28/11 Shanghai to be the first tire one city to set housing price growth below GDP and Income growth, c8%
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Policy summary (cont'd) Date 03/29/11 Details Most cities announced to set their housing price growth before the end of 1Q deadline: Beijing had the toughest set to require housing price keep steady or down Guangzhous housing price growth below GDP and disposable income growth (Guangzhou 2011 forecasted GDP growth 11%) Shenzhens housing price growth below GDP and disposable income growth (Shenzhen 2011 forecasted GDP growth 10%) Zhaoqings housing price growth below GDP growth Jinans housing price growth below disposable income growth (Jinan 2011 forecasted GDP growth 12%, disposable income growth 12%) Taiyuans housing price growth below GDP and disposable income growth (Taiyuan 2011 forecasted GDP growth 13%, disposable income growth 10%) Lanzhous housing price growth below 9% Xians housing price growth below 15% Haikous housing price growth below disposable income growth (Haikous forecasted disposable income growth 10%) Kunmings housing price growth below GDP and disposable income growth (Kunming 2011 forecasted disposable income growth 10%) Hefeis housing price growth below GDP and disposable income growth (Hefei 2011 forecasted GDP growth 16% and disposable income growth 13%) Yinchuans housing price growth below disposable income growth, and shall be below 10% (Yinchuan is the first city to announce target for housing price growth) Shenyangs housing price growth below GDP and disposable income growth (Shenyang 2011 forecasted GDP growth 12% and disposable income growth 12%) Dandongs housing price growth below 9%-9.5% Jinzhous housing price growth below 13% Guiyangs housing price growth below last years growth( last years growth 17%) Yueyangs housing price growth below 10% Ningbos housing price growth below disposable income growth (Ningbo 2011 forecasted disposable income growth 10%) Xiamens housing price growth below GDP and disposable income growth ( Xiamen 2011 forecasted GDP growth 15%, disposable income growth 12%) Yushus housing price growth below 2010s growth ( 2010s growth 50.5%) Yichuns housing price growth below disposable income growth (average disposable income growth 11.9% from 2007-2010) PBoC raised both 1-year deposit and lending rates by 25bp to 3.25% and 6.31% respectively, effective 6 April Ministry of Housing and Urban-Rural Development Raised both the deposit and the borrowing rate of Housing Accumulation Fund. The New borrowing rate is set to 4.7% for terms greater than 5 years, and 4.2% for terms less than 5 years PBoC announced to increase RRR by another 50bp, effective from April 21 NDRC implements One home one price PBoC announced to increase RRR by another 50bp, effective from May 18 Ministry of Land and Resources required local government to report land sales details if the transacted price is 50% above reserved price or the transacted A.V sets a historical high NDRC (National Development and Reform Commission) allowed local government finance vehicle (LGFVs) to issue bonds for public housing developments. Government plans to extend the home purchase limit to Tier2/3 cities. Hangzhou stopped the third unit housing mortgage, first house down payment increased to 60% and mortgage rate is 10% above the benchmark interest rate For property companies who tends to stock the land, change the plot ratio, delay the launch schedule and other illegal activities will be fined by RMB10,000 to RMB30,000. Ministry of Housing and Urban-Rural Development has announced five criteria to select the new cities under home purchase restriction: (1). Select cities whose Jan-June new home price increase was top ranked or June new home price had a big increase y-o-y; (2). Cities whose June new home price increase from end of 2010 was equal or larger than the government guidance; (3) Cities whose Jan- June new home transaction was much higher than the level last year; (4) Cities which are outside the purchase restricted area and has quite a few non-local buyers;(5) Cities whose housing price up significantly compared to last year and has a lot of discontent about the local housing price. Department of Housing and Urban Construction said for cities who meet the two more criteria above might be put under new purchase restriction. Ministry of Land has announced to add 22 more new cities to the list whose agricultural land usage and land acquisition needs to be approved by State Council. The cities include: Qinhuangdao, Zhenjiang, Nantong, Yangzhou, Taizhou, Jiaxing, Shaoxing, Taizhou, Wenzhou, Maanshan, Dezhou, Dongyin, Weihai, Nanyang, Jiangmen, Huizhou, Zhuhai, Foshan, Zhongshan, Dongguan, Guilin and Sanya. The list increased to 84 cities. Central Bank decided to include margin deposit as part of reserve requirement, and effective from Sep 5th. Hubei Housing and Construction Department announced for those cities that couldn't control housing price under its target by the end of October, are required to be under purchase restriction. Premier Mr. Wen Jiabao went to Wenzhou to investigate the credit crisis situation in Wenzhou and said to support small business in Wenzhou
04/06/11 04/07/11 04/17/11 05/01/11 05/11/11 05/31/11 06/20/11 07/15/11 08/10/11 08/10/11 08/17/11
08/24/11
08/27/11 09/03/11 10/4/2011
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Policy summary (cont'd) Date 10/11/2011 Details Foshan local government announced that residents under the four categories below will be exempt from the Home Purchase Limit: 1. Foreigners who can fulfil the requirements of the distinguished talent migration program and possess the required certificate/proof are exempt from the purchase restrictions for foreigners. 2. Purchase restrictions do not apply for the transfer of properties for which an application for real estate ownership certificate was made more than five years ago. 3. On top of the allowance under the existing policy, Foshan local residents are allowed to purchase one more unit of property under RMB7,500/sqm. 4. Properties of local households that are classified under the "village redevelopment" programme can be exempted from the purchase restrictions, conditional upon the household purchasing a newly constructed property under RMB7,500/sqm. More than 14 cities have increased their first housing mortgage rate: Beijing, Shanghai, Shenzhen, Hanghzou has increased their mortgage rate by 5%-10%; Chengdu, Jinan has increased by 5%-20%; Changzhou and Wuhan has increased by 10%-30%, Changchun increased most, for some of its share holding banks the mortgage rate increased by 50% to 10.575%. Nanjing and Changzhou to increase mortgage cap of social reserve fund: Nanjing announced to increase mortgage cap of social reserve fund from RMB200,000 per person, RMB400,000 per home to RMB300,000per person, RMB600,000 per home. Changzhou also increased the mortgage cap for first home buyers and economic housing buyers the limit from RMB240,000 per head to RMB300,000 per head; the limit for couple increased from RMB400,000 to RMB500,000. Zhuhai local government announced that for non-local residents who failed to provide proof of 1-2 years' local tax payments or social insurance are not allowed to purchase an apartment in Zhuhai. Developers are not allowed to sell their projects at ASPs higher than RMB11,285/sqm for the rest of the year. Guangdong announce to set up public rental financing companies to better finance social housing construction, and plan to provide more public rental housing as the major products of social housing, instead of economic housing and price capped housing. Zhongshan local government announced that online commodity housing contracts with ASPs higher than RMB5,800/sqm are not allowed to register for the rest of the year Zengcheng government official said Zengcheng will continue housing price control over next year and target to control housing price growth capped at 10%. According to Chongqing Finance Bureau, home buyers who acquired their units after 12th January 2008 are legible to receive the government tax refund. The policy applies to residents who are living in major areas, such as Yuzhong, Jiangbei, Shapingba, Jiiulongpo, Dadukou and Nanan etc. The refund amount will be the income tax payment or total mortgage payment during the financial year, whichever lower. Chongqing government said the tax refund aims at attracting more talents to live in Chongqing. Wuhan government to set the maximum price for economic housing in city center at RMB23,307/sqm. Chengdus Bureau of Housing and Urban-Rural Development tried to ease the home purchase restriction by granting developers and property agents the right to verify the qualification of buyers when signing up transactions online. The government would only check the qualification of buyers when the buyers register for the housing ownership certificate. It was seen a big move to loose the home purchase restriction, but this action was suspended after only one week of practice. Last week, the Chengdu government announced on its website that it would strictly implement the home purchase restrictions and will make sure all the purchases met official criteria. 6 rural banks in Zhejiang are allowed to lower the reserve ratio from 16.5% to 16%, effective from 25th November. Market participants believed that central government may adopt loosening policies to promote the economy. That said, Peoples Bank of China did not show signs of loosening credit. New loans by big four banks amounted to only RMB100bn for the first 20 days of November, implying that the overall new loan may be no more than RMB500bn for November, down 15% m-o-m. Hangzhou government will provide subsidy to senior management staffs of companies which are operating in Hangzhou Economic and Development Zone. The companies will receive 2 to 25 subsidy quotas based on their annual sales revenue. For those companies generating more than RMB10bn revenue per year, 25 management staffs will be subsidized. Each individual will receive RMB100k upfront and a reimbursement of mortgage interest cost in the following 36 months. Beijing government has enlarged the pool of home buyers eligible for preferential rates on revenue tax and deed tax. Effective from 10 December 2011, Houses less than 140 sqm and with ASP less than RMB17,280 to 38,880/sqm, depending on location can qualified for the tax break. The government estimated that more than 70% of new home purchases will qualify under the new rule. PBoC announced a RRR cut by 50bps
10/18/2011 10/27/2011
11/1/2011 11/3/2011 11/10/2011 11/14/2011 11/15/2011
11/23/2011 11/24/2011
11/24/2011
11/25/2011
11/26/2011 11/30/2011
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Key property market data
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Land
Land purchased vs. land developed Beijing Land purchased vs. land developed Shanghai Land purchased vs. land developed Tianjin
30 (mn sqm) 20
15 (mn sqm) 10
16 (mn sqm) 12 8
10
5 4 0 2000 2002 2004 2006 2008 2010 2000 2002 2004 2006 2008 2010 0 2000 2002 2004 2006 2008 2010 land area purchased
Source: CEIC
land area purchased

Source: CEIC
land area dev eloped

Source: CEIC
land area purchased
Land purchased vs. land developed Chongqing
Land purchased vs. land developed Guangdong province
Land purchased vs. land developed Zhejiang province
20 (mn sqm) 15 10 5 0 2000 2002 2004 2006 2008 2010
40 (mn sqm) 30 20 10 0 2000 2002 2004 2006 2008 2010
40 (mn sqm) 30 20 10 0 2000 2002 2004 2006 2008 2010
land area purchased

Source: CEIC

Source: CEIC
land area purchased

Source: CEIC
land area purchased
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Real estate investment

Real estate investment Beijing Real estate investment Shanghai Real estate investment Tianjin
90% 70% 50% 30% 10% -10% 04 05 06 07 08 09 10 YTD11 YoY change on GDP YoY change on RE inv t - residential YoY change on RE inv t
40% 30% 20% 10% 0% -10% -20% 04 05 06 07 08 09 10 YTD11 YoY change on GDP YoY change on RE inv t YoY change on RE inv t - residential
40% 30% 20% 10% 0% 04 05 06 07 08 09 10 YTD11 YoY change on GDP YoY change on RE inv t - residential YoY change on RE inv t
Source: CEIC
Source: CEIC
Source: CEIC
Real estate investment Chongqing
Real estate investment Guangdong province
Real estate investment Zhejiang province
50% 40% 30% 20% 10% 0% 04 05 06 07 08 09 10 YTD11 YoY change on GDP YoY change on RE inv t YoY change on RE inv t - residential
50% 40% 30% 20% 10% 0% -10% 04 05 06 07 08 09 10 YTD11 YoY change on GDP YoY change on RE inv t YoY change on RE inv t - residential
Source: CEIC
40% 30% 20% 10% 0% 04 05 06 07 08 09 10 YTD11
YoY change on GDP YoY change on RE inv t YoY change on RE inv t - residential
Source: CEIC
Source: CEIC
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Weekly new home sales (number of units)

Tier-1 cities Tier-2 cities Yangtze River Delta area
16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 May -08 Feb-09 Oct-09 Tier-1 cities
Source: Soufun
35,000 30,000 25,000 20,000 15,000 10,000 5,000 Jun-10 Feb-11 Nov -11 Av erage
Source: Soufun
14,000 12,000 10,000 8,000 6,000 4,000 2,000 May -08 Feb-09 Oct-09 YRD Area
Source: Soufun
May -08 Feb-09
Oct-09 Jun-10
Feb-11 Nov -11
Jun-10
Feb-11 Nov -11 Av erage
Tier-2 cities
Av erage
Western/ Central area
Pearl River Delta area
Bohai Rim area
25,000 20,000 15,000 10,000 5,000 May -08 Feb-09 Oct-09 Jun-10 Feb-11 Nov -11 Av erage
9,000 7,500 6,000 4,500 3,000 1,500 May -08 Feb-09 Oct-09 PRD Area
Source: Soufun
8,000 6,000 4,000 2,000 Jun-10 Feb-11 Nov -11 Av erage

Source: Soufun
May -08
Feb-09
Oct-09 Bohai-Rim
Jun-10
Feb-11 Nov -11 Av erage
Western/Central
Source: Soufun
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Secondary residential property price index (May 2004 = 100)

Beijing Shanghai Guangzhou
350 300 250 200 150 100 50 0 May -04 Mar-06 Jan-08 Nov -09 Sep-11
300 250 200 150 100 50 0 May -04 Mar-06 Jan-08 Nov -09 Sep-11
400 350 300 250 200 150 100 50 0 May -04 Mar-06 Jan-08 Nov -09 Sep-11
Source: Centaline China
Shenzhen
Tianjin
Annual growth
400 350 300 250 200 150 100 50 0 May -04 Mar-06 Jan-08 Nov -09 Sep-11
500 400 300 200 100 0 May -04 Mar-06 Jan-08 Nov -09 Sep-11
60% 50% 40% 30% 20% 10% 0% -10% -20% 2008 BJ

2009 SH GZ
2010 SZ
2011 YTD TJ
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Secondary residential property rental index (May 2004 = 100)

Shenzhen
Tianjin
Annual growth
130 120 110 100 90 80 May -04 Mar-06 Jan-08 Nov -09 Sep-11
15% 10% 5% 0% -5% -10% -15% 2008 BJ

2009 SH GZ
2010 SZ
2011 YTD TJ
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Secondary residential rental yield

6% 5% 4% 3% 2% 1% 0% May -04 Mar-06 Jan-08 Nov -09 Sep-11
5% 4% 3% 2% 1% 0% May -04 Mar-06 Jan-08 Nov -09 Sep-11
8% 7% 6% 5% 4% 3% 2% 1% 0% May -04 Mar-06 Jan-08 Nov -09 Sep-11
Shenzhen
Tianjin
Annual growth
1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 2008 BJ

2009 SH GZ
2010 SZ
2011 YTD TJ
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Residential supply and demand (y-t-d through Oct 2011)

Supply & demand Beijing Supply & demand Shanghai Supply & demand Tianjin
80 60 40 20 0
(mn sqm)
(x )
12 10 8 6 4 2 0
100 80 60
(mn sqm)
(x )
8 6 4
60 50 40 30 20 10 0
(mn sqm)
(x )
6 5 4 3 2 1 0
40 20 0 00 01 02 03 04 05 06 07 08 09 10 YTD Area under construction Area sold

Source: CEIC
2 0
00 01 02 03 04 05 06 07 08 09 10 YTD Area under construction Area sold

Source: CEIC

Source: CEIC
Area completed AUC/Area sold (RHS)
Supply & demand Chongqing
Supply & demand Guangdong province
Supply & demand Zhejiang province
175 150 125 100 75 50 25 0
(mn sqm)
(x )
6 5 4 3 2 1 0
300 250 200 150 100 50 0
(mn sqm)
(x )
6 5 4 3 2 1 0
200 (mn sqm) 150 100
(x )
10 8 6 4
50 0 00 01 02 03 04 05 06 07 08 09 10 YTD Area under construction Area sold

Source: CEIC
2 0

Source: CEIC

Source: CEIC
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Office
Capital & rental value index Beijing Capital & rental value index Shanghai Capital & rental value index Guangzhou
300 250 200 150 100 50
(1Q00 = 100)
200 150 100 50 0
(4Q96 = 100)
210 180 150 120 90
(4Q03 = 100)
1Q00
2Q02
3Q04
4Q06
1Q09
2Q11
4Q96 4Q98 4Q00 4Q02 4Q04 4Q06 4Q08 4Q10 Rental Value Index
Source: JLL
4Q03
1Q05
2Q06
3Q07
4Q08
1Q10
2Q11
Rental Value Index

Source: JLL
Capital Value Index
Capital Value Index

Source: JLL
Rental Value Index
Capital Value Index
Supply, take-up & vacancy Beijing
Supply, take-up & vacancy Shanghai
Supply, take-up & vacancy Guangzhou
1.5 1.3 1.0 0.8 0.5 0.3 0.0
(mn sqm)
(%)
30% 25% 20% 15% 10% 5% 0%
1.0 0.8 0.6 0.4 0.2 0.0
(mn sqm)
(%)
35% 30% 25% 20% 15% 10% 5% 0%
0.8 0.6 0.4 0.2 0.0
(mn sqm)
(%)
30% 25% 20% 15% 10% 5% 0%
2000
2003
2006
2009
2012e
2015e
2000
Completions (LHS) v acancy (RHS)

Source: JLL
Absorption (LHS)
Source: JLL
2003 2006 Completions (LHS) v acancy (RHS)
2009
2012e 2015e Absorption (LHS)
2005
2007
2009
2011e
2013e
2015e
Completions (LHS) v acancy (RHS)

Source: JLL
Absorption (LHS)
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Key indicators for residential property 2004 Investment in real estate (RMBm) National Beijing Shanghai Guangdong province Tianjin Chongqing Investment in residential properties (RMBm) National Beijing Shanghai Guangdong province Tianjin Chongqing Residential properties completion volume (mn sqm) National Beijing Shanghai Guangdong province Tianjin Chongqing Residential properties sales volume (mn sqm) National Beijing Shanghai Guangdong province Tianjin Chongqing Residential properties sales value (RMBm) National Beijing Shanghai Guangdong province Tianjin Chongqing Implied ASP for residential properties (RMB/sqm) National Beijing Shanghai Guangdong province Tianjin Chongqing
Source: CEIC
2005
2006
2007
2008
2009
2010
Jan-Oct11
1,315,825 147,329 117,546 135,584 26,392 39,309 883,695 77,599 90,067 88,942 17,524 20,869 347 23 31 28 10 12 338 23 31 30 8 11 861,937 108,511 176,266 99,232 23,487 17,900 2,549 4,747 5,761 3,298 2,950 1,573
1,575,930 152,501 124,686 149,828 32,754 51,773 1,076,819 77,953 92,084 98,856 23,493 30,037 400 28 27 27 13 17 498 28 28 42 13 18 1,498,605 173,994 190,605 177,946 50,344 34,044 3,010 6,162 6,698 4,201 3,991 1,902
1,938,246 171,987 127,559 183,435 40,232 62,963 1,361,162 86,362 83,563 129,475 31,134 37,678 432 22 27 32 13 17 544 22 26 46 13 20 1,703,801 162,630 184,104 213,568 61,951 41,870 3,132 7,375 7,039 4,605 4,649 2,070
2,527,965 199,582 130,753 251,005 50,530 84,990 1,801,025 99,166 83,753 179,429 34,282 52,182 478 19 28 33 14 18 691 17 33 57 14 33 2,532,348 184,597 270,630 320,312 78,104 85,673 3,665 10,661 8,253 5,653 5,557 2,588
3,057,982 190,874 136,687 293,234 65,372 99,100 2,208,126 94,056 84,363 213,252 45,933 61,953 477 14 18 35 15 20 559 10 20 44 11 27 2,042,406 120,137 160,847 251,934 63,557 70,482 3,655 11,648 8,182 5,754 5,598 2,640
3,623,171 233,771 146,418 296,132 73,518 123,891 2,561,874 90,662 91,868 210,392 49,486 78,902 596 16 15 38 16 24 862 19 29 66 15 38 3,815,721 248,677 362,023 417,372 96,536 123,171 4,427 13,224 12,364 6,366 6,605 3,266
4,826,707 290,107 198,068 365,969 86,664 162,026 3,403,814 150,895 122,983 253,802 56,539 109,149 612 15 14 42 16 22 931 12 17 66 14 40 4,395,333 206,052 239,535 459,150 107,027 161,064 4,724 17,151 14,213 7,006 7,913 4,040
4,992,282 248,468 174,700 372,901 86,378 159,448 3,583,212 145,566 110,157 269,226 52,414 111,124 400 6 10 28 5 17 710 7 11 52 10 30 3,641,738 122,331 162,024 394,418 86,446 137,573 5,131 17,558 14,153 7,627 8,543 4,603
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China - Residential Sales (2011 through November) Region National Eastern China Beijing Tianjin Hebei Shanghai Jiangsu Zhejiang Fujian Shandong Guangdong Hainan Central China Shanxi Jilin Anhui Jiangxi Henan Hubei Hunan Western China Guangxi Chongqing Sichuan
Source: CEIC
Jan - Nov 2011 GFA Sold (m sqm) 796.4 373.4 7.7 11.2 45.1 12.1 58.1 24.0 19.5 72.8 57.8 7.6 203.9 9.0 15.6 32.8 17.2 43.8 26.7 36.6 219.1 22.6 33.5 47.9
Amt (RMB bn) 4,058.1 2,396.7 133.2 95.6 170.8 173.6 357.9 240.6 142.9 314.2 439.8 68.5 776.6 28.9 67.4 147.1 65.2 138.4 111.2 132.3 884.8 82.1 153.1 223.3
Jan - Nov 2011 GFA Sold (m sqm) 740.6 357.7 10.0 10.3 34.3 14.5 65.4 32.2 18.2 64.8 52.5 7.3 181.4 8.6 13.0 29.1 17.4 38.1 24.4 33.3 201.4 21.2 32.5 47.2
Amt (RMB bn) 3,567.9 2,252.5 173.9 80.0 115.8 219.3 366.5 300.5 110.1 247.1 371.3 64.3 607.5 29.5 48.5 116.4 52.8 107.2 88.7 100.5 707.9 72.2 129.9 189.0
YoY Growth GFA Sold 8% 4% -23% 8% 31% -17% -11% -26% 7% 12% 10% 5% 12% 5% 20% 13% -1% 15% 9% 10% 9% 7% 3% 2%
Amt (RMB bn) 14% 6% -23% 20% 47% -21% -2% -20% 30% 27% 18% 7% 28% -2% 39% 26% 23% 29% 25% 32% 25% 14% 18% 18%
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Company write-ups
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Agile (3383 HK)

Differentiated business model focusing on large-scale suburban projects; low land cost and
economies of scale afford pricing flexibility and mid-market focus

Continued progress on the Hainan project validates the companys vision; recent soft launch of
Shanghai Marriott bodes well for upcoming commercial development in Hainan

Reiterate OW(V) with a reduced TP of HKD8.4 (from HKD9.6) due to lower ASP and higher discount
rate; likely to miss annual target due to slower contract sales, but earnings impact limited
Key highlights
Differentiated business model focusing on large-scale suburban projects
Agile has a distinctive business model with a successful track record, focusing on large-scale suburban developments in its home base of Guangdong. Capitalising on low land cost and economies of scale, the companys mid-market target product has generally been well received.
operational and market standpoints. The higher ASP seen in successive phases appears to validate the companys vision. The recent soft launch of Shanghai Marriott was the first internationally branded hotel development by the company. Its success bodes well for the development of commercial projects in Hainan, a crucial step for the entire development.
for large-scale greenfield developments. This should lessen the risk of the large-scale Hainan project. We lower our 12-month forward NAV due to an upward revision of WACC and revised assumption of expected ASP and contracted sales schedule. Our TP of HKD8.4 suggests a potential return of 26%, including 6% dividend yield, which is above the Neutral band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risk includes slower-than-expected execution of commercial development in Hainan.
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Valuation and risks

We reiterate our OW(V) rating with a reduced TP of HKD8.4, set at a 45% discount to our 12-month forward NAV of HKD15.2 (down from HKD20.5 previously). The target discount is narrowed from -53% (-1 SD) to -45% (-0.5 SD) to reflect the recent launch of Shanghai Marriott, the companys first branded hotel, as well its expertise in provisioning complimentary facilities
Continued progress on the Hainan project with upcoming commercial developments

With two full seasons of sales at the Hainan project, the companys risk profile has fundamentally improved from financial,
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Agile Property
Ratio, growth and per share analysis 12/2010a 12/2011e 12/2012e 12/2013e Year to y-o-y % change 12/2010a 12/2011e 12/2012e 12/2013e
Financials & valuation:

Financial statements Year to Profit & loss summary (RMBm)
Overweight (V)
NAV discount chart
20% 0% -20% -40% -60% -80% -100% J an-06 Mar-07 May-08 % to NAV Mean
Property sales revenue Property investment & other revenue Cost of sales Gross profit Selling & Admin expenses Other gains & misc Operating profit/EBIT Net interest Share of profit from assoc. PBT Taxation Minority interests Net profit Core Profit Cash flow summary (RMBm) Cash flow from operations Capex Changes in investments New shares issued Dividends paid Others Net change in cash Cash at the beginning Cash at the end Balance sheet summary (RMBm) Shareholders funds Long-term liabilities Minority interests Total capital employed Fixed assets Current assets Total assets
20,197 323 (11,131) 9,389 (1,413) (409) 7,567 269 0 11,034 (4,615) (443) 5,976 3,577 (2,549) (748) 386 (802) (233) 6,188 2,241 4,372 6,482 18,681 15,496 1,654 37,879 17,039 52,840 69,878
27,821 339 (14,438) 13,721 (1,779) 65 12,007 (142) 1 11,866 (6,176) (1,065) 4,626 4,626 658 (989) 0 0 (676) 635 (372) 6,482 6,110 22,631 16,461 2,719 43,858 13,964 68,763 82,727
29,496 639 (16,629) 13,506 (1,970) 62 11,597 (109) 102 11,591 (5,592) (1,003) 4,996 4,996 3,282 (2,291) 0 0 (1,117) (533) (658) 6,110 5,452 26,510 19,281 3,722 51,561 17,695 81,429 99,124
36,208 1,146 (22,008) 15,347 (2,357) 55 13,045 (114) 294 13,225 (6,535) (1,179) 5,510 5,510 1,494 (1,014) 0 0 (1,206) 1,021 295 5,452 5,747 30,814 20,302 4,902 58,065 20,294 95,142 115,437
Revenue Operating profit PBT Reported EPS HSBC EPS Ratios (%) ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity(excl. restricted cash) Net debt/equity(incl. restricted cash) Per share data (RMB) Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS (HKD) BV
Agile: NAV breakdown Particulars Development properties Residential Office/retail Investment properties Office/Retail Hotel properties Net debt (excluding restricted cash) Outstanding land premium Outstanding LAT 12M fwd. NAV
54% 103% 201% 229% 97% 11% 22% 6% 37% 17% 8.3 76% 54% 0.52 1.02 0.29 5.38
37% 59% 8% -22% 30% 12% 22% 6% 43% 16% 7.1 68% 58% 1.71 1.33 0.38 6.52
7% -3% -2% 8% 8% 12% 20% 5% 38% 17% 8.3 58% 54% 1.33 1.44 0.41 7.63
24% 12% 14% 10% 10% 12% 19% 5% 35% 15% 9.4 52% 49% 1.44 1.59 0.45 8.87
J ul-09
Sep-10 +1 SD -1 SD
Nov -11
Price relative
20 16 12 8 4 0 20 16 12 8 4 0 Aug-08 Agile properties Mar-10 Rel to HSCEI Oct-11
(RMBm)
(HKD/sh)
% of GAV
Jan-07
63,901 7,504 1,651 5,052 (8,047) 0 (25,344) 44,718
21.7 2.5 0.6 1.7 (2.7) 0.0 (8.6) 15.2
81.8% 9.6% 2.1% 6.5%
Source: Datastream, HSBC
Issuer information
Share price (HKD)

100.0%
7.0 Target price (HKD) 3383.HK 3,102 36 China Derek Kwong
8.4 Potent'l return (%)
26
Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst
Bloomberg (Equity) 3383 HK Market cap (HKDm) 24,112 Enterprise value (CNYm) 34,884 Sector Real Estate Contact +852 2996 6629
Note: price at close of 30 Dec 2011
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China Overseas Land (688 HK)

Industry bellwether with a proven execution platform underlined by consistent sales delivery Significant cost of capital advantage amid continual tightness in credit A conviction stock; reiterate OW (adding the volatility flag) with a reduced TP of HKD21 (from
HKD24.2) due to minor adjustment to target discount on the back of increased market volatility
Key highlights
Overachiever in sales performance
China Overseas Land (COLI) appears is an overachiever in terms of sales delivery. Year-toNovember, COLI posted aggregate sales of RMB67.4bn, or 98% of its full-year target, significantly outpacing peers, which secured 85% on average. At the current pace of sales, we expect COLI to comfortably beat its full-year target, giving it flexibility to pace itself through the end of 2011. For this reason, we would not be surprised to see COLI take a breather in sales in the final months of 2011, particularly as global equity markets remain weak.
yield market and with access to syndicated loans, COLI can borrow at much lower costs than its peers. In our view, the companys significant cost of capital advantage is a key investment attribute, particularly as credit (both onshore and offshore) remains tight amid slowing residential sales. Furthermore, prudent balance sheet management should underpin COLIs financial flexibility against a rather challenging market environment.
Valuation and risks

COLI is a conviction stock. We are OW(V) with a new TP of HKD21, set at a 5% discount (versus par previously) to our 12-month forward NAV of HKD22.1. We tweak the target discount to reflect increased market volatility that leads to a wider measure of standard deviation from mean, but the target discount is effectively unchanged at 0.5 standard deviation above mean. Our TP of HKD21 suggests a potential return of 65%, including 3% dividend yield, which is above the Neutral rating band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risks include any hiccup in contracted sales delivery and deterioration in its cash collection ratio as sales were concentrated in the final months of 1H11.
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Strong earnings visibility

The combination of strong sales in prior years and consistent contracted sales delivery y-t-d is the key reason behind COLIs strong earnings visibility. With unbooked sales of RMB63bn as at July 2011 and aggregate sales of RMB67.4bn y-t-d, COLI should have theoretically secured 98% of its 2012e property development revenue. The strong earnings security is also ahead of the sector, which has locked in 70% of 2012e bookings on average.
Balance sheet strength accompanied by cost of capital advantage

In addition to sales delivery, COLI stands out as having the lowest cost of capital in the sector, as multiple funding channels are made available to it. Without the need to tap into the offshore high
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China Overseas Land & Investment

Financial statements Year to Profit & loss summary (HKDm)
Overweight (V)
NAV discount chart
90% 60% 30% 0% -30% -60% -90% 01 02 03 04 05 06 07 08 09 +1 SD -1 SD 10 11
Property sales revenue Property investment & others Cost of sales Gross profit Selling & admin. expenses Other income and gains Operating profit/EBIT Net interest expense Share of profit from assoc. PBT Taxation Minority interests Net profit Core profit
Cash flow summary (HKDm)
42,962 1,351 (26,539) 17,774 (1,907) 555 16,423 14 335 20,567 (7,898) (296) 12,373 9,807 (3,433) (1,707) (3,435) 4 (2,012) 17,717 7,134 23,781 31,574 54,735 34,324 3,207 100,850 14,373 21,980 125,895 162,248
51,770 1,643 (31,424) 21,990 (2,198) 766 20,558 2 922 23,055 (8,666) (1,060) 13,329 12,315 (10,200) (222) (2,288) 0 (2,697) (2,214) (17,622) 31,574 13,952 64,445 40,006 4,267 117,302 17,051 24,506 153,461 195,018
66,613 75,411 1,932 2,264 (42,497) (48,982) 26,047 28,694 (2,498) (2,716) 0 0 23,549 25,978 (177) (338) 2,060 5,844 25,433 31,484 (10,213) (14,534) (1,227) (886) 13,993 16,064 13,993 16,064 6,830 (182) (2,152) 0 (3,083) 1,682 3,096 13,952 17,048 73,294 40,389 5,494 127,761 18,350 26,943 193,966 239,260 5,123 (30) (1,776) 0 (3,503) 1,050 865 17,048 17,914 80,012 40,404 6,380 135,380 19,672 29,062 238,734 287,468
Revenue Operating profit PBT Reported EPS HSBC EPS

Ratios (%)
19% 71% 71% 65% 50% 12% 17% 6% 42% 22% 18.1 24% 23% 1.51 1.20 0.27 6.70
21% 13% 12% 8% 26% 13% 21% 7% 40% 23% 16.3 44% 43% 1.63 1.51 0.38 7.89
28% 14% 10% 5% 14% 14% 20% 6% 35% 20% 15.1 37% 36% 1.71 1.71 0.43 8.97
13% 10% 24% 15% 15% 15% 21% 6% 34% 21% 16.2 34% 33% 1.97 1.97 0.49 9.79
ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity (excl-restricted cash) Net debt/equity(incl-restricted cash)
Per share data (HKD)
% to NAV Mean
Price relative
21 18 15 12 9 6 3 21 18 15 12 9 6 3 Aug-08 China Ov erseas Land Inv t Mar-10 Oct-11 Rel to HSCEI
Cash flow from operations Capex Change in investments New shares issued Dividends paid Others Net change in cash Cash at the beginning Cash at the end
Balance sheet summary (HKDm)
Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS BV

COLI: NAV breakdown
(RMBm) Development properties Residential Others Investment properties Office/retail Industrial Car parks Net debt Outstanding LAT Outstanding land premium 12M fwd. NAV
(HKD/sh)
% of GAV
Jan-07
Shareholders' funds Long-term liabilities Minority interests Total capital employed Fixed assets Other assets Current assets Total assets
193,707 59 15,537 135 29 (24,177) (18,959) (12,707) 153,623
27.9 0.0 2.2 0.0 0.0 (3.5) (2.7) (1.8) 22.1
92.9% 0.0% 7.0% 0.1% 0.0%
Source: Datastream, HSBC estimates
Issuer information
Share price (HKD) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst
65
100.0%
Bloomberg (Equity) 688 HK Market cap (HKDm) 107,223 Enterprise value (HKDm) 121,773 Sector Real Estate Contact +852 2996 6629
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China Resources Land (1109 HK)

A pick-up in contracted sales momentum saw CRL exceed its 2011 full-year sales target by November Strong fundamentals include solid balance sheet, low cost of capital and a huge recurring income base Upgrade to OW(V) from N with a higher TP of HKD17.6 (from HKD11) on narrowing target discount to
15% (+0.5 SD) from 55% (-1 SD). We add CRL as a conviction stock
Key highlights
Pick-up in contracted sales momentum provides comfort on execution
China Resources Land (CRL) had a strong 2H11 in terms of sales, with 100% of its sales target locked in as of November. Given the improvement in sales momentum, we believe CRL has the flexibility to pace itself through the end of 2011and smooth out December sales to 2012. CRL has planned for several new launches through year-end, including Oak Bay in Beijing and Shanghai.
is around 5%, based on our analysis. In our view, this is a key positive attribute for the company in such a capital-intensive environment.
Valuation and risks

We upgrade to OW(V) from N and a new TP of HKD17.6, set at a 15% discount (versus 55% previously) to our revised 12-month forward NAV of HKD20.7. In our view, operational improvements in recent months, coupled with the cost of capital advantage and balance sheet strength, are the key reasons behind the narrowing of the target NAV discount. Our TP of HKD17.6 suggests a potential return of 44%, including 4% dividend yield, which is above the Neutral rating band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
Key risks include the inability to sustain current contracted sales momentum and to contain gearing levels. Moving forward, CRL needs to take on a prudent land banking approach. Another risk is the potential dilutive impact from largescale asset injection that may require equity issuance at a significant discount.
SOE background provides cost of capital advantage

With SOE backing from its parent company, China Resources Hldg, CRL is able to reap the benefits of significant cost of capital advantage, driven by access to low-cost debt. Following COLIs lead, the companys weighted cost of debt
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China Resources Land

Overweight (V)
NAV discount chart
Property development revenue Property investment & other revenue Cost of sales Gross profit Selling & Admin expenses Other gains Operating profit/EBIT Net interest Share of profit from assoc. Non-operating profit/loss PBT Taxation Minority interests Net profit Core Profit
22,587 3,143 (15,577) 10,152 (1,750) 253 8,655 (36) 48 2,947 11,614 (4,276) (1,312) 6,026 4,268 (11,751) (1,689) (1,959) 26 (1,392) 3,951 (12,815) 3,981 19,873 11,972 45,916 29,252 3,499 3,223 81,891 25,252 4,960 95,425 125,638
27,997 4,379 (19,306) 13,070 (2,495) 0 10,576 (303) 0 3,058 13,331 (4,654) (451) 8,225 5,932 (684) (1,824) (3,684) 5,596 (1,799) 11,552 9,156 0 11,972 21,128 57,937 33,381 3,950 4,295 99,564 30,061 8,807 122,087 160,956
36,754 5,095 (25,681) 16,168 (2,989) 0 13,180 (248) 0 0 12,931 (5,145) (467) 7,319 7,319 8,904 (5,332) (955) 0 (2,573) 9,000 9,044 0 21,128 30,172 62,683 46,453 4,417 4,502 118,055 35,333 9,957 135,300 180,590
46,708 6,455 (35,139) 18,024 (3,646) 1 14,379 (136) 0 0 14,242 (5,655) (361) 8,226 8,226 8,316 (3,714) (1,202) 0 (2,709) 94 784 0 30,172 30,956 68,200 47,814 4,779 4,720 125,512 38,993 11,394 134,035 184,422

Ratios (%)
55% 87% 65% 36% 40% 6% 10% 4% 35% 17% 10.8 56% 1.20 0.85 0.31 9.13
26% 20% 15% 18% 20% 7% 11% 4% 33% 18% 7.7 49% 1.42 1.02 0.36 9.98
29% 25% -3% -11% 23% 8% 12% 4% 32% 17% 5.5 45% 1.26 1.26 0.44 10.80
27% 10% 10% 12% 12% 9% 13% 5% 28% 15% 5.8 40% 1.42 1.42 0.50 11.75
40% 20% 0% -20% -40% -60% -80% -100% 00 01 02 03 04 05 06 07 08 +1 SD -1 SD 09 10 11
ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity
% to NAV Mean
Price relative
24 20 16 12 8 4 24 20 16 12 8 4 0 Aug-08 China Resourc es Land
Source: HSBC
Cash flow from operations Capex Changes in investments New shares issued Dividends paid Others Net change in cash Capital injection Cash at the beginning Cash at the end

NAV breakdown Particulars Development properties Office/retail Residential Investment properties Office/Retail Residential Hotel properties Net debt (excl restricted cash) Outstanding land premium Outstanding LAT 12M fwd. NAV
(HKDm)
(HKD/sh)
% of total asset
0 Jan-07 Mar-10 Rel to HSCEI Oct-11
3,420 91,236 50,745 2,479 19,100 (28,238) (10,419) (8,277) 120,048
0.6 15.7 8.7 0.4 3.3 (4.9) (1.8) (1.4) 20.7
2.0% 54.6% 30.4% 1.5% 11.4%
Shareholders funds Long-term liabilities Minority interests Deferred items Total capital employed Fixed assets Other assets Current assets Total assets
Issuer information
Share price (HKD)

100.0%
12.5 Target price (HKD) 1109.HK 9,279 32 China Michelle Kwok
44
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Franshion (817 HK)

Year-to-November contracted sales progress firmly on target The Changsha land sale marks the beginning of a more exciting growth platform Reiterate OW with a reduced TP of HKD1.9 (from HKD2.5); target discount mildly adjusted to 60% but
remains 1 SD below mean
Key highlights
Firmly on track to achieve contracted sales target
Franshion secured nearly 90% of its contracted sales target of RMB10bn year-to-November, excluding a portion of subscription sales from Beijing Jin Mao Palace that are yet to be contracted. This sales run rate compares favourably with the sector average of c80%. We expect sales to slow down in the final months of 2011, driven by the remaining inventory of Beijing Jin Mao Palace and Shanghai Jinmao Noble Manor.
Following the land sale in Changsha in October, we expect Franshion to continue to sell 600-900mu of land pa in the coming five years. Excluding the portion bought back by the company for secondary development, we expect this development to contribute RMB1-2bn pa, representing 10-20% of our estimated gross revenue.
Valuation and risks

We reiterate our OW rating and set a new TP of HKD1.9 based on a 60% discount (versus 55% previously) to our 12-month forward NAV of HKD4.8 (down from HKD5.4). While we continue to set the target discount at 1 SD below the historical mean, the discount has widened on an absolute basis due to increased market volatility. Our TP of HKD1.9 suggests potential return of 30%, inclusive of 3% dividend yield, which is above the Neutral band of 5-15% for Chinese stocks classified as non-volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risks include slippage in the development schedule/lower-than-expected demand for the Changsha project and lower-than-expected ASP from major en-bloc sales.
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Much improvement seen in earnings visibility

The satisfactory sales of Beijing Jin Mao Palace in 2011 helped secure nearly 30% of our estimated development revenue in 2012, barring any completion slippage. In addition, the company is in negotiation to dispose of another commercial building in Shanghai for an estimated consideration of RMB4bn. Upon materialisation of this en-bloc transaction, the revenue lock-in ratio would reach 50%.
Execution of Changsha project off to a good start

The primary development project at Changsha and continuous disposal of commercial buildings in Shanghai will be key revenue stabilisers for Franshion in the coming five years, in our view.
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Franshion Properties

Overweight
NAV discount chart
0% -20%
Property dev revenue Property inv revenue Hotel income & others Total cost of sales Gross profit Other income and gains SG&A Net interest expense Share of profit from assoc. Non operating profit/loss PBT Taxation Minority interests Net profit Core Profit
2,925 860 2,564 (3,045) 3,303 163 (907) (367) 3 869 3,064 (932) (418) 1,714 1,067 3,115 (135) (1,427) 4,655 (229) 1,667 7,646 3,523 11,230 23,124 10,708 3,595 3,042 40,469 32,169 3,470 15,715 51,355
4,366 957 2,642 (3,772) 4,193 0 (1,031) (574) 0 1,138 3,725 (1,275) (470) 1,981 1,981 (1,131) (380) (824) 0 (229) 8,487 5,922 11,230 17,152 24,876 20,280 4,064 3,240 52,460 32,801 4,235 26,814 63,851
9,615 16,577 965 1,017 2,771 2,993 (7,504) (11,731) 5,848 8,855 0 0 (1,307) (1,668) (261) (288) 0 0 0 0 4,280 6,899 (1,571) (2,775) (405) (1,449) 2,303 2,676 2,303 2,676 2,824 (361) (1,668) 0 (362) (5,200) (4,766) 17,152 12,386 26,818 16,754 4,470 3,458 51,500 33,392 5,910 23,929 63,231 3,635 (1,007) (2,113) 0 (420) (1,525) (1,431) 12,386 10,955 29,073 15,007 5,918 3,698 53,697 34,625 8,037 25,884 68,547

Ratios (%)
0% -3% 24% 36% -5% 3% 5% 2% 40% 17% 3.9 35% 26% 0.19 0.12 0.03 2.52
25% 24% 22% 16% 86% 2% 4% 1% 40% 25% 3.8 43% 30% 0.22 0.22 0.04 2.72
68% 44% 15% 16% 16% 6% 9% 4% 34% 17% 5.2 38% 28% 0.25 0.25 0.05 2.93
54% 58% 61% 16% 16% 7% 10% 4% 35% 13% 8.9 35% 23% 0.29 0.29 0.05 3.17
-40% -60% -80% -100% J an-08 Oct-08 J ul-09 % to NAV Mean

ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity (excl-restricted cash) Net debt/equity (incl-restricted cash)
Apr-10
Jan-11 +1 SD -1 SD
Oct-11
Price relative
7 6 5 4 3 2 1 0 Aug-07 J un-08 Apr-09 Feb-10 Dec-10 Rel to HSCEI Oct-11 Franshion properties 7 6 5 4 3 2 1 0
Cash flow from operations Capex Other investing activities New shares issued Dividends paid Other financing activities Net change in cash Cash at the beginning Cash at the end
Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS (HKD) BV
Franshion: NAV breakdown
(RMBm) Development properties Office/Retail Residential Investment properties Office/Retail Residential Hotel properties GAV Net debt (excluding restricted cash) Outstanding land premium Outstanding LAT 12M fwd. NAV
(HKD/sh)
% of GAV
Shareholders' funds Long-term liabilities Minority interests Deferred items Total capital employed Fixed assets Other assets Current assets Total assets
21,877 4,434 14,029 277 13,895 54,512 (10,629) (3,320) (2,536) 38,027
2.7 0.6 1.8 0.0 1.7 6.8 (1.3) (0.4) (0.3) 4.8
40.1% 8.1% 25.7% 0.5% 25.5% 100.0%
Issuer information
30
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Guangzhou R&F (2777 HK)

Likely to miss already-revised full-year sales target of RMB32bn, unless en-bloc transaction kicks in Management confident of maintaining the dividend payout ratio at the historical level Reiterate OW (adding the volatility flag) with a reduced TP of HKD7.1 (from HKD8.9) based on 60%
target discount (1 SD below mean)
Key highlights
Lags the pack in contracted sales
Year-to-November, Guangzhou R&F secured RMB26.3bn of contracted sales, representing 82% of the revised full-year target (RMB32bn) or 66% of the initial target (RMB40bn), lagging the sector average of 85%. We believe contracted sales for December (and full-year 2011) will hinge on three major new launches in December 2011, namely Guangzhou Yingkai Plaza, Taiyuan Edinburg Residence and Nanjing Qi Lin Hi-tech Park, with total saleable resources of RMB8.7bn. We estimate a sell-through rate of over 70% will be needed for the company to achieve its full-year sales target, which is much higher than the current sell-through rate of about 50%. We therefore expect the company to miss its 2011 full-year sales target by 5%.
Maintaining dividend payout, while slowing acquisition plan for 2012

Since listing in 2005, Guangzhou R&F has consistently distributed 40-45% of underlying profit to shareholders, including in 2008. Management is confident of maintaining a stable payout ratio for 2011, on the back of a reasonable balance sheet and a slowdown in land acquisition. As of November, the company had RMB1.7bn unpaid land premium outstanding, but a strong cash balance of RMB12bn (including restricted cash).
We fine tune the target discount modestly to 60% from 56%, due to increased market volatility that leads to a wider 1 SD from mean, and maintain the target discount at 1 SD below mean. We lower our 12-month forward NAV due to an upward revision of WACC and revised assumption of expected ASP and the contracted sales schedule. Our TP of HKD7.1 suggests a potential return of 26%, including 10% dividend yield, which is above the Neutral band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risk includes slower execution of new launches, especially Guangzhou Yingkai Plaza.
Valuation and risks

In view of the slow momentum in contracted sales year-to-November, we reiterate our OW rating (adding the volatility flag) with a reduced TP of HKD7.1, set at a 60% discount (from 56%) to our 12-month forward NAV of HKD17.8 (from HKD20.4).
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Guangzhou R&F

Overweight (V)
NAV discount chart
120% 90% 60% 30% 0% -30% -60% -90% Mar-07 May -08 Jul-09 % to NAV Mean
Property sales revenue Property investment & other revenue Cost of sales Gross profit Selling & admin. expenses Other income and gains Operating profit/EBIT Net interest expense Share of profit from assoc. PBT Taxation Minority interests Net profit Core profit
Cash flow summary (RMBm)
22,972 1,669 (15,349) 9,293 (1,583) 181 7,892 (863) (68) 8,070 (3,614) (106) 4,351 3,518 4,348 (1,743) (4,790) 0 (1,160) 2,356 (989) 6,642 5,654 19,788 20,669 212 2,155 42,823 16,581 8,784 52,052 77,417
20,312 2,015 (13,349) 8,978 (1,557) 0 7,421 (1,010) 498 6,909 (3,035) 0 3,873 3,873 1,451 0 (744) 0 (1,289) 3,584 3,002 5,654 8,656 21,875 24,398 212 2,370 48,854 16,521 9,248 60,753 86,522
29,927 37,607 2,341 2,759 (22,262) (28,973) 10,006 11,392 (2,140) (2,671) 0 0 7,866 8,721 (1,126) (1,160) 624 791 7,364 8,352 (3,001) (3,366) (49) 0 4,314 4,987 4,314 4,987 3,020 (120) (1,334) 0 (1,549) 1,134 1,151 8,656 9,807 24,015 27,445 260 2,607 54,327 16,611 10,701 65,726 93,038 1,567 (120) (1,270) 0 (1,726) 1,212 (336) 9,807 9,471 26,485 28,357 260 2,868 57,969 16,716 11,984 70,847 99,547

Ratios (%)
35% 67% 66% 50% 44% 8% 19% 5% 32% 14% 8.5 112% 94% 1.35 1.09 0.50 6.14
-9% -6% -14% -11% 10% 9% 19% 5% 33% 17% 7.0 104% 89% 1.20 1.20 0.48 6.79
45% 6% 7% 11% 11% 9% 19% 5% 25% 13% 6.6 95% 79% 1.34 1.34 0.54 7.45
25% 11% 13% 16% 16% 10% 20% 5% 22% 12% 7.0 92% 75% 1.55 1.55 0.62 8.22
Sep-10 +1 SD -1 SD
Nov -11
Per share data (RMB)
Price relative
45 36 27 18 9 45 36 27 18 9 0 Aug-08 Guangz hou R&F Mar-10 Rel to HSCEI Oct-11
Balance sheet summary (RMBm)

GZ R&F: NAV breakdown
(RMBm) Development properties Office/retail Residential Investment properties Office/retail Residential Hotel Properties Net debt (excl. restricted cash) Outstanding land premium Outstanding LAT 12M fwd. NAV
(HKD/sh)
% of GAV
Jan-07
11,683 38,043 13,327 561 13,434 (22,791) (1,700) (3,479) 49,078
4.2 13.8 4.8 0.2 4.9 (8.3) (0.6) (1.3) 17.8
15.2% 49.4% 17.3% 0.7% 17.4%
Source: Thomson Reuters Datastream, HSBC estimates
Issuer information
6.1 Target price (HKD) 2777.HK 805 96 China Derek Kwong
26
100.0%
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KWG Property (1813 HK)

KWG is a quality mid-cap trading at a near-distress valuation; our value pick within the Chinese
property space
Delay in project launches led to lower contract sales in 2H11, full-year sales likely to miss target by
20%, but liquidity position manageable given the absence of large land acquisitions
Reiterate OW (adding the volatility flag) with a reduced TP of HKD4.5 (from HKD8.5) based on a 65%
discount to our forward NAV estimate
Key highlights
Capitalised on the distressed valuation of a quality mid-cap
We reiterate our positive view on KWG, which is now trading near the distressed level of a 78% discount to our forward NAV of HKD13. While the companys operational performance has declined in 2H11, its liquidity position is manageable given the absence of large land acquisitions. The pipeline indicates more project launches in early 2012, which should boost contract sales and act as a key share price catalyst. Our new target is set at a 65% discount to our forward NAV, which captures the 10-20% price decline assumption.
Contract sales to be below annual target

KWG is the laggard of the pack with year-toNovember contracted sales tracking significantly behind schedule at a run rate of only 73% versus the full-year target of RMB15bn. The key reason for the slower-than-expected contract sales has been the lack of new project launches throughout 2011. Thus far, the company has not launched any of its Shanghai projects, and we believe some of these launches did not happen until 2012. In Guangzhou, the company finally launched the Liede project (Riviera) in late November. We believe full-year sales will fall short of the target by c20%.
Valuation and risks

We reiterate OW and add a volatility flag with a TP of HKD4.5 (from HKD8.5). We revise our target discount to 65% or 0.5 SD below the mean on the back of weaker operations in 2H11. Previously, the target discount was 45% or 0.5 SD above the historical mean. We lower our 12-month forward NAV to HKD13 from HKD15.5, reflecting lower ASP and widened WACC assumption. Our TP suggests a potential return of 81%, including 8% dividend yield, which is above the Neutral band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risks include ASP declines greater than our assumptions and continued delay in project launches.
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KWG Property

Overweight (V)
NAV discount chart
75% 50% 25% 0% -25% -50% -75% -100% Sep-07 Feb-09 % to NAV Mean
7,221 245 (4,368) 3,098 (662) 79 2,515 (20) 9 2,508 (1,226) (0) 1,282 1,279 5,570 (688) (4,437) (5,125) 3,679 (145) 3,544 2,737 2,541 5,276 11,584 10 10,050 2,958 24,603 4,806 10,308 24,920 40,034
9,339 314 (5,462) 4,191 (843) 53 3,401 (134) 1 3,268 (1,514) (12) 1,741 1,741 2,939 (233) (762) (996) 3,218 (318) 2,900 1,727 5,276 7,003 13,006 22 11,954 2,958 27,941 5,020 11,071 33,158 49,250
8,168 459 (5,337) 3,290 (753) 70 2,607 (36) 803 3,374 (1,372) (8) 1,994 1,994 5,814 (446) (2,664) (3,110) 904 (433) 471 (36) 7,003 6,966 13,763 30 13,481 2,958 30,233 5,454 13,734 37,291 56,479
9,334 791 (6,530) 3,595 (891) 71 2,775 (40) 1,264 3,998 (1,621) (1) 2,376 2,376 6,306 (445) (2,431) (2,876) 1,527 (496) 1,031 996 6,966 7,962 14,379 31 15,199 2,958 32,568 5,894 16,165 41,280 63,340

Ratios (%)
75% 118% 98% 68% 79% 7% 12% 4% 34% 17% 3.6 61% 48% 0.44 0.44 0.11 4.48
29% 35% 30% 36% 36% 8% 14% 4% 35% 18% 3.3 66% 54% 0.60 0.60 0.15 5.03
-11% -23% 3% 15% 15% 9% 15% 4% 30% 23% 2.2 69% 56% 0.69 0.69 0.17 5.33
17% 6% 19% 19% 19% 10% 17% 4% 27% 23% 2.1 70% 58% 0.82 0.82 0.20 5.57
Jul-10 +1 SD -1 SD
Dec-11
Price relative
18 15 12 9 6 3 0 18 15 12 9 6 3 0 Aug-08 Sep-09 Oct-10 Rel to HSCEI Nov -11
Cash flow from operations Capex Other investing activities Cash flow from invt. activities Bank financing Dividends paid Net cash used in fin. activities Net change in cash Cash at the beginning Cash at the end
Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS BV (HKD)
KWG: NAV breakdown
(RMBm) Development properties Office/retail Residential Investment properties Office/retail Residential Hotel Properties under development Net debt Outstanding LAT Outstanding land premium 12M fwd. NAV
(HKD/sh)
% of GAV
Jul-07
KWG Property
Shareholders' funds Minority interests Long-term liabilities Deferred taxation & others Total capital employed Fixed assets Other assets Current assets Total assets
10,795 26,095 4,412 900 3,855 (8,528) (1,273) (4,160) 32,096
4.4 10.6 1.8 0.4 1.6 (3.4) (0.5) (1.7) 13.0
23.4% 56.7% 9.6% 2.0% 8.4%
Issuer information
2.6 Target price (HKD) 1813.HK 979 39 China Derek Kwong
81
100.0%
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Longfor (960 HK)

Despite the markets concern over recent price cuts, Longfor remains on track to deliver its operational
targets
Strong conviction on managements long-term vision and strategy to create a market leader A conviction stock; reiterate OW(V) with a reduced TP of HKD13.3 (from HKD17.2) based on a 30%
discount to forward NAV of HKD19
Key highlights
Market concerns over contract sales and price cuts appear overdone
The company reignited a brisk pace of contract sales after a slowdown in June and July 2011. We expect the strong momentum to help the company exceed its annual target. Recent price promotions were enthusiastically received by the market, resulting in 90%-plus sell-through rates.
achieved healthy cash flow through strong sellthrough and quick cash collection.
Valuation and risks

We reiterate OW(V) with a TP of HKD13.3. Longfor is one of our conviction stocks in the China property space, and we believe its execution and strategy will continue to support share price outperformance. We revise our target discount to be in line with the historical average. We lower our 12-month forward NAV estimate to HKD19 from HKD21.5, reflecting lower ASP and widened WACC assumptions. Our TP suggests a potential return of 55%, including 3% dividend yield, which is above the Neutral band of 0-20% return around the current share price for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risks include ASP declines greater than our assumptions.
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Aligning operational changes with long-term strategy; enhancing institutional capabilities

The companys long-term strategy is to dominate the mid- to high-end of the market, providing quality products with a compelling value proposition across a broad market segment.
Effectively managing HPR by shifting product mix and geographic focus

Longfor has effectively managed the impact of HPR by shifting product mix and geographic focus. By focusing on market consolidation in key cities in the Western Region and engaging in direct price competition in the Yangtze River Delta and Pan Bohai Region, the company has
IP portfolio of mid-market retail properties to enhance income stability and margin preservation
The company has identified mid-market retail properties as the key recurrent income asset to help preserve margin over the long term. It intends to grow its IP portfolio at a measured pace such that it may contribute up to 25% of net income in 10-15 years.
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Longfor Properties

Overweight (V)
NAV discount chart
0% -20%
14,597 496 (9,996) 5,097 (761) 34 4,370 (7) 183 7,068 (2,051) (887) 4,130 2,570 2,047 (2,574) (5,754) 2,108 (324) 7,559 3,062 6,802 9,863 15,980 14,464 1,386 1,594 33,424 8,213 15,065 48,436 71,714
24,399 746 (15,737) 9,408 (1,025) 0 8,383 (58) 575 8,901 (3,934) (641) 4,326 4,326 (2,886) (1,041) (575) 0 (516) 6,185 1,168 9,863 11,031 19,216 18,648 2,026 1,594 41,484 9,247 15,649 65,875 90,772
32,516 55,222 972 1,317 (22,210) (40,404) 11,278 16,136 (1,255) (1,814) 0 0 10,023 14,322 (78) (89) 609 214 10,554 14,446 (4,583) (6,836) (617) (772) 5,353 6,838 5,353 6,838 456 (1,267) (609) 0 (865) 1,639 (647) 11,031 10,383 23,095 20,759 2,643 1,594 48,091 10,513 16,267 78,340 105,120 1,239 (1,307) (214) 0 (1,071) 1,111 (242) 10,383 10,141 28,648 21,448 3,416 1,594 55,105 11,820 16,490 76,812 105,122

Ratios (%)
33% 47% 74% 50% 36% 11% 18% 5% 30% 17% 8.3 47% 44% 0.80 0.50 0.10 3.10
67% 90% 26% 5% 68% 14% 25% 5% 34% 17% 7.6 65% 61% 0.84 0.84 0.17 3.73
33% 19% 19% 24% 24% 14% 25% 5% 30% 16% 7.4 64% 60% 1.04 1.04 0.21 4.48
69% 42% 37% 28% 28% 15% 26% 7% 25% 12% 9.8 56% 53% 1.33 1.33 0.27 5.56
-40% -60% -80% Nov -09 J ul-10 % to NAV Mean

Mar-11 +1 SD -1 SD
Nov-11
Price relative
16 12 8 4 0 16 12 8 4 0 May -10 Nov -10 May -11 Rel to HSCEI Nov -11 Longfor Properties

Longfor: NAV breakdown
(RMBm) Development properties Office/retail Residential Investment properties Office/retail Net debt Outstanding LAT Outstanding land premium 12M fwd. NAV
(HKD/sh)
% of GAV
Nov -09
24,703 65,503 9,156 (6,472) (3,280) (2,000) 87,611
5.4 14.2 2.0 (1.4) (0.7) (0.4) 19.0
24.9% 65.9% 9.2%
Issuer information
Share price (HKD)

100.0%
55
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Shimao (813 HK)

Contracted sales outlook is grim Success of deleveraging hinges heavily on sales delivery, and scaling back new acquisitions Downgrade to N (adding the volatility flag) from OW with a reduced TP of HKD7 (from HKD8.4), set at
a 60% to our revised 12m forward NAV of HKD17.5
Key highlights
Weakening contracted sales outlook through 2012
Shimaos efforts to deleverage are necessary but initiatives on this front will happen at the expense of growth as the company scales back construction. We forecast contracted sales in 2012 to stay flat y-o-y, after lowering our 2011 sales estimate by 8% to about RMB32bn. This comes on the back of slower-than-expected sales year-toNovember, while 2012s modest outlook is mainly due to constraints in saleable resources given the scaled back construction.
contracted sales target growth of 18% in 2011 is lower than the industry range of 25-64% y-o-y. In order to propel itself to the next level, Shimao needs to be able to achieve stronger sales via higher sell-through rates, which is difficult against a weakening physical market backdrop.
Valuation and risks

We downgrade to N(V) with a lower TP of HKD7, set at a 60% discount (versus 57% previously) to our revised 12-month forward NAV of HKD17.5. Our TP of HKD7 suggests a potential return of 12%, including 7% dividend yield, which is within the Neutral rating band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key downside risks include failure to deleverage and slower-than-expected contracted sales, which will take a toll on cash inflow, while further dampening investors confidence on execution. Key upside risks include higher than expected contracted sales momentum and ASP.
Feasibility of organic deleveraging hinges heavily on sales delivery

Based on our projected contracted sales, we forecast a cash balance of RMB12.5bn by end 2011, which is relatively low and equivalent to around 4.5 months worth of sales. In our view, there are three preconditions to deleveraging: 1) Shimao needs to deliver the projected sales, which are its most significant source of cash; 2) it needs to scale back land acquisitions; and 3) it needs to reduce SG&A expenses.
Difficult to see operational upside

In our view, it will be difficult for Shimaos medium-term sales growth to surprise on the upside, noting that the company beat its 2011 fullyear sales target by the smallest margin among non-SOE developers in 2010. Furthermore, its
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Shimao Property
Ratio, growth and per share analysis 12/2010a 12/2011e 12/2012e 12/2013e Year to y-o-y % change 12/2010e 12/2011e 12/2012e 12/2013e

Neutral (V)
NAV discount chart
20% 0% -20% -40% -60% -80% -100% Jul-06 Aug-07 Sep-08 % to NAV Mean
Property sales revenue Property investment & other revenue Cost of sales Gross profit Selling & Admin expenses Other gains & misc Operating profit/EBIT Net interest Share of profit from assoc. PBT Taxation Minority interests Net profit Core Profit
20,450 26,771 33,146 1,339 1,411 1,749 (13,812) (16,557) (22,546) 7,977 11,626 12,348 (1,824) (2,225) (2,515) 797 0 0 6,950 9,401 9,833 (672) (794) (935) (48) 449 428 8,570 9,056 9,326 (3,079) (3,731) (4,242) (819) (899) (601) 4,672 4,427 4,482 3,563 4,427 4,482 (3,708) (1,254) 25 (1,180) 5,271 6,919 12,140 26,699 24,696 3,255 2,370 57,020 32,787 8,087 54,795 95,669 (759) (1,023) 0 (755) 431 12,140 12,570 29,922 29,369 4,154 2,370 65,815 33,678 8,493 67,641 109,812 420 (1,159) 0 (1,328) (2,269) 12,570 10,301 32,649 27,068 4,755 2,370 66,842 34,771 8,754 72,582 116,107
41,330 2,328 (28,834) 14,824 (2,876) 0 11,949 (935) 387 11,401 (5,392) (1,032) 4,978 4,978 5,250 (1,659) 0 (1,345) (119) 10,301 10,182 35,894 27,117 5,787 2,370 71,168 36,397 8,818 75,300 120,515

Ratios (%)
28% 21% 50% 30% 25% 7% 14% 4% 32% 16% 5.6 82% 76% 1.32 1.01 0.40 8.86
29% 35% 6% -5% 24% 8% 16% 4% 34% 16% 4.0 83% 77% 1.25 1.25 0.44 9.93
24% 5% 3% 1% 1% 7% 14% 4% 28% 13% 3.6 83% 77% 1.26 1.26 0.46 11.10
25% 21% 22% 11% 11% 8% 15% 4% 28% 11% 4.3 70% 63% 1.40 1.40 0.51 12.20
ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity(excl. restricted cash) Net debt/equity(incl. restricted cash)
Oct-09
Nov -10 +1 SD -1 SD
Dec-11
Price relative
30 25 20 15 10 5 0 Jan-07 Aug-08 Shimao Property
30 25 20 15 10 5 0 Mar-10 Rel to HSCEI Oct-11
Cash flow from operations Capex New shares issued Dividends paid Net change in cash Cash at the beginning Cash at the end
Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS (HKD) BV (HKD)
Shimao: NAV breakdown
(RMBm) Development properties Residential Office/retail Investment properties Office/retail Hotel properties Net debt (excluding restricted cash) Outstanding land premium Outstanding LAT 12M fwd. NAV
(HKD/sh)
% of total asset
61,295 10,724 16,726 9,267 (24,869) (13,496) (7,183) 52,464
20.4 3.6 5.6 3.1 (8.3) (4.5) (2.4) 17.5
62.5% 10.9% 17.1% 9.5%
Issuer information
Share price (HKD)

100.0%
12
??
Note: price at close of 30 Dec 2011.
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Shui On Land (272 HK)

Access to a wide range of financing channels improves cash flow and asset turnover Ability to improve asset turnover provides a key milestone Reiterate OW with a reduced TP of HKD2.9 (from HKD4) due to an increase in number of shares and
a wider target discount
Key highlights
Access to various financing channels relieves balance sheet strain
Our cash flow analysis indicates that Shui On Land (SOL) is under more cash flow pressure than its peers. In recognition of such balance sheet strain, management has meaningfully stepped up efforts in sourcing funds over the past few months. Key funding channels include offshore syndicated loans and disposal of non-core assets, as well as minority stakes in other developments. The most recent fundraising deal saw SOL dispose of a 45% effective interest in Lot 18 (GFA of 108,400 sqm) in Foshan Lingnan Tiandi to a Japanese investor for RMB391m. With a buyback clause, this is effectively a financing transaction, rather than an asset sale.
Commercial sales help make up the slack in the residential segment

Following the disposal of a commercial property at Shanghai KIC project for RMB600m, SOL is targeting to offload other non-core assets over the next six months. Specifically, management indicated that the Chongqing project sale, expected to be closed by the end of 2011, could bring in proceeds of RMB3.3bn. Aggregate commercial sales of nearly RMB4bn, coupled with residential sales of RMB6bn through November 2011, should bring SOL to its target of RMB10bn in 2011.
Valuation and risks

We reiterate OW and have a new TP of HKD2.9, set at a 60% discount (versus 55% previously) to our 12-month forward NAV of HKD7.3 (down from HKD8.8). While we have maintained the target discount at 1 SD below the mean, the discount widened on an absolute basis due to increased market volatility. Our TP of HKD2.9 suggests a potential return of 29%, including 5% of dividend yield, which is above the Neutral band of 5-15% for Chinese stocks classified as non-volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key risks include failure to dispose of non-core commercial assets, failure to reach 1m sqm GFA of completion by end-2012, and lower than expected residential demand, particularly for the launches in 4Q11 such as Dalian Tiandi Ph 2.
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Approaching a key milestone for business transformation

At the end of 2012, SOL expects to complete its three-year plan of delivering 1m sqm GFA. In our view, the market will look at this as a milestone for SOL to transform its business model into one that better suits the policy sensitive and dynamic real estate market. Successful implementation should make SOL appeal to a wider group of investors.
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Shui On Land

Overweight
NAV discount chart
20% 0% -20% -40% -60% -80% -100% Nov -06 Feb-08 May -09 % to NAV Mean
Property sales revenue Property investment & other revenue Cost of sales Gross profit SG&A Other income and gains Operating profit/EBIT Net interest expense Share of profit from assoc. Non operating profit/loss PBT Taxation Minority interests Net profit Core Profit
4,133 746 (2,869) 2,010 (703) 76 1,383 192 58 2,734 4,367 (1,357) (201) 2,809 756 (3,793) (3,459) (180) 0 (249) 9,741 2,060 2,928 4,905 24,820 16,601 1,208 4,877 47,506 27,433 4,058 24,762 56,253
5,717 1,112 (3,676) 3,153 (794) 0 2,359 21 78 952 3,411 (1,345) (326) 1,740 1,244 5,505 (9,097) (1,666) 1,768 (437) 4,418 491 4,905 5,396 28,404 16,770 1,534 5,365 52,072 38,575 5,818 26,947 71,339
6,763 1,319 (3,926) 4,155 (861) 0 3,294 (189) 197 0 3,302 (1,221) (501) 1,580 1,580 1,721 (2,017) (228) 0 (643) 1,708 540 5,396 5,935 29,341 21,604 2,034 6,438 59,416 41,944 6,261 32,486 80,692
12,997 1,388 (8,639) 5,747 (1,081) 0 4,666 (144) 215 0 4,736 (1,926) (589) 2,221 2,221 202 (1,500) (240) 0 (739) 329 (1,949) 5,935 3,987 30,823 20,270 2,624 7,725 61,441 44,803 6,735 34,641 86,179

Ratios (%)
-28% -49% 12% 0% -57% 2% 3% 1% 31% 15% 4.9 51% 50% 0.55 0.15 0.11 4.88
40% 65% -22% -42% 54% 2% 4% 1% 37% 18% 2.5 64% 63% 0.32 0.23 0.09 4.88
18% 33% -3% -15% 19% 3% 5% 2% 41% 20% 2.2 65% 63% 0.27 0.27 0.11 5.04
78% 45% 43% 41% 41% 4% 7% 3% 34% 15% 3.0 68% 65% 0.38 0.38 0.15 5.29
ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core profit margin Interest cover ex-exceptional (x) Net debt/equity (excl. restricted cash) Net debt/equity (incl. restricted cash)
Aug-10 +1 SD -1 SD
Nov -11
Price relative
15 12 9 6 3 15 12 9 6 3 0 Aug-08 Shui On Land
Source: DataStream, HSBC
Cash flow from operations Capex Other investing activities New shares issued Dividends paid Other financing activities Net change in cash Cash at the beginning Cash at the end
Reported EPS (fully diluted) HSBC EPS (fully diluted) DPS (HKD) BV
SOL: NAV breakdown
(RMBm) Development properties Residential Investment properties Office/Retail Others GAV Net debt (excluding restricted cash) Outstanding land premium Outstanding LAT Potential CB conversion 12M fwd. NAV
(HKD/sh)
% of GAV
Jan-07
Mar-10 Rel to HSCEI
Oct-11
30,775 29,691 4,101 64,567 (19,137) (3,757) (2,144) (2,720) 36,810
6.1 5.9 0.8 12.7 (3.8) (0.7) (0.4) (0.5) 7.3
47.7% 46.0% 6.4% 100.0%
Issuer information
29
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SOHO China (410 HK)

Subdued sales suggest likelihood of a shortfall However financial liquidity should partially provide a buffer to operational stability Downgrade to N from OW with a reduced TP of HKD5.4 (from HKD6.4); target discount unchanged at
0.5 SD below mean
Key highlights
Risk of contracted sales shortfall
Year-to-October, SOHO recorded contracted sales of RMB10.6bn, well behind the indicated RMB23.8bn target for 2011. While most developers sales through November 2011 are also behind schedule by a varying degree with an average runrate of 85%, SOHO has secured merely 45% of target. In bringing 2011 full-year sales to target, SOHO is heavily dependent on the sales progress of two projects: 1) SOHO Zhongshan Plaza and 2) Wangjing SOHO, which have admittedly been slow since their launch dates in mid August 2011. We see risk of a sales shortfall as slowing demand in commercial real estate is unlikely to result in SOHO reporting sales worth RMB10bn in December 2011.
on hand of RMB18.3bn. Netting off debt and the HKD2.8bn convertible bond, the company is in a net cash position of RMB3.3bn. Such balance sheet strength should allow SOHO to withstand a shortfall in contracted sales, more than its peers with net gearing levels of 40-110% as at June 2011. Stress testing SOHOs balance sheet, we expect its financial liquidity to remain intact even if it does not launch any new projects for sale. Under this scenario, we estimate a reasonably healthy cash balance of RMB8.5bn by end-2012, assuming no new acquisitions
sales schedule and upward revision of WACC. We increase WACC by 120bp to 10.3%, as we increase the assumed cost of debt. While a significant portion of SOHOs land bank is non-residential, our revised ASP assumptions have minimal impact on NAV. Our TP of HKD5.4 suggests a potential return of 10%, including 6% of dividend yield, which is within the Neutral band of 5-15% for Chinese stocks classified as non-volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key downside risks include slower than expected sales progress and lower than expected ASP. Key upside risks include a surprise en-bloc sale that boosts contracted sales and substantial improvement in demand for commercial properties.
Valuation and risks

We downgrade to Neutral with a lowered TP of HKD5.4, set at an unchanged 45% discount (0.5 SD below mean) to our 12-month forward NAV of HKD9.8 (down from HKD11.6 previously). We lower our 12-month forward NAV from HKD11.6 due mainly to the slower than expected
Financial strength to partially buffer sales shortfall

SOHO has been in a net cash position since listing in 2007. As at 17 September 11, SOHO had cash
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SOHO China

Neutral
NAV discount chart
100% 50%
Property sales revenue Property Invt.& other revenue Cost of sales Gross profit SG&A Other income and gains Operating profit/EBIT Net interest expense Non operating profit/loss PBT Taxation Minority interests Net profit Core Profit
18,105 110 (8,958) 9,257 (905) 252 8,603 (68) 165 8,700 (4,928) (135) 3,636 3,512 12,790 (59) (6,618) (1,660) 2,347 6,799 7,123 14,034 19,243 8,037 737 1,060 29,077 3,639 6,072 38,219 47,930
5,467 238 (3,732) 1,973 (401) 0 1,571 (29) 1,997 3,539 (1,548) (4) 1,988 913 (2,195) (1,609) 0 (726) 1,998 (2,533) 14,034 11,501 20,504 10,954 741 1,060 33,259 7,542 6,276 46,687 60,505
15,596 23,772 410 493 (8,083) (12,985) 7,922 11,280 (723) (982) 0 0 7,200 10,297 (190) (264) 0 0 7,010 10,033 (3,130) (4,142) 0 0 3,881 5,891 3,881 5,891 4,988 (1,270) 0 (1,358) (1,218) 1,142 11,501 12,644 23,027 9,935 741 1,060 34,763 9,158 6,521 49,039 64,718 1,603 (1,995) 0 (2,062) 1,893 (561) 12,644 12,083 26,856 11,345 741 1,060 40,002 11,595 6,814 48,680 67,090

Ratios (%)
146% 141% 54% 10% 108% 29% 19% 8% 48% 19% 15.6 net cash net cash
-69% -79% -59% -45% -74% 5% 5% 2% 32% 16% 6.6 net cash net cash
181% 300% 98% 95% 325% 22% 18% 6% 46% 24% 10.8 net cash net cash
52% 42% 43% 52% 52% 24% 24% 9% 43% 24% 12.1 net cash net cash
0% -50% -100% Oct-07 Aug-08 Jun-09 % to NAV Mean Apr-10 Feb-11 +1 SD -1 SD Dec-11
Price relative
15 12 15 12 9 6 3 0 Aug-08 Jun-09 SOHO china
Cash flow from operations Capex Other investing activities Dividends paid Other financing activities Net change in cash Cash at the beginning Cash at the end

SOHO China: NAV breakdown
0.70 0.68 0.26 3.71
0.38 0.18 0.14 3.95
0.75 0.75 0.26 4.44
1.14 1.14 0.40 5.18
9 6 3 0
(RMBm) Development properties Office/Retail Residential Investment properties Office/Retail Residential Others Hotel Properties GAV Net debt (excluding restricted cash) Outstanding land premium Outstanding LAT 12m fwd NAV
(HKD/sh)
% of GAV
Oct-07
Apr-10
Feb-11
Dec-11
26,735 526 22,916 0 0 949 51,126 2,727 (6,840) (4,000) 43,012
6.1 0.1 5.2 0.0 0.0 0.2 11.6 0.6 (1.6) (0.9) 9.8
52.3% 1.0% 44.8% 0.0% 0.0% 1.9% 100.0%
Rel to HSCEI
Issuer information
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Yanlord Land (YLLG SP)

Downside protection afforded by reasonable cash flow, access to funding and strong brand equity But overall growth prospects subdued due to margin compression and structurally slow asset turnover Initiate with N(V) and target price of SGD1; trades at trough valuation but strategic shift needed to
drive rerating
Key highlights
Thinly covered and misunderstood
Despite its long trading history, Yanlord is a thinly covered stock and its operations are somewhat misunderstood. While it is regarded as a quality high-end residential developer that commands superior margins on the strength of its brand, we think its historically high margins are largely driven by previously low land acquisition costs. As this low cost land bank has run dry, we expect the margin compression that appeared in 2011 to continue in the foreseeable future.
strategic relationships with financially strong partners and significant brand equity. On the other hand, we believe growth opportunities are limited, in light of the margin compression and slow asset turnover.
Valuation and risks

We initiate with N and our target price of SGD1.1 is based on a 56% discount to our 12-month forward NAV, which is 1 SD below the historical mean. We believe our target price represents a fair valuation given the stocks prolonged de-rating since mid-2009, weak operational metrics and the absence of strategic shift needed for rerating. Our target price implies a potential return of 8% including a dividend yield of 1%, which is within the Neutral rating band of 0-20% for Chinese stocks classified as volatile. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated. Key upside risks include an improvement in macro conditions or continued share purchase from highprofile investors. Key downside risks include deteriorating contract sales performance, or capital market volatility leading to refinancing issues.
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Strategic shift necessary for rerating

In our view, a rerating is only possible if management embarks on a comprehensive strategic shift. The company should focus on increasing asset turnover, specifically reducing the time between land acquisition and presale launch. The company should also incorporate pricing flexibility to ensure quick sell-through of existing launches and inventories. Given the current sector headwinds and the difficulty in scaling up area under construction, the company may be well advised to engage in organizational capacity building to prepare for a faster asset turn business model once macro conditions turn favourable.
Downside limited, upside constrained

We believe a further de-rating in the stock is unlikely, given it trades only slightly above trough valuation. The company can maintain reasonable cash flow despite its compressed margin, slow contract sales and heavy refinancing needs. It is also supported by superior access to funding,
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Yanlord Land Group Ltd

Neutral (V)
NAV discount chart
60% 40% 20% 0% -20% -40% -60% -80% -100% Oct-07 Aug-08 Jun-09 % to NAV Mean
Property sales revenue Property investment & others Cost of sales Gross profit Selling & admin. expenses Other income and gains Operating profit/EBIT Net interest expense Share of profit from assoc. PBT Taxation Minority interests Net profit Core profit
7,123 260 (3,355) 4,029 (493) 162 3,698 (87) (3) 4,514 (2,170) (396) 1,948 1,268 (7,378) (773) (339) 3 (656) 8,494 (648) 6,553 5,814 13,087 10,329 6,743 797 30,957 21,946 382 22,485 44,813
9,350 286 (5,827) 3,809 (571) 0 3,238 (144) 0 3,094 (1,251) (703) 1,140 1,140 (3,043) (211) 0 0 (117) 2,594 (777) 5,814 5,038 14,111 9,610 9,291 797 33,810 23,018 520 26,821 50,359
10,963 315 (6,287) 4,991 (641) 0 4,350 (194) 0 4,156 (1,701) (1,081) 1,374 1,374 (1,067) (385) 0 0 (105) 206 (1,352) 5,038 3,686 15,380 8,449 11,372 797 35,998 24,445 795 28,635 53,875
13,565 347 (8,656) 5,255 (734) 0 4,522 (162) 0 4,359 (1,722) (1,147) 1,490 1,490 1,768 (446) 0 0 (126) (2,107) (911) 3,686 2,775 16,744 5,903 12,519 797 35,963 25,744 1,346 28,665 55,755

Ratios (%)
-1% -3% 5% 26% 14% 6% 10% 3% 50% 16% 6.6 49% 49% 1.00 0.65 0.06 6.72
31% -12% -31% -41% -10% 5% 8% 2% 34% 12% 3.0 70% 70% 0.59 0.59 0.05 7.24
17% 34% 34% 20% 20% 5% 9% 3% 39% 12% 3.4 74% 74% 0.71 0.71 0.06 7.89
23% 4% 5% 8% 8% 6% 9% 3% 33% 11% 4.3 61% 61% 0.76 0.76 0.07 8.59
Apr-10
Feb-11 +1 SD -1 SD
Dec-11
ROIC ex-exceptional ROAE ex-exceptional ROAA ex-exceptional Operating margin Core margin, ex-exceptional (%) Interest cover ex-exceptional (x) Net debt/equity (excl-restricted cash) Net debt/equity (incl-restricted cash)
Price relative
5 4 3 2 1 5 4 3 2 1 0 Aug-08 Yanlord Land
NAV breakdown (RMBm) Development properties Residential Commercial Investment properties Commercial Hotel Net debt (excluding restricted cash) Outstanding LAT Outstanding land premium 12M fwd. NAV (RMB) 12M fwd. NAV (SGD)
(RMB/sh)
% of GAV
Jan-07
Mar-10 Rel to STI
Oct-11
29,515 0 6,820 1,002 (6,744) (3,407) (1,000) 26,186
15.1 0.0 3.5 0.5 (3.5) (1.7) (0.5) 13.4 2.4
79.0% 0.0% 18.3% 2.7%
Issuer information
Share price (SGD) Reuters (Equity) Market cap (USDm) Free float (%) Country Analyst
0.96 Target price (SGD) YNLG.SI 1,449 26 China Phillip Zhong
100.0%
Bloomberg (Equity) YLLG SP Market cap (SGDm) 1,881 Enterprise value (CNYm) 18,790 Sector Real Estate Contact +852 2996 6535
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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Derek Kwong, Michelle Kwok, Phillip Zhong, Stanley Cheung and Qi Zhuang
Important disclosures
Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below. This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website. HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities

Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis: For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return
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by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral. Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change. *A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities

As of 03 January 2012, the distribution of all ratings published is as follows: Overweight (Buy) 54% (25% of these provided with Investment Banking Services) Neutral (Hold) Underweight (Sell) 35% 11% (20% of these provided with Investment Banking Services) (12% of these provided with Investment Banking Services)
Information regarding company share price performance and history of HSBC ratings and price targets in respect of its long-term investment opportunities for the companies the subject of this report,is available from www.hsbcnet.com/research.
HSBC & Analyst disclosures

Disclosure checklist Company Ticker Recent price Price Date Disclosure
AGILE PROPERTY CHINA OVERSEAS LAND & INV CHINA RESOURCES LAND FRANSHION PROPERTIES GUANGZHOU R&F KWG LONGFOR PROPERTIES CO LTD SHIMAO PROPERTY SHUI ON LAND LIMITED SOHO CHINA LIMITED YANLORD LAND GROUP LTD
Source: HSBC
3383.HK 0688.HK 1109.HK 0817.HK 2777.HK 1813.HK 0960.HK 0813.HK 0272.HK 0410.HK YNLG.SI
6.96 12.98 12.48 1.50 6.14 2.62 8.78 6.63 2.36 5.17 0.96
02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012 02-Jan-2012
1, 4, 5, 11 4, 11 1, 4, 5 1, 5 4, 11 1, 4, 5, 11 1, 4, 5 1, 4, 5, 11 4, 6, 7 4 1, 5, 6, 7
1 2
HSBC* has managed or co-managed a public offering of securities for this company within the past 12 months. HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next 3 months.
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3 4 5 6 7 8 9 10 11
At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this company. As of 30 November 2011 HSBC beneficially owned 1% or more of a class of common equity securities of this company. As of 30 November 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of investment banking services. As of 30 November 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-investment banking-securities related services. As of 30 November 2011, this company was a client of HSBC or had during the preceding 12 month period been a client of and/or paid compensation to HSBC in respect of non-securities services. A covering analyst/s has received compensation from this company in the past 12 months. A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as detailed below. A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this company, as detailed below. At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in securities in respect of this company
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues. For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research. * HSBC Legal Entities are listed in the Disclaimer below.
Additional disclosures
1 2 3 This report is dated as at 04 January 2012. All market data included in this report are dated as at close 30 December 2011, unless otherwise indicated in the report. HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner. As of 30 November 2011, HSBC and/or its affiliates (including the funds, portfolios and investment clubs in securities managed by such entities) either, directly or indirectly, own or are involved in the acquisition, sale or intermediation of, 1% or more of the total capital of the subject companies securities in the market for the following Company(ies) : CHINA RESOURCES LAND , AGILE PROPERTY , CHINA OVERSEAS LAND & INV , SOHO CHINA LIMITED , SHUI ON LAND LIMITED , KWG , GUANGZHOU R&F , SHIMAO PROPERTY , LONGFOR PROPERTIES CO LTD
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Disclaimer
* Legal entities as at 04 March 2011 Issuer of report UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; TW HSBC The Hongkong and Shanghai Banking Corporation Securities (Taiwan) Corporation Limited; CA HSBC Securities (Canada) Inc, Toronto; HSBC Bank, Paris Branch; HSBC France; DE Limited HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Level 19, 1 Queens Road Central Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Hong Kong SAR Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Telephone: +852 2843 9111 Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; GR HSBC Securities SA, Athens; HSBC Bank plc, London, Madrid, Telex: 75100 CAPEL HX Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Fax: +852 2596 0200 Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Website: www.research.hsbc.com Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch This document has been issued by The Hongkong and Shanghai Banking Corporation Limited (HSBC) in the conduct of its Hong Kong regulated business for the information of its institutional and professional customers; it is not intended for and should not be distributed to retail customers in Hong Kong. The Hongkong and Shanghai Banking Corporation Limited is regulated by the Securities and Futures Commission. All enquires by recipients in Hong Kong must be directed to your HSBC contact in Hong Kong. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or their officers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. This publication is distributed in New Zealand by The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch. In Japan, this publication has been distributed by HSBC Securities (Japan) Limited. It may not be further distributed in whole or in part for any purpose. In Korea, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch ("HBAP SLS") for the general information of professional investors specified in Article 9 of the Financial Investment Services and Capital Markets Act (FSCMA). This publication is not a prospectus as defined in the FSCMA. It may not be further distributed in whole or in part for any purpose. HBAP SLS is regulated by the Financial Services Commission and the Financial Supervisory Service of Korea. Copyright. The Hongkong and Shanghai Banking Corporation Limited 2012, ALL RIGHTS RESERVED. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, on any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of The Hongkong and Shanghai Banking Corporation Limited. MICA (P) 208/04/2011 and MICA (P) 040/04/2011
[316499]
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Global Financial Institution Group Research Team

Carlo Digrandi Global Industry Head, FIG +44 20 7991 6843 carlo.digrandi@hsbcib.com Banks
Europe Robin Down Analyst, Global Sector Head, Banks +44 20 7991 6926 robin.down@hsbcib.com Monica Patrascu +44 20 7991 6828 Peter Toeman +44 20 7991 6791 Rob Murphy +44 20 7991 6748 Iason Kepaptsoglou +44 20 7991 6722 Lorraine Quoirez +44 20 7991 6667 monica.patrascu@hsbcib.com peter.toeman@hsbcib.com robert.murphy@hsbcib.com iason.kepaptsoglou@hsbcib.com lorraine.quoirez@hsbcib.com Kathy Park +82 2 3706 8755 Sachin Sheth +91 22 2268 1224 Tejas Mehta +91 22 2268 1243 Kar Weng Loo +65 6239 0654 Xiushi Cai +65 6239 0624 Bruce Warden +886 2 8725 6028 kathypark@kr.hsbc.com sachinsheth@hsbc.co.in tejasmehta@hsbc.co.in karwengloo@hsbc.com.sg xiushicai@hsbc.com.sg brucebwarden@hsbc.com.tw Phillip Zhong +852 2996 6535 Perveen Wong +852 2996 6571 Pratik Burman Ray +65 6239 0652 David Choo +65 6239 0651 Abel Lee +886 2 8725 6026 CEEMEA Levent Bayar +90 212 376 46 17 Credit Research phillipyzhong@hsbc.com.hk perveenwong@hsbc.com.hk pratikray@hsbc.com.sg davidthchoo@hsbc.com.sg abelchlee@hsbc.com.tw
Insurance
Europe Kailesh Mistry Analyst, Head of European Insurance +44 20 7991 6756 kailesh.mistry@hsbcib.com Dhruv Gahlaut +44 207 991 6728 Thomas Fossard +33 1 56 52 43 40 CEEMEA Erol Hullu +90 212 376 46 16 dhruv.gahlaut@hsbcib.com thomas.fossard@hsbc.com
leventbayar@hsbc.com.tr
Johannes Thormann Global Head of Exchanges +49 211 910 3017 johannes.thormann@hsbc.de Dimitris Haralabopoulos +30 210 6965 214 dimitris.haralabopoulos@hsbc.com CEEMEA Gyorgy Olah Head of Ceemea Banks Research +44 20 7991 6709 gyorgy.olah@hsbcib.com Aybek Islamov +44 20 7992 3624 Tamer Sengun +90 212 376 46 15 Jan Rost +27 11 676 4209 Avinash Prakash Goel +91 80 3001 3704 Latin America Victor Galliano +1 212 525 5253 aybek.islamov@hsbcib.com tamersengun@hsbc.com.tr jan.rost@za.hsbc.com avinashgoel@hsbc.co.in
Banks and Insurance

Asia Dilip Shahani Analyst, Head of Global Research, Asia-Pacific +852 2822 4520 dilipshahani@hsbc.com.hk Devendran Mahendran Sovereigns and Financial Institutions +852 2822 4521 devendran@hsbc.com.hk North America Van Hesser Global Head of Credit Research, US Banks +1 212 525 3114 van.hesser@us.hsbc.com Monica A Parekh Associate +1 212 525 4117 Arjun Bowry Associate +1 212 525 3119
erolhullu@hsbc.com.tr
Asia James Garner Analyst, Head of Asian Insurance +852 2822 4321 james.e.garner@hsbc.com.hk Michael Chang +852 2996 6555 Grace Zhou +852 2822 3053 Sinyoung Park +822 3706 8770 michaelpchang@hsbc.com.hk graceqzhou@hsbc.com.hk sinyoungpark@kr.hsbc.com
monica.a.parekh@us.hsbc.com
arjun.bowry@us.hsbc.com
victor.galliano@us.hsbc.com
Specialist Sales
Nigel Grinyer +44 20 7991 5386 Martin Williams +44 20 7991 5381 Juergen Werner +49 211 910 4461 Philip P Dragoumis +30 210 696 5128 Matthew Robertson +44 20 7991 5077 nigel.grinyer@hsbcib.com martin.williams@hsbcib.com juergen.werner@hsbc.de philip.dragoumis@hsbc.com matthew.robertson@hsbcib.com
Paulo E Ribeiro Diversified Financial Services +1 212 525 4430 paulo.e.ribeiro@us.hsbc.com Mariel Santiago Financials +1 212 525 5418 Felipe Rodrigues +55 11 3847 9029 Leonardo Martins +55 11 3847 9881
Real Estate
Europe John Fraser-Andrews Head of Real Estate Equity Research, Europe +44 20 7991 6732 john.fraser-andrews@hsbcib.com Thomas Martin +49 211 910 3276 Stphanie Dossmann +33 1 56 52 43 01 thomas.martin@hsbc.de stephanie.dossmann@hsbc.com
mariel.x.santiago@us.hsbc.com felipe.c.rodrigues@hsbc.com.br leonardo.c.martins@hsbc.com.br
Asia Todd Dunivant Analyst, Head of Banks, Asia-Pacific +852 2996 6599 tdunivant@hsbc.com.hk York Pun +852 2822 4396 Eric Mak +852 2996 6585 yorkkypun@hsbc.com.hk erichkmak@hsbc.com.hk
Asia Derek Kwong Head of Real Estate Equity Research, Asia +852 2996 6629 derekkwong@hsbc.com.hk Ashutosh Narkar +91 22 2268 1474 Michelle Kwok +852 2996 6918 ashutoshnarkar@hsbc.co.in michellekwok@hsbc.com.hk

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Financial Institutions Group China Real Estate

China Real Estate

Financial Institutions Group China Real Estate 4 January 2012

Be realistic on policy expectations 32 Key property market data 39

SOHO China (410 HK) Yanlord Land (YLLG SP)

Disclosure appendix Disclaimer

Financial Institutions Group China Real Estate 4 January 2012

600 500 400 300 200 100 0

(RMBmn) 8.9% 8.9%

20% 15% 10% 5% 0%

2011 Market Share (RHS

Key dev elopers (LHS)

Source: HSBC estimates

NAV discount chart

Source: Company data, HSBC estimates

Source: Company data, HSBC estimates

Financial Institutions Group China Real Estate 4 January 2012

Financial Institutions Group China Real Estate 4 January 2012

Note: OW = Overweight; N = Neutral; UW = Underweight; V = volatile. Source: Bloomberg, HSBC estimates

Financial Institutions Group China Real Estate 4 January 2012

Looking beyond the policy conundrum

remain our conviction Overweights we are adding CRL to this list

Policy easing or not, should this be the question?

Financial Institutions Group China Real Estate 4 January 2012

New assumption -20% -10% -10% 0%

*by market capitalisation

Residential price trend Year-end monthly average

2012e: down 10-15%, back to 2009 level

Financial Institutions Group China Real Estate 4 January 2012

Cost of capital will be in the limelight

Not revisiting 2009, no V-shape rebound

Theoretical floor value analysis

Financial Institutions Group China Real Estate 4 January 2012

Stock for which we have narrowed the target discount:

Financial Institutions Group China Real Estate 4 January 2012

Where our conviction lies

COLI 0% -5% -25%

-45% -55% -60% -60% -60% -60% -65% Disccount to NAV

Source: HSBC estimates

Standard deviation below mean

Financial Institutions Group China Real Estate 4 January 2012

Longfor (960 HK; OW(V); TP HKD13.3)

Financial Institutions Group China Real Estate 4 January 2012

Cost of capital under the limelight

volatility and tight credit conditions

developers cost of capital

forward margin implications

The importance of cost of capital advantage

factor as a fundamental consideration in stock selection so far.

Two considerations: NAV and margins

Financial Institutions Group China Real Estate 4 January 2012

Estimated weighted cost of debt

WACC calculation methodology

Estimating the cost of equity

Source: HSBC estimates

Estimating the cost of debt

Financial Institutions Group China Real Estate 4 January 2012

Putting it together: WACC range of 9.1-15.3%

Financial Institutions Group China Real Estate 4 January 2012

Offshore borrowing cost (b) 9% 3% 4% 7% 9% 9% 7% 9% 9% 8% 7%

^ WACC = (h) * (g) * [1-( m)] + [(j) +(i) * (k)] * (l)

China Developers source of funding

1H09 FY09 1H10 FY10 1H11 FY11* 0%