Deutsche Bank Markets Research

Asia Company Date

China 6 May 2016 Limited Karen Kwan, MBA

HY Corporate Credit Research Analyst

Real Estate (+852 ) 2203 5930 [email protected]

High-quality asset company; initiate on

SHUION PerpC17 with Buy

Initiate on Shui On Land with CreditBuy on SHUION PerpC17 and Hold on rest We like Shui On Land’s (SHUION, NR/NR/NR) mostly high-quality assets, proven track record of going through various property cycles and steady recurring income. Management has shown more determination in disposing commercial assets and targets to lower its net debt/total equity ratio to 50% by end-2017. Having said that, the company’s credit metrics are weak and valuations for the overall property HY sector are not appealing. We believe Shui On Land should be able to tap the on-shore Panda bond market, and we expect that to happen in 2H16/early 2017. We initiate on SHUION PerpC17 with CreditBuy, and have CreditHold recommendations on the USD bonds SHUION'17, SHUION'18, SHUION'19C17, SHUION'20C17 and SHUION'17 CNH bonds. We like its 10.125% USD500mn perpetual callable Dec, 2017 (ask price 106.5, ask YTC 5.80%, ask YTM 12.31%) for essentially a short-dated bond of 1 year and 7 months given our expectations that the property company will call this bond and it provides good carry, in our view. We find Shui On PerpC17’s ask YTC more attractive than Greentown PerpC19’s ask YTC of 5.45% (which has a longer call date of Jan, 2019, about 13 months longer). We note that given limited supply of off-shore property HY issuance, there is some scarcity value to short-dated bonds. Key upside risks include: faster or cheaper refinancing via on-shore markets, disciplined landbanking in and/or , faster or better-priced disposals. Downside risks include slower-than-expected sales from Shanghai due to more severe tightening, inability to raise Panda bonds, and severe RMB depreciation.

Key credit considerations  High-quality assets in core regions of Shanghai and key tier-2 cities  Proven track record of going through various property cycles  Well-established reputation in large-scale high-end and mid-high end investment properties  Steady recurring income  Broad funding channels in the off-shore market  Annual contract sales’ partial dependency on commercial asset sales  No new landbanking (excluding relocation payments) for the past several years and potential landbanking in Shanghai and Wuhan over the next few years  Recent improvements in en-bloc sales should help to gradually lower its high gearing, which had been largely a result of a historical heavy investment property portfolio  Projects with relocations could face delays/ and or changes on progress depending on local government  Weak credit metrics

Gradually de-leveraging high-quality asset holder We recognize that Shui On’s credit metrics are on the weak side, but we like the fact that it is gradually de-leveraging and gross margins would improve in 2016-2017 from last year’s levels. The company targets to lower total debt as well as expects its average costs of borrowing to drop by about 1ppt in 2016 from 2015’s 6.2%. At current levels, we believe that its 10.125% PerpC17 still offers good carry. ______Deutsche Bank AG/ DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 057/04/2016.

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

The Basics: background and landbank

Company background and management

Shui On Land is a developer with a focus on development and operation of large-scale mixed-used complex in city-core as well as high- to mid-high end residential projects in five cities in China. The company was founded in 2004 as the flagship of the Shui On Group, a Hong Kong-based private group founded in 1971 which is primarily engaged in real estate development and construction. Shui On Land got listed on the in October, 2006. Its market cap reached HKD16.1bn (or USD2.1bn) as of 5 May, 2016. Mr. Lo Hong Sui, Vincent (aged 67) is the Chairman of Shui On Land, and CEO of the company from 2004 to March 2011. He resumed a more active role in the company management following the resignation of Mr Lee Chun Kong, the ex-CEO in January 2014. As at the end of February, 2016, Mr. Lo Hong Sui, Vincent is the largest shareholder with 57.1% stake in the company. Mr Douglas Sung became the CFO of Shui On Land since early January, 2016 and is a member of the Executive Committee. He has a deep understanding of the real estate sector as well as finance, with over 20 years of experience in Asia real estate, having worked in sell-side research as well as direct investment and fund management. Mr Frankie Wong is an Executive Director of the company and an adviser to the Chairman of Shui On Group. He is an experienced person who joined the Shui On Group in 1981 and worked at its sister company SOCAM Development (983 HK, non-rated) as well. We note that Chairman Lo’s daughter, Stephanie Lo, is Director – Product Development for China Xintiandi Limited, a wholly owned subsidiary of Shui On Land. She has a background in architecture and interior design.

Good landbank quality As of end-2015, Shui On’s total landbank was 9.4mn sq m (leasable and saleable landbank, excluding 2.4mn sq m of clubhouse, carparks and other facilities), of which 7.7mn sq m was attributable. Its landbank is relatively balanced in exposure to residential, office, and retail/hotel/serviced apartments by GFA (see Fig. 1). At end-2015, 29% of Shui On’s attributable landbank was in Shanghai by GFA, with the next highest geographical exposure at 22% in . Its other geographical exposure consisted of 18% in , 17% in , and 14% in Wuhan. Subsequently, it had engaged in a transaction to sell some Foshan assets to for over RMB1.7bn (at roughly RMB8k/sq m). On May 3, Shui On announced it sold two offices in Wuhan (A1 and A3) to CITIC China for an aggregate initial purchase price of RMB4.499bn. We still expect Shui On to sell some Foshan Lingnan Tiandi retail assets, and potentially some of Shanghai assets such as some office GFA from KIC later this year. These coupled with the announced disposals of Foshan assets to Country Garden and Wuhan transaction to CITIC China should enable Shui On to attain its target commercial sales of RMB10bn in 2016 smoothly, in our view. Looking into 2017, there are still commercial assets (such as office and retail from Chongqing and Wuhan and KIC office in Shanghai) available for disposal.

Figure 1: Shui On Land's attributable landbank breakdown as of end-2015* Asset type % of attributable GFA Residential 35% Office 33% Retail 27% Hotel/Serviced Apts 5% *excluding carparks, clubhouse, and other facilities Source: Company data, Deutsche Bank

Page 2 Deutsche Bank AG/Hong Kong

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 2: Shui On Land's attributable landbank breakdown by location as of end-2015* Location % of attributable GFA Shanghai 29% Chongqing 22% Dalian 18% Foshan 17% Wuhan 14% *excluding carparks, clubhouse, and other facilities Source: Company data, Deutsche Bank

Among the cities where Shui On operates, Dalian is the only one which still has abnormally high residential inventory levels at around 20 months at end- March, according to CREIS data (estimated by available for sale properties/average monthly sales of the latest 3 months). While we are concerned about Dalian’s weak supply-demand dynamics, we feel comfortable about the other four cities where Shui On’s projects are located. Furthermore, we estimate Dalian Tiandi to constitute only around 6% of Shui On’s total residential saleable resources amount in 2016.

Figure 3: Overall residential inventory months in Dalian

Inventory 45

40

35

30

25

20

15

10

5

0

10 11 12 13 14 15

10 11 12 13 14 15 10 11 12 13 14 15

13 14 15 16 10 11 12

------

------

------

Feb Feb Feb Feb Feb Feb Feb

Nov Nov Nov Aug Aug Aug Aug Aug Aug Nov Nov Nov

May May May May May May

Note: The number of inventory months is calculated by monthly ending inventory divided by average of monthly sales of last 3 months Source: Soufun, CREIS, Deutsche Bank

Contract sales and operating cashflow outlook for 2016

2016 contract sales: progress thus far is good Shui On’s 2016 contract sales target of RMB24bn (of which residential/commercial split is expected to be RMB14bn/10bn) looks manageable to us. We estimate over 70% of its FY2016 residential saleable resources would come from Shanghai, including from The Gallery (Lot 2) of Rui Hong Xin Cheng (“RHXC”). Already, it achieved RMB3.6bn of sales from the Upper (Lot 9) at RHXC earlier this year (Feb ASP was RMB80k/sq m whereas in Oct, 2015, the ASP was about RMB71k/sq m). Potentially, Lot 2 has 103,700sq m of available for sale GFA for launch from 2Q16 to 2017, with potential saleable resources of RMB9.3-10.4bn to if we assume an ASP of RMB90-100k/sq m. By end-March, Shui On already achieved RMB5.8bn of residential contract sales (locking in 41% of the residential full year contract sales target of RMB14bn) and additionally, there was RMB1.6bn of unsubscribed property sales. Historically, Shui On’s asset turnover had been slow but showed good improvement in 2015 and it is on the right track so far this year as well.

Deutsche Bank AG/Hong Kong Page 3

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Shanghai tightening might affect sales pace of projects there; having said that, Shui On’s projects are mostly well-located and hence we are not overly worried about it. We also note that most of Shui On’s landbank is vintage -- that was acquired many years ago; hence, its overall GPM should continue to be above the China property sector average. The company guides GPM of over 30% over the next few years, which we agree that it should be able to achieve. That would translate to a higher YoY GPM in 2016 booking vs. 2015’s 26.1%. This would also be helped by a higher portion of revenue booking from Shanghai that we expect in 2016 vs. 2015.

Figure 4: Shui On’s contract sales trend since 2011

Contracted sales YoY growth (RMB bn) 30.0 200% 190%

25.0 150%

114% 121% 20.0 100% 10.0

15.0 13.2 50% 6.7 12% 10.0 0% 4.8 4.2 0.2 14.0 5.0 -46% -41% -50% 9.9 8.3 5.9 5.6 5.5 0.0 -100% 2011 2012 2013 2014 2015 2016 Target

Residential (LHS) Commercial (LHS) YoY change in total contracted sales (RHS)

Source: Company data, Deutsche Bank

Expect mild rental income growth: We expect Shui On to be able to achieve a single digit YoY growth in rental income in 2016 vs. 2015’s RMB1.54bn, despite disposal of 1, 2, and 3 Corporate Avenues. This is mainly because there will be new GFA to be completed this year and also we see further ramp- up of the HUB in Shanghai.

Figure 5: Shanghai’s The Hub model Figure 6: The Hub complex at night

Picture taken in Oct, 2015 Picture taken in Oct, 2015 Source: Deutsche Bank Source: Deutsche Bank

Page 4 Deutsche Bank AG/Hong Kong

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 7: Inside The Hub shopping mall Figure 8: Model of Shanghai’s Rui Hong Xin Cheng

Picture taken in Oct, 2015 Picture taken in Oct, 2015 Source: Deutsche Bank Source: Deutsche Bank

Figure 9: Exterior of Shanghai’s Rui Hong Xin Cheng Figure 10: A showflat of Rui Hong Xin Cheng

Picture taken in Oct, 2015 Picture taken in Oct, 2015 Source: Deutsche Bank Source: Deutsche Bank

Leveraging on ample liquidity: We believe one of the reasons contributing to Shui On’s success in disposing some en-bloc commercial property has been the ample liquidity environment in HK and China. There is also a variety of third parties purchasing commercial assets from Shui On -- including Link REIT, Country Garden, and CITIC China.

Expect a positive net operating cashflow for 2016: We expect a positive net operating cashflow this year. Figure 11 captures the company guided major operating cashflow items. Shui On expects its 2016 new start GFA to be down slightly YoY from 2015’s ~0.5mn sq m. However, the geographical mix of the new starts would change. While management indicates possibilities of acquiring new projects in Shanghai and Wuhan, we do not think the size of each project would be as big as the typical projects before, after learning from its experience.

Deutsche Bank AG/Hong Kong Page 5

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 11: Shui On’s guided 2016 major operating cashflow items (in RMB bn) Cash carried forward from previous year 5.2 Cash collected from residential (same yr) 11.2 Cash collected from commercial (same yr) 7 Rental income 1.5 Other income 0.5

Total operating cash inflow 25.4

Outflows Relocation and Foshan land premium -3 Construction costs -6 SG&A -2.5 Interests -3.5 Taxes -2 Our estimated figure of other landbanking -4

Total operating cash outflow after accounting for -21 above items Note: the other landbanking figure of RMB4bn is DB estimate, and not company guidance Source: Company data, Deutsche Bank

Debt breakdown and refinancing potential

On-shore financing: Shui On Land has not yet tapped the on-shore bond market (be it regular corporate bonds or Panda bonds), but we believe it would be able to issue Panda bonds on-shore using its off-shore list co., likely to be in 2H16/early 2017. There is no filing on the Shanghai Exchange yet, so we can infer that Shui On has not applied for on-shore Panda bonds yet. When we visited the Bond division of the Shanghai Stock Exchange in January, the Exchange indicated that there is no specific list of requirements for issuers of Panda bonds as this market is still in a trial status. Hence, compared to some other bond markets, the Panda bond approval process and timing seem more opaque to us. However, to reference some other China developers that we currently cover, we estimate the rough size that Shui On might be able to issue on-shore. We reckon that YTD, developers have only tapped the private on- shore Panda bond market, though a few peers like Shimao and Country Garden indicated they would like to be able to tap the public on-shore Panda bond market when that becomes available. Let us take Agile as an example. Agile had previously already applied for RMB15bn quota of on-shore Panda bonds before its FY2015 results announcement and we note that Agile’s (list co.) net assets of as June-2015 was RMB41.58bn (and some industry contacts indicated that one should subtract the net assets of the on-shore entities that have issued corporate bonds, which in Agile’s case are not big); and taking 40% of that would translate to RMB16.6bn if we ignore the on-shore entities. That gets us close to the figure of RMB15bn of on-shore Panda bonds quota for which Agile had applied. Although there is no written explicit cap on private Panda bond issuance size, if we make an assumption and take 40% of Shui On Land’s net assets at the list co. level (RMB46.1bn) at end-2015, that would translate to RMB18.4bn. As a first-time on-shore bond issuer (Shui On has not issued the normal domestic corporate bonds), we take a 20-25% haircut on size, that would translate to a potential tapping of RMB13.8-14.8bn of on-shore Panda bonds for Shui On, per our estimate. Again, we note there are no official written rules on the limit of size of issuance for Panda bonds. There is only a maximum of 40% of net assets for issuance of domestic public corporate bonds.

Page 6 Deutsche Bank AG/Hong Kong

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Aims to lower foreign currency debt exposure and costs of borrowing Shui On’s exposure to foreign currency debt should also drop to around 40% or lower at end-2016 from end-2015’s 46% out of total debt, due to the release of RMB4-5bn of foreign currency debt related to Corporate Avenue in Shanghai. Furthermore, management targets to lower total debt as well as expects its average costs of borrowing to drop by about 1ppt in 2016 from 2015’s 6.2%.

Figure 12: Panda bonds issuance by China property developers since 2015 Company Coupon (%) Issue date Maturity Original Amt issued Maturity (Yrs) (RMBmn) Country Garden 4.75 02-Mar-16 02-Mar-21 3+2 4,000 Country Garden 4.99 30-Dec-15 30-Dec-20 3+2 1,000 Powerlong 6.80 28-Dec-15 28-Dec-19 2+2 200 Powerlong 7.30 28-Dec-15 28-Dec-20 3+2 300 Shimao 4.80 18-Jan-16 18-Jan-21 5 4,000 5.20 21-Jan-16 21-Jan-20 4 1,500 Note: Sunac’s IR mentioned at its results briefing that the company plans to tap Panda bonds in 2016; according to Bloomberg, Sunac tapped Panda Bonds in Jan, raising 4-year bonds of RMB1.5bn at 5.20%. Source: Company, Deutsche Bank, Bloomberg Finance LP

Figure 13: Shui On’s debt breakdown by currency at end- Figure 14: Debt breakdown by currency (incl. perpetual) 2015 at end-2015

HKD HKD 12% 11%

RMB RMB 49% USD 54% 34% USD 40%

Note: assuming USD225mn of convertible perpetual capital securities and USD500mn of perpetual Note: the above does not include perpetual capital securities and derivatives capital securities as 100% debt Source: Company data, Deutsche Bank The above does not include derivatives Source: Company data, Deutsche Bank

The company does have high refinancing needs in 2017 in the off-shore bond market, with RMB notes of RMB2.5bn due in Feb 2017 and USD500mn senior notes due in Nov 2017. Its USD500m perps will be callable in Dec 2017, and a total of USD752.5mn of senior notes will be callable in 1H17. We expect the company to fund the majority of these refinancing needs with on-shore Panda bonds as well as internally generated cash, such as disposals of commercial assets. From a credit perspective, while it is credit positive to recuperate cash and realize the asset value monetization, we also feel that it has been selling some of its high-quality commercial properties in prime locations of Shanghai, which would be difficult to replace in the future. But the company does need to increase its asset churn and de-leverage, so that should be the priority, as it is.

Deutsche Bank AG/Hong Kong Page 7

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 15: Shui On’s debt maturity breakdown

RMB bn 25 25 21.9 20 20

11.6 15 15 12.8 12.4

10 6.0 4.9 1.4 10 0.3 1.4 2.7 5 8.9 5 5.8 4.1 0.9 0 0 2016 2017 2018-2020 2020 & after Senior notes HKD bank borrowings USD bank borrowings RMB bank and other borrowings

Note: the above does not include perpetual capital securities and derivatives Source: Company data, Deutsche Bank

Results recap for 2015 Shui On Land delivered a mixed set results for 2015. Its revenue was down 37% to RMB6.5bn mainly due to sharp decline of 48% in booked property sales ASP with less contribution from Shanghai. As a result, gross margin dropped notably by 7.5ppt to 26.1% in 2015 from 33.6% in 2014. On the other hand, core earnings grew robustly by 438% YoY to RMB2.4bn thanks to divestment of 1 & 2 Corporate Avenue in Shanghai. Accounting for a disposal gain of investment properties of RMB3.2bn, our calculated EBITDA was up 63% YoY to RMB3.9bn in 2015.

Credit metrics Shui On Land recorded some improvements in its credit metrics in 2015 thanks to the company’s efforts to accelerate asset turnover and deleverage. Adjusted EBITDA/interest coverage improved to 1.1x at YE15 from 0.7x at YE14 and 0.3x at end-Jun 15, while total debt/EBITDA dropped to 12.5x in 2015 from 20.3x in 2014. It has reduced exposure to (convertible) perpetual capital securities. As a result, adjusted net gearing ratio (assuming hybrids as 50% debt and 50% equity) improved to 90.8% at YE15 from 92.5% at YE14 and 102.8% as of June, 2015. While we recognize it is still relatively high vs some peers, we believe the company has moved in the right direction and lowered its average cost of borrowing. We see more management determination in improving the company’s capital structure. Its liquidity position was weak at end-2015 with total cash of RMB10.6bn covering 83% of short-term debt. Management indicated at its results briefing that they will target to bring down the net debt/total equity ratio to around 50% by end-2017 and reduce exposure to foreign currency debt in 2016.

Valuations

Peer comparison and bond valuations Shui On Land is not rated by the off-shore credit rating agencies. We think it should have similar issue rating as compared to Yuzhou (issue rating: B1/B/ BB-) and GZ R&F (issue rating: B1/B/BB) in terms of credit quality. Both of the peers have better 2015 gross margins, stronger interest coverage and lower gross leverage than Shui On but Shui On has a higher percentage of recurring income/total revenue, better landbank quality than the two and lower net gearing than GZ R&F. In terms of geographical exposure and mix of commercial/residential assets and the ability to fetch premium in pricing of

Page 8 Deutsche Bank AG/Hong Kong

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited residential properties due to brand name, we view Holdings as a close comparable. However, due to the SOE background of Jinmao, bondholders would view it quite differently from Shui On, in our view. We also view Cifi and Yanlord as close peers in terms of landbank distribution which have high exposure to Shanghai and big tier-2 cities. Having said that, Cifi and Yanlord possess more diversified geographical distribution and stronger credit metrics than Shui On.

We initiate with CreditBuy on SHUION PerpC17 and CreditHold on the USD bonds SHUION'17, SHUION'18, SHUION'19C17, SHUION'20C17 and SHUION'17 CNH bonds. SHUION'20C17 trades flat to GZRFPR'20C17 in YTM while SHUION'19C17 trades ~20bp wider than YUZHOU'19C17 for a longer tenor of 0.4 year, which is fair, in our view. Besides, we slightly prefer SHUION'20C17 (mid price: 108.125, YTM: 7.38%, YTW: 6.16%; Z-sprd: 539bp) and SHUION'19C17 (mid price: 108.125, YTM: 6.67%, YTW: 6.14%; Z-sprd: 537bp) to SHUION'18 (mid price: 105.875, YTM: 5.59%, Z-sprd: 471bp) for a steep YTM curve. Key upside risks include: faster or cheaper refinancing via on-shore markets, disciplined landbanking in Shanghai and/or Wuhan, faster or better-priced disposals leading to more-than-expected de-leveraging. Downside risks include slower-than-expected sales from Shanghai due to more severe tightening, inability to raise Panda bonds, and severe RMB depreciation.

Perps valuations We view BJCAPT PerpC18 (ask Price: 106.9, YTC: 4.58%, G-sprd: 384bp), BJCAPT PerpC19 (ask Price: 105.9, YTC: 5.3%, G-sprd: 429bp), and GRNCH PerpC19 (ask Price: 108.9, YTC: 5.45%, G-sprd: 458bp) as close peers to SHUION PerpC17 (ask Price: 106.5, YTC: 5.79%, G-sprd: 513bp), all of which have strong step-up at next call date, though we acknowledge BJCAPT is SOE- backed and GRNCH’s largest shareholder is SOE CCCG, which are reflected in the two notches uplift in issuer ratings by Moody’s. However, Beijing Capital Land and Greentown showed higher Debt/EBITDA in its 2015 results. We think the SHUION PerpC17 looks attractive for a short duration of 1.6 years.

In Fig. 17, we compare the valuations of various China corporate perpetuals. We select USD senior notes issued by the same issuer or if not available, senior notes of peers with the same issue rating to compare valuation of perps to senior notes ratio. The maturity of the selected senior notes is close to the next callable date of the perps we analyze. We then compare the perps’ G- spread to next call date (or to step-up date) to the tenor-adjusted G-spread of senior notes peer to get the perps to senior ratio. In terms of valuation versus senior notes peer, SHUION'PerpC17 and GRNCH 9% Perp also look slightly more attractive compared to Beijing Capital Land’s. SHUION PerpC17’s ask G- spread to next call/ step-up date is 513bp, about 1.1x of adjusted G-spread of SHUION'17. At current levels, we believe that its 10.125% PerpC17 offers good carry.

Deutsche Bank AG/Hong Kong Page 9

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 16: Summary of terms of selected perpetual bonds

Ch in a Communications Beijing Cap Land Beijing Cap Land Construction Green town Shui On Land Bond ticker AGILE 8.25% 49s BJCAPT 8.375% 49s BJCAPT 7.125% 49s CHCOMU 3.5% 49s GRNCH 9% 49s SHUION 10.125% 49s

Issuer/Guarantor Rating Ba3/BB-/NR Ba2/NR/BB+ Ba2/NR/BB+ A3/NR/A- Ba3/BB/NR NR/NR/NR Issue Rating NR/NR/NR NR/NR/NR NR/NR/NR A3/NR/NR NR/NR/NR NR/NR/NR Format Reg S only Reg S only Reg S only Reg S only Reg S only Reg S only Coupon 8.250% 8.375% 7.125% 3.500% 9.000% 10.125% Issue Date 11-Jan-13 8-Apr-13 2-Dec-14 21-Apr-15 28-Jan-14 10-Dec-12 Amount outstanding ($mn) 700 400 450 1,100 500 500 Ranking Jr Subordinated Sr Unsecured Sr Unsecured Sr Unsecured Subordinated Sr Unsecured 1st Call Date 18-Jul-18 8-Apr-18 2-Dec-19 21-Apr-20 28-Jan-19 10-Dec-17 Subsequent call date On 18 Jul 2023 and Each coupon Each coupon Each coupon Each coupon Each coupon on 18 Jul 2028 only payment after the payment after the payment after the payment after the payment after the initial call date initial call date initial call date initial call date initial call date

Coupon reset details Fixed 8.25% coupon Fixed 8.375% coupon Fixed 7.125% coupon Fixed 3.5% coupon Fixed 9% coupon till Fixed 10.125% till Jul 2018; then till April 2018; then till Dec 2019; then till Apr 2020; then Jan 2019; then resets coupon Dec 2017; resets at 5YR UST + resets at 5YR UST + resets at 5YR UST + resets at 5YR UST + at 5YR UST then resets at 5YR 746.3bps till Jul 2023; 756.7bps+500bp till 553.2bps+500bp till 219.2bp + 500bps +737.3bps+500bp UST + 948.7bps+ then resets at 5YR April 2023, then Dec 2024, then resets thereafter and every 5 years 300bp thereafter UST + 746.3bp+25bp resets at 5yr UST at 5yr UST thereafter. till Jul 2033, +1256.7bps +1053.2bps thereafter reset at thereafter thereafter 5YR UST + 746.3bp +100bp Coupon Deferrable/Cumulative Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Yes/Yes Dividend limitations Yes Yes Yes Yes Yes Yes Redemption due to Change of Yes N/A Yes Yes Yes Yes Control

*Note that both Agile and Beijing Capital Land have been put on review for possible downgrade by Moody’s. China Communications Construction is on negative outlook by Moody’s. *Note that Beijing Capital Land’s parent Beijing Capital Group’s family corporate rating is Ba2, but issuer Central Plaza Development’s rating is Ba3 by Moody’s. Source: Company data, Deutsche Bank

Figure 17: Valuations of selected China property perpetuals vs senior notes

Priced to call Priced to first step-up

Size 1st Call 2nd Call Ask Cash Spread Sen. spd Perp/senior Spread Sen. spd Perp/senior Bond (US$mn) Date Date Step up Rank Price YTC (%) carry (call) bp (call) bp ratio (call) (st. up) bp (st. up) bp ratio (st. up) Rec. Strong step-up at first call date BJCAPT 8.375% 400 Apr-18 Oct-18 500bp in Apr'18 Sen 106.9 4.6 7.8% 384 367 1.05 384 367 1.05 Hold BJCAPT 7.125% 450 Dec-19 Jun-20 500bp in Dec'19 Sen 105.9 5.3 6.7% 429 401 1.07 429 401 1.07 Hold GRNCH 9% 500 Jan-19 Jul-19 500bp in Jan'19 Sub 108.9 5.4 8.3% 458 406 1.13 458 406 1.13 Hold SHUION 10.125% 500 Dec-17 Jun-18 300bp in Dec'17 Sen 106.5 5.8 9.5% 513 463 1.11 513 463 1.11 Buy Weak step-up at ~10Y mark AGILE 8.25% 700 Jul-18 Jan-19 25bp in Jul'23 Sub 90.8 13.2 9.1% 1,243 548 2.27 909 648 1.40 Hold Source: Bloomberg Finance LP, Deutsche Bank

Page 10 Deutsche Bank AG/Hong Kong

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 18: RV charts of selected China perpetuals in ask yield to call

Ask YTC (%) 13.5 AGILE'PerpC18

12.0

10.5

9.0

7.5

6.0 SHUION'PerpC17 GRNCH'PerpC19 BJCAPT'PerpC19 4.5 BJCAPT'PerpC18 CHCOMU'PerpC20 3.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Years-to-next-call *Agile is on this chart for comparison purposes but we do not believe Agile will call its perpetuals given step-up in spreads is low, while we do believe Shui On Land will call its perpetuals in Dec, 2017. Source: Bloomberg Finance LP, Deutsche Bank

Figure 19: Peer comparison of operational statistics for 2015

Company Shui On Land Cifi GZ R&F Yuzhou Yanlord China Jinmao Stock Code 272.HK 884.HK 2777.HK 1628.HK YLLG.SP 817.HK Issue ratings NR/NR/NR B1/B+/BB- B1/B/BB B1/B/BB- Ba3/BB-/NR Baa3/BBB-/BBB- Reporting period FY15 FY15 FY15 FY15 FY15 FY15 Reporting currency (RMBmn) (RMBmn) (RMBmn) (RMBmn) #NAME?(RMBmn) #NAME?(HKDmn) Market cap as of 28-Apr-16 (USDmn) Operating Statistics

Total land bank in GFA as of YE15 (mn sq m) 11.8 12.5 41.8 8.6 4.1 13.0 Number of cities as of YE15 6 15 29 11 9 15 Number of projects as of YE15 8 88 Over 70 54 36 54 2015 Contracted sales (RMB bn) 21.5 30.2 54.4 14.0 28.9 30.1 2015 Contracted GFA (mn sq m) 0.6 2.1 4.1 1.4 1.0 1.3 2015 Contracted ASP (RMB per sq m) 34,100 14,692 13,200 9,997 29,299 22,764 2015 recognized property sales (RMB bn) 4.4 17.0 40.7 10.2 16.1 16.3 Recognized GFA (mn sq m) 0.3 1.3 3.5 1.1 0.6 n.a. Recognized ASP (RMB per sq m) 15,000 12,873 11,590 9,172 27,303 n.a. Note: China Jinmao's landbank excludes GFA for primary development of 20.6mn sq m Source: Company, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 11

6 May 2016

HY Corporate Credit,Real Estate Shui On Land Limited

Figure 20: Peer comparison of financial summary

Company MEDIAN Shui On Land CIFI GZ R&F Yuzhou Yanlord China Jinmao Stock Code 272.HK 884.HK 2777.HK 1628.HK YLLG.SP 817.HK Issue ratings NR/NR/NR B1/B+/BB- B1/B/BB B1/B/BB- Ba3/BB-/NR Baa3/BBB-/BBB- Reporting period FY15 FY15 FY15 FY15 FY15 FY15 FY15 Reporting currency (RMBmn) (RMBmn) (RMBmn) (RMBmn) #NAME?(RMBmn) #NAME?(HKDmn) Market cap as of 21-Apr-16 (USDmn) Income Statement

Revenue 6,472 18,231 44,291 10,376 16,581 22,110 Revenue from investment properties 1612 1184 3547 218 401 3749 Recurring income as a % of revenue 25% 6% 8% 3% 2% 17% Gross profit 1,689 4,144 14,207 3,709 4,555 8,549 EBITDA ^ 3,863 3,184 11,354 3,167 3,501 6,416 EBIT 2,188 3,357 11,353 3,245 3,594 6,955 Gross interest -3,579 -1,774 -6,019 -1,299 -1,262 -2,757 Profit before tax 4,088 3,805 11,590 3,143 4,317 7,973 Attributable profit/(loss) to shareholders 788 2,095 5,616 1,657 1,469 3,789 Balance Sheet

Total cash 10,614 14,905 21,284 11,949 17,568 16,417 Total assets 117,180 67,452 183,733 52,846 79,897 158,900 Advanced proceeds from customers 5,025 10,396 18,408 7,221 n.a. n.a. Short term debt 12,815 2,794 32,679 3,987 6,110 8,575 Net debt 37,653 9,050 61,154 8,134 965 32,561 Total debt 48,267 23,955 82,439 20,083 18,533 48,978 Total equity 46,118 15,283 49,217 10,241 30,534 58,903 KEY CREDIT METRICS Profitability

Revenue growth 20.1% -36.9% 12.7% 27.6% 32.4% 41.3% -25.2% EBITDA growth 22.8% 62.8% -5.0% 17.3% 29.3% 28.2% -30.9% Gross margin 29.8% 26.1% 22.7% 32.1% 35.8% 27.5% 38.7% EBITDA margin 27.3% 59.7% 17.5% 25.6% 30.5% 21.1% 29.0% Net margin 12.4% 12.2% 11.5% 12.7% 16.0% 8.9% 17.1% Return on equity (ROE) 12.2% 2.1% 18.2% 14.6% 18.6% 7.4% 9.8% Selling expenses as a % of revenue 2.4% 3.5% 2.0% 2.0% 2.8% 2.1% 4.4% Admin and other operating expenses as a % of revenue 5.0% 13.9% 3.3% 5.4% 2.9% 4.5% 7.0% Interest and Debt Coverage

EBITDA interest coverage *^ 2.1x 1.1x 1.8x 1.9x 2.4x 2.8x 2.3x Recurring income / Gross interest 0.5x 0.5x 0.7x 0.6x 0.3x 0.3x 1.4x Debt / EBITDA *^ 7.4x 12.5x 7.5x 7.3x 6.3x 5.3x 7.6x Net debt / EBITDA *^ 4.0x 9.7x 2.8x 5.4x 2.6x 0.3x 5.1x Total debt / Total capital 56.1% 51.1% 61.1% 62.6% 66.2% 37.8% 45.4% Total debt / Total assets 36.8% 41.2% 35.5% 44.9% 38.0% 23.2% 30.8% Net debt / Equity 69.3% 81.6% 59.2% 124.3% 79.4% 3.2% 55.3% Net debt / Equity ^^ 70.5% 90.8% 59.2% 144.0% 79.4% 3.2% 61.6% Net debt / Equity ^^^ 73.9% 100.9% 59.2% 167.6% 79.4% 3.2% 68.4% Liquidity and Debt Subordination

Total cash / Short-term debt 239.5% 82.8% 533.6% 65.1% 299.7% 287.5% 191.5% Total cash / Total debt 46.5% 22.0% 62.2% 25.8% 59.5% 94.8% 33.5% Total cash / Total assets 15.3% 9.1% 22.1% 11.6% 19.1% 22.0% 10.3% Short-term debt / Total debt 23.2% 26.6% 11.7% 39.6% 19.9% 33.0% 17.5% Note: * Ratios are calculated based on trailing 12-month data; ^ EBITDA includes cash distribution from JVs and associates; ^^ 50% of hybrid is treated as debt and 50% as equity, ^^^ 100% of hybrid is treated as debt Source: Company, Deutsche Bank

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Figure 21: Key financial summary of Shui On Land

C ompany Shui On Land (NR/NR/NR) Stock code 272.HK Reporting period FY13 FY14 FY15 1H15 Reporting currency (RMBm) (RMBm) (RMBm) (RMBm) Income statement Revenue 9,828 10,249 6,472 2,027 Gross profit 3,155 3,446 1,689 578 EBITDA ^ 2,083 2,373 3,863 155 Gross interest (3,103) (3,474) (3,579) (1,844) Net income 2,125 1,778 788 1,195 Cash Flows Statement FFO (Funds from operations) (1,565) (1,702) (3,566) n.a. Changes in working capital 731 (7,972) (853) n.a. Cash from operations 1,826 (6,771) (890) (2,278) Balance Sheet Total cash 10,180 12,430 10,614 7,126 Restricted cash embedded in total cash 4,802 5,762 7,270 4,823 Inventory (completed properties held for sale) 1,536 4,648 2,560 2,627 Total assets 98,602 108,323 117,180 112,947 Short term debt 6,315 11,687 12,815 9,030 Net debt (incl. restricted cash) 27,081 35,838 37,653 41,309 Total equity 36,155 37,811 36,645 38,827 Total debt 37,261 48,268 48,267 48,435 KEY CREDIT METRICS Revenue growth 103.9% 4.3% -36.9% -61.3% EBITDA growth 61.1% 13.9% 62.8% -87.7% Gross margin 32.1% 33.6% 26.1% 28.5% EBITDA margin 21.2% 23.2% 59.7% 7.6% EBITDA interest coverage *^ 0.7x 0.7x 1.1x 0.3x Debt / EBITDA *^ 17.9x 20.3x 12.5x 38.1x Debt / EBITDA ^^ 18.6x 21.6x 13.1x 41.0x Debt / EBITDA ^^ 19.4x 22.8x 13.6x 43.9x Net debt / EBITDA *^ 13.0x 15.1x 9.7x 32.5x Net debt / EBITDA ^^ 13.7x 16.4x 10.3x 35.4x Net debt / EBITDA ^^^ 14.5x 17.6x 10.9x 38.2x Total debt / Total capital 46.9% 51.8% 51.1% 50.5% Net debt / Equity (cash incl. restricted cash) 64.2% 79.8% 81.6% 87.2% Net debt / Equity ^^ 70.5% 92.5% 90.8% 102.8% Net debt / Equity ^^^ 77.2% 107.2% 100.9% 121.3% Unrestricted cash / Short-term debt 141.7% 85.2% 49.4% 63.5% Total cash / (ST debt + 6-month COGS) 105.5% 82.4% 69.8% 68.0% Total cash / Short-term debt 161.2% 106.4% 82.8% 78.9%

Note: * Ratios are calculated based on trailing 12-month data; ^ EBITDA includes cash distribution from JVs and associates; ^^ 50% hybrid is treated as debt and 50% as equity; ^^^100% hybrid is treated as debt Note that we included derivative financial instruments on the liability section in our total debt figures; for instance, there were RMB275mn of derivatives financial instruments at end-2015. Source: Company, Deutsche Bank

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Figure 22: RV charts of China property BB issuance in terms of mid-YTW

YTW (%) China property BB bonds 8.5

CENCHI'21C19 CENCHI'20C17 7.5

COGARD'23C18 SOHOCH'22C17 6.5 CENCHI'18C16 COGARD'21C17 COGARD'20C18

SHIMAO'22C19 5.5 SHIMAO'21C18 YLLGSP'18C16 COGARD'19C17

4.5 LNGFOR'23C18 GRNCH'20C18 ROADKG'17C16 SHIMAO'20C17 GRNCH'18C16 3.5 GRNCH'19C17 LNGFOR'19C16

2.5 0 1 2 3 4 5 Years-to- worst

CENCHI COGARD LNGFOR SHIMAO GRNCH

Log. (CENCHI) Log. (COGARD) Log. (LNGFOR) Log. (SHIMAO) Log. (GRNCH)

Source: Bloomberg Finance LP, Deutsche Bank

Figure 23: RV charts of China property BB issuance in terms of mid-YTM

YTM (%) China property BB bonds 9.0 YLLGSP'18C16 8.5 CENCHI'21C19 8.0 CENCHI'20C17 7.5

7.0 COGARD'23C18 COGARD'21C17 SOHOCH'22C17 6.5 ROADKG'17C16 CENCHI'18C16 COGARD'20C18 SHIMAO'21C18 SHIMAO'22C19 6.0 GRNCH'18C16 COGARD'19C17 5.5 LNGFOR'19C16 LNGFOR'23C18

SHIMAO'20C17 5.0 GRNCH'19C17

4.5 GRNCH'20C18

4.0 1 2 3 4 5 6 7 8 Years-to- maturity CENCHI COGARD LNGFOR SHIMAO GRNCH

Log. (CENCHI) Log. (COGARD) Log. (LNGFOR) Log. (SHIMAO) Log. (GRNCH)

Source: Bloomberg Finance LP, Deutsche Bank

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Figure 24: RV charts of selected China property B and CCC issuance in terms of mid-YTW

YTW (%)

10.5

EVERRE'20C18 10.0 EVERRE'18C16

9.5

9.0 FTHDGR'20C17 FTHDGR'19C17 FTHDGR'18 EVERRE'19 8.5

TPHL'20C18 8.0 FANHAI'20C18

FTHDGR'17 7.5 CHINSC'20C18 FANHAI'19C17

7.0 GZRFPR'20C17 AGILE'20C18 PWRLNG'18 FUTLAN'19C17 TPHL'19C17 AGILE'19C17 CAPG'18 6.5 LOGPH'19C17 GZRFPR'19C17 SUNAC'19C17 CAPG'19C17 YUZHOU'19C17 SHUION'19C17 YUZHOU'19C17 new KWGPRO'19C17 new CIFIHG'20C18 SHUION'20C17 6.0 FUTLAN'17 KWGPRO'20C17

KWGPRO'19C17 5.5 LOGPH'17 SHUION'18

5.0 SHUION'17 AGILE'17

4.5 CIFIHG'19C17 KWGPRO'17

4.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Years-to-worst

AGILE CAPG CIFIHG FANHAI EVERRE FUTLAN

FTHDGR KWGPRO LOGPH GZRFPR SUNAC SHUION

TPHL YUZHOU Log. (AGILE) Log. (CAPG) Log. (CIFIHG) Log. (FANHAI)

Log. (EVERRE) Log. (FUTLAN) Log. (FTHDGR) Log. (KWGPRO) Log. (LOGPH) Log. (GZRFPR)

Log. (SUNAC) Log. (SHUION) Log. (TPHL) Log. (YUZHOU)

Source: Bloomberg Finance LP, Deutsche Bank

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Figure 25: RV charts of selected China property B and CCC issuance in terms of mid-YTM

YTM (%) 10.5 EVERRE'20C18 10.0 EVERRE'18C16

9.5 FTHDGR'20C17

9.0 FTHDGR'19C17 FTHDGR'18 EVERRE'19 8.5 TPHL'19C17 TPHL'20C18 8.0 FANHAI'19C17 FANHAI'20C18 CAPG'19C17 7.5 FTHDGR'17 CHINSC'20C18 LOGPH'19C17 GZRFPR'20C17 SHUION'20C17 FUTLAN'19C17 7.0 AGILE'20C18 PWRLNG'18 SHUION'19C17 AGILE'19C17 SUNAC'19C17 KWGPRO'20C17 GZRFPR'19C17 6.5 SUNAC'18C16 YUZHOU'19C17 YUZHOU'19C17 new CAPG'18 KWGPRO'19C17 CIFIHG'20C18 YUZHOU'18C16 KWGPRO'19C17 new 6.0 FUTLAN'17

CIFIHG'19C17 5.5 LOGPH'17 SHUION'18

5.0 AGILE'17 SHUION'17 4.5 KWGPRO'17

4.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 4.0 4.5 Years-to-maturity AGILE CAPG CIFIHG EVERRE FUTLAN FTHDGR KWGPRO

LOGPH GZRFPR SUNAC SHUION TPHL YUZHOU FANHAI

Log. (AGILE) Log. (CAPG) Log. (CIFIHG) Log. (EVERRE) Log. (FUTLAN) Log. (FTHDGR) Log. (KWGPRO)

Log. (LOGPH) Log. (GZRFPR) Log. (SUNAC) Log. (SHUION) Log. (TPHL) Log. (YUZHOU) Log. (FANHAI)

Source: Bloomberg Finance LP, Deutsche Bank

The author of this report wishes to acknowledge the contribution made by Meili Mou, an employee of CRISIL Global Research & Analytics, a division of CRISIL Limited, a third-party provider of offshore research support services to Deutsche Bank.

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Appendix 1

Important Disclosures

Additional information available upon request

Disclosure checklist Institution Disclosure Shui On Land Ltd SHUION 9.625% notes due 2019 14 SHUION 10.125% perpetual notes 14 SHUION 9.75% notes due 2020 14 Shui On Development Holding Ltd 6.875 20170226 14 SHUION 8.7% notes due 2018 14 SHUION 8.7% notes due 2017 14 *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

For disclosures pertaining to recommendations or estimates made on a security mentioned in this report, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr

Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Karen Kwan

The authors of this report wish to acknowledge the contribution made by Mary Mou,an employee of Irevna, a third- party provider to Deutsche Bank of offshore research support services.

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Deutsche Bank debt rating key Bond rating dispersion and banking relationships CreditBuy (“C-B”): The total return of the Reference 450 Credit Instrument (bond or CDS) is expected to 400 78 % outperform the credit spread of bonds / CDS of other 350 issuers operating in similar sectors or rating 300 categories over the next six months. 250 200 150 29 % CreditHold (“C-H”): The credit spread of the Reference 11 % 100 11 % 47 % Credit Instrument (bond or CDS) is expected to 50 43 % perform in line with the credit spread of bonds / CDS 0 of other issuers operating in similar sectors or rating Buy Hold Sell categories over the next six months. CreditSell (“C-S”): The credit spread of the Reference Companies Covered Cos. w/ Banking Relationship Credit Instrument (bond or CDS) is expected to Asia-Pacific Universe underperform the credit spread of bonds / CDS of

other issuers operating in similar sectors or rating categories over the next six months. CreditNoRec (“C-NR”): We have not assigned a recommendation to this issuer. Any references to valuation are based on an issuer’s credit rating. Reference Credit Instrument (“RCI”): The Reference Credit Instrument for each issuer is selected by the analyst as the most appropriate valuation benchmark (whether bonds or Credit Default Swaps) and is detailed in this report. Recommendations on other credit instruments of an issuer may differ from the recommendation on the Reference Credit Instrument based on an assessment of value relative to the Reference Credit Instrument which might take into account other factors such as differing covenant language, coupon steps, liquidity and maturity. The Reference Credit Instrument is subject to change, at the discretion of the analyst. DB Credit Opinion Definition : The DB Credit Opinion follows the same scale as S & P's credit ratings ranging from AAA for the Highest credit quality to C for the Weakest credit quality. It reflects our opinion on the creditworthiness of a company. We derive our Credit Opinion from fundamental credit analysis of the company, comparable analysis, benchmarking against

rating agencies and qualitative judgement. (a) Regulatory Disclosures (b) 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. (c) 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.

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(d) Additional Information

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Raj Hindocha Marcel Cassard Steve Pollard Global Chief Operating Officer Global Head Global Head Research FICC Research & Global Macro Economics Equity Research

Michael Spencer Ralf Hoffmann Andreas Neubauer Regional Head Regional Head Regional Head Asia Pacific Research Deutsche Bank Research, Germany Equity Research, Germany

International Locations

Deutsche Bank AG Deutsche Bank AG Deutsche Bank AG Deutsche Securities Inc. Deutsche Bank Place Große Gallusstraße 10-14 Filiale Hongkong 2-11-1 Nagatacho Level 16 60272 Frankfurt am Main International Commerce Centre, Sanno Park Tower Corner of Hunter & Phillip Streets Germany 1 Austin Road West,Kowloon, Chiyoda-ku, Tokyo 100-6171 Sydney, NSW 2000 Tel: (49) 69 910 00 Hong Kong Japan Australia Tel: (852) 2203 8888 Tel: (81) 3 5156 6770 Tel: (61) 2 8258 1234 Deutsche Bank AG London Deutsche Bank Securities Inc. 1 Great Winchester Street 60 Wall Street London EC2N 2EQ New York, NY 10005 United Kingdom United States of America Tel: (44) 20 7545 8000 Tel: (1) 212 250 2500