Chinese Homebuilders and Property Developers

China Co., Ltd. Credit Report

Ratings Overview

Issuer Rating ▪ Pengyuan International has assigned its first-time global scale long-term LT Issuer Credit Rating BBB+ issuer credit rating (LTICR) of ‘BBB+’ to China Vanke Co., Ltd. (Vanke). The outlook is stable.

Outlook Stable ▪ Vanke is one of the leading property developers in China. Property development contributed 95% of the Company’s revenue, followed by 4%

from property management and the rest from other businesses such as Contents logistics and warehousing services in the first half of 2019. Vanke’s rating reflects its superior market position in Chinese property development

industry, nationwide high-quality land bank, low leverage and strong Business Profile ...... 3 profitability. On the other hand, Vanke’s rating is constrained by market Financial Profile ...... 6 cyclicality, policy uncertainties as well as a relatively high business

concentration risk. Liquidity ...... 6

Covenants ...... 7 Rating Outlook Other Considerations ...... 7

▪ The stable outlook for Vanke reflects Pengyuan International’s Company Background ...... 7 expectation that the Company will continue to grow its contracted sales Peer Comparison ...... 7 and maintain its leading market position in China.

Rating Scores Summary ...... 9 ▪ We would consider downgrading Vanke’s issuer credit rating if its credit

profile deteriorates substantially, which could be caused by 1) a Related Criteria ...... 9 substantial increase in leverage for a prolonged period; 2) a material decline in EBITDA margin with little prospects of recovery; 3) a marked deterioration of operating profile.

▪ We would consider upgrading the Company’s issuer credit rating if its credit profile improves substantially, which could be caused by 1) substantial decrease in leverage on a sustained basis; 2) substantial improvement of operating profile. Contacts Financial Summary Primary Analyst Table 1: Financial Ratios Name Simon Lee, CFA 2017A 2018A 2019F 2020F 2021F Title Analyst EBITDA Interest Coverage 6.1x 5.2x 5.2x 5.7x 5.6x Direct +852 3615 8307 Gross Debt/Capitalization 51% 54% 54% 54% 53% Email [email protected] Net Debt/Adj. Inventory 16% 31% 27% 23% 25%

Contracted Sales/Gross Debt 1.9x 1.5x 1.5x 1.4x 1.4x Secondary Analyst EBITDA Margin 21% 26% 26% 27% 28%

Name Winnie Guo ROIC 20% 22% 25% 31% 34% Source: Company, Pengyuan International estimates

Title Director

Direct +852 3615 8344 Email [email protected]

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Key Rating Drivers

Credit Strengths ▪ Vanke has long been one of the top three players in the Chinese property development sector and we expect its leading market position to be maintained. Established over 30 years ago, Vanke was the third largest property developer in China in terms of contracted sales in 2018. Thanks to its leading market position and large scale, Vanke has better operating efficiencies and higher market recognition compared to other Chinese property players, which enabled it to outperform throughout the property cycles in China. Its contracted sales growth slowed to 10% in the first half of 2019 from 15% in 2018 and 46% in 2017, but still outpaced the Chinese property market growth. We estimate Vanke’s market share in contracted sales expanded to 4.7% in the first half of 2019 from 3.1% in 2016 and expect the Company to maintain its current market share in the coming two years despite slower contracted sales growth.

▪ We believe the Company has a nationwide quality land bank with an optimal land bank life. Vanke has a nationwide land bank across China, which is sufficient to support around three years of sales as of June 2019. The company had attributable gross floor area (GFA) 96 million square meters (sqm) of land bank across 29 provinces or autonomous regions, by our estimates. As of the end of 2018, 16% of its land bank was located in Guangdong province, followed by 11% in province and 7% in Zhejiang province. We estimate that tier-1 and 2 cities accounted for 73% of its attributable land bank. The high-quality land bank supports Vanke’s project pipeline. We expect Vanke to maintain an optimal land bank life of around three years in 2019 and 2020.

▪ We assess Vanke’s leverage to be manageable based on its strong cash collection and conservative land acquisition strategy. We estimate Vanke had a high cash collection ratio of 90% in the first half of 2019, which is expected to be maintained in the next two years. In addition, Vanke’s land premium has dropped with the attributable land acquisition cost decreasing by 2% year-on-year to RMB70 billion in the first half of 2019. As a result, its attributable land premium to contracted sales ratio decreased to 29% in the first half of 2019 from 33% in the first half of 2018, reflecting a more conservative strategy. Thanks to its lower land acquisition, we expect Vanke’s gross debt to total capitalization ratio to be maintained around 54% in 2019 and net debt to adjusted inventory to slightly improve to 27% in 2019 from 31% in 2018.

▪ Strong profitability with stable cash flow driven by strong contracted sales and execution. Vanke has stronger profitability and more stable cash flow than its peers. In 2018, the Company achieved EBITDA margin of 26%, compared to the sector’s average of 20%, and its ROIC reached 22%, much higher than the sector’s average of 4%. We expect Vanke’s strong profitability and stable cash flow to sustain, driven by the its large unrecognized contracted sales and outstanding execution capability.

Credit Weaknesses ▪ Market cyclicality and policy risks might influence the Company’s profitability and financing negatively. We anticipate the Chinese government will continue its tight control on property and crack down on unregulated financing. As one of the largest property developers in China, Vanke is exposed to market cyclicality and policy or regulatory risks. Policy uncertainties related to property regulations among different cities remain the key concern for Vanke.

▪ We estimate Vanke’s business concentration risk is relatively high. Being one of the property leaders in China, 95% of Vanke’s revenue came from property development in the first half of 2019, while other businesses, such as property services and rental housing, also have relatively high correlation to the property development market. Although Vanke has started diversifying its business beyond residential property, we believe the transition would take time and property development will remain the company’s core business in the next three years.

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Table 2: Key Credit Metrics (RMB million) 2017A 2018A 2019F 2020F 2021F Financials and Profitability Revenue 242,897 297,679 367,938 453,147 514,071 EBITDA 51,417 77,454 95,092 121,718 141,786 EBITDA margin 21% 26% 26% 27% 28% Return on assets (ROA) 5% 6% 6% 7% 7% Return on invested capital (ROIC) 20% 22% 25% 31% 34% Cash Flow Measures Funds from operations (FFO) 31,041 46,505 50,700 64,261 72,932 Operating cash flows (OCF) 53,715 28,218 75,302 62,517 33,027 Free cash flow (FCF) 53,277 12,970 72,827 56,505 28,965 Discretionary cash flow (DCF) 40,411 -4,553 52,612 31,049 -502 Capital expenditure 438 15,247 2,475 6,012 4,062 Balance Sheet Measures Cash and liquid investments 174,134 200,329 266,269 335,330 388,664 Excess cash 159,101 181,450 246,057 313,562 365,812 Total debt 195,732 281,347 326,183 386,183 456,183 Adjusted debt 36,631 99,897 80,126 72,621 90,371 Total capitalization 382,406 516,968 604,637 719,575 853,608 Leverage Measures EBITDA Interest Coverage 6.1x 5.2x 5.2x 5.7x 5.6x Gross Debt/Capitalization 51% 54% 54% 54% 53% Net Debt/Adj. Inventory 16% 31% 27% 23% 25% Contracted Sales/Gross Debt 1.9x 1.5x 1.5x 1.4x 1.4x FFO/Cash interest expense 4.8x 3.6x 2.8x 3.0x 2.9x Source: Company, Pengyuan International estimates Business Profile

Leading market position in China’s property development sector Vanke has long been one of the top three players in terms of contracted sales in China’s property development market. According to Leju, E-house and CRIC Research, Vanke ranked No. 3 in attributable contracted sales averaged over 2016 to 2018, as shown in Exhibit 1. Vanke recorded total and attributable contracted sales of RMB607 billion and RMB425 billion respectively in 2018. In the first half of 2019, Vanke recorded total contracted sales of RMB334 billion, representing a year- on-year growth of 9.6%, derived from a 5.6% year-on-year growth of cumulative GFA sold and 3.8% growth of average selling price (ASP). As of June 2019, Vanke had unrecognized property sales of RMB622 billion, which is expected to be booked in the next three years.

Exhibit 1: 2016-2018 Ranking of Chinese property developers’ three-year average attributable contracted sales RRMB bn

500 450 400 350 300 250 200 150 100 50

0

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

CCRE

Vanke Tahoe

CMSK

Yango Redco

Jingrui

Guorui

COGO

Yuexiu

Jinmao

Longfor Shimao Aoyuan Yuzhou

Yanlord Jiayuan

Risesun Xinyuan

CR Land CR

Gemdale

Ronshine Roadking

Fantansia

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden

SinoOceanland XinhuZhongbao

Note: The ranking excludes Wanda (3699 HK) due to limitation on obtaining attributable contracted sales Source: Company, Leju, E-house, CRIC Research, Pengyuan International estimates Vanke has high customer recognition in China’s property market as evidenced by various awards obtained each year. Vanke was named “Top 1 in China’s Top 100 Property Services Enterprises” for nine consecutive years, ranked first in “The Most Preferred Property Services Brand of China’s Top 500 Property Developers” for five consecutive years, and named “Leading Featured Property Services Enterprises in China – Enterprise Headquarters” for two consecutive years. Vanke ranked 307th, 332rd and 254th on the Fortune Global 500 in 2017, 2018 and 2019 respectively.

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Vanke has continuously expanded its market share from 2014 to 2018 and we expect it to maintain its leading market position in the next few years despite slower contracted sales growth. Vanke’s market share in terms of contracted sales increased to 4.0% in 2018 from 2.8% in 2014 while its market share in terms of GFA sold rose to 2.4% in 2018 from 1.5% in 2014 (Exhibits 2 and 3).

Exhibit 2: Market share of Vanke by total contracted sales Exhibit 3: Market share of Vanke by total GFA sold

RMB bn mn sqm 800 5.0% 50 3.0%

2.5% 4.0% 40 600 2.0% 3.0% 30 400 1.5% 2.0% 20 1.0% 200 1.0% 10 0.5%

0 0.0% 0 0.0% 2014 2015 2016 2017 2018 2019F 2014 2015 2016 2017 2018 2019F

Total Contracted Sales Market Share Total GFA Sold Market Share

Source: Company, NBS, Pengyuan International estimates Source: Company, NBS, Pengyuan International estimates

Nationwide quality land bank with optimal land bank life

Strategically positioned as a ‘city and town development and services provider’, Vanke is primarily engaged in the development of small to medium residential properties. Its projects cover over 70 cities in mainland China’s southern region, , northern region, central and western region, and has a small presence in six cities overseas, namely San Francisco, Hong Kong, Singapore, New York, London and Seattle.

Vanke has a high quality and geographically diversified land bank in China, providing a sustainable and diversified source of revenue. The company had an attributable land bank of 96 million sqm as of June 2019. We estimate the central and western region, southern region, northern region and Shanghai accounted for 28%, 25%, 25% and 22% of its land bank respectively in 2018 (Exhibit 4). Around 16.4% of its land reserves is located in Guangdong, followed by 10.5% in Jiangsu, 6.9% in Zhejiang and 6.6% in Liaoning province. Tier-1, 2 and 3 cities accounted for 10.9%, 62.0% and 27.1% of land reserves in terms of attributable GFA respectively.

With such advantageous locations, Vanke’s land bank has high profitability, in our view. Most of Vanke’s projects are located in prime or premium secondary locations near business districts or local landmarks. The superior location has provided the Company strong pricing power. Vanke reported an average selling price (ASP) of RMB15,032/sqm and RMB15,534/sqm in 2018 and the first half of 2019 compared to its unit land costs of RMB5,427/sqm and RMB6,522/sqm during those respective periods. The substantial difference between unit land cost and ASP results in high profitability.

In our view, Vanke has an optimal land bank life, which is sufficient for its future development. We expect the Company to maintain its land bank life at an optimal level in the next three years by adjusting its land acquisition to match the slowdown in contracted sales. Due to strong contracted sales growth and moderate land acquisition, Vanke’s land bank life shortened to 3.2 years in the first half of 2019 from 3.3 years in 2018 and 3.5 years in 2017 (Exhibit 5). Meanwhile, it has reduced land acquisition with the attributable land acquisition to contracted sales ratio decreasing to 32% in 2018 from 58% in 2017. In the first half of 2019, Vanke acquired GFA10.74 million sqm of attributable new land with attributable land cost of RMB70 billion, representing a year-on-year decline of 1.6%.

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Exhibit 4: 2018 Attributable land bank GFA Exhibit 5: 2015-2019 Land bank life

Year Southern Central and Region 6 Western 25% Region 28% 5

4

3

2

1 Northern Shanghai Region Region 25% 22% 0 2015 2016 2017 2018 2019F

Source: Company, Pengyuan International estimates Source: Company, Pengyuan International estimates Relatively high business concentration but high operating efficiency

In our view, Vanke’s business concentration is high. The Company focuses on the development of small to medium residential properties. Around 95% of its revenue came from property development, of which around 90% was small and medium housing units of under 144 sqm each (Exhibit 6). Though Vanke has been diversifying its business, we expect the transition will take time and residential property development will remain its core business in the next few years.

Vanke has high operating and cash flow efficiencies supported by a high sell-through rate and cash collection rate (Exhibit 7). Thanks to its strong execution and robust demand from tier-2 cities, Vanke’s sell-through rate was 133% in 2018, higher than the selected peer median of 96%. Vanke has also kept its cash collection ratio above 90%, higher than the selected peer median of 82%.

Exhibit 6: The first half of 2019 Revenue breakdown by segment Exhibit 7: 2016-2018 Sell-through rate and cash collection rate

Property Others 180% Management 1% 4% 160% 140%

120%

100%

80%

60%

40%

20%

0% Property 2016 2017 2018 95% Sell-through Rate Cash Collection Rate

Source: Company Source: Company

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Financial Profile

Credit Profile

Thanks to its financial discipline, Vanke was able to keep its leverage relatively low throughout property cycles, though its expansion in recent years has pushed up the leverage a bit. Vanke had a gross debt to total capitalization ratio of 54% in the first half of 2019 and we expect the ratio to stay at a similar level in the coming two years due to the Company’s conservative land acquisition approach since 2018. In the first half of 2019, Vanke’s land replenishment totaled RMB70 billion, down 2% year-on-year, with GFA at 10.7 million sqm, down 21% year-on-year. Its total land premium to contracted sales ratio fell to 27% in the first half of 2019 from 35% in the first half of 2018.

Vanke’s net debt to adjusted inventory ratio increased to 31% in 2018 from 16% in 2017, largely due to a significant increase in debt in 2018 which outpaced the increase in inventory. We expect the ratio to fall to 27% in 2019 and 23% in 2020 on the back of conservative land acquisition and high sell-through rate.

Vanke’s contracted sales to gross debt ratio was 1.5x in 2018, and is expected to be 1.3x-1.5x from 2019 to 2021, driven by strong contracted sales. Vanke’s EBITDA interest coverage was 5.2x in 2018 and we expect the EBITDA interest coverage will remain above 5.0x in the next three years.

We believe Vanke’s cash flow variation is low. Vanke reported a positive funds from operations (FFO), operating cash flow (OCF) and free cash flow (FCF) from 2016 to 2018. We expect Vanke to continue to report positive FFO, OCF and FCF from 2019 to 2021 driven by its strong contracted sales, cash collection and disciplined land acquisition.

In our opinion, Vanke’s debt structure risk is low. Its short-term debt to total debt ratio fell to 26% at the end of the first half of 2019 from 34% in 2018. We expect the short-term debt to total reported debt ratio to be around 30% in the next two years.

We believe Vanke’s interest rate risk is low. As of the end of 2018, Vanke’s floating interest rate debt accounted for 56% of its interest-bearing debt. We estimate that an increase of 100 basis points in interest rates would decrease Vanke’s profit after tax by approximately RMB538 million in 2019, equivalent to a 1.2% change in net profit after tax. In addition, we believe Vanke’s foreign exchange rate risk is low. As of the end of 2018, 70% of its debt is denominated in RMB. Its foreign debt is mainly denominated in US dollars, of which 23% is hedged.

The financial policy of Vanke is neutral. As a company listed in Hong Kong and Shenzhen, Vanke has relatively high transparency in financial policy and management is willing to discuss the company’s financial policies with external parties. The Company has a disciplined management and investment strategy. Management is cautious over land replenishment and expects to keep it around 35% of contracted sales.

Profitability

Thanks to economies of scale, strong land replenishment capability and pricing power, Vanke consistently outperformed its peers in EBITDA and ROIC, with average EBITDA and ROIC at 21% and 20% compared to sector’s average of 18% and 5% respectively, from 2016 to 2018.

Thanks to solid housing demand in tier-1 and 2 cities where Vanke has high exposure, its EBITDA and ROIC rose to 26% and 22% in 2018 from 21% and 20% in 2017 respectively, primarily driven by its improved gross margin in the property development segment to 38% in 2018 from 34% in 2017. We believe Vanke is able to maintain high profitability in the next three years supported by its substantial unrecognized sales and low-cost land reserves. Liquidity

We assess Vanke’s liquidity as excellent. We believe the cash flow liquidity ratio better reflects property developers’ liquidity, since the quick ratio doesn’t take into account inventory which is a big component of the land bank. We project Vanke’s cash flow liquidity ratio to be 4.2x over the next 12 months, after accounting for its undrawn bank facilities. This indicates Vanke has more than sufficient cash inflow to support its cash outflow requirements. As of September 2019, the Company had credit facility of RMB358 billion, of which RMB181 billion is unused.

We made the following key assumptions when calculating Vanke’s liquidity:

▪ Estimated cash and short-term investments of around RMB200 billion and RMB266 billion in 2019 and 2020

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▪ Projected FFO to be about RMB51 billion and RMB64 billion in 2019 and 2020 ▪ Projected net working capital inflows of about RMB51 billion RMB34 billion during 2019 and 2020 ▪ Estimated short-term debt payment of around RMB95 billion and RMB115 billion in 2019 and 2020 ▪ Estimated cash interest payment of about RMB18 billion and RMB21 billion in 2019 and 2020 Covenants

We assess Vanke’s bond covenants as neutral and the risk of the Company breaching its financial covenants to be very low in the next 12 months. All its onshore debt shares similar covenants, which apply but are not limited to the following conditions, where an emergency investor protection will be activated if ▪ The Company reports material losses (including losses from investment and operations) of more than 10% of net assets at the end of the previous year ▪ The Company gives up its creditor claims or assets of over 10% of its net assets at the end of the previous year ▪ New borrowings or external guarantees in a given financial year exceed 20% of net assets at the end of the previous year

For its offshore debt, all debt issues are non-public so the covenants are not publicly disclosed. Other Considerations

We apply an uplift of one notch in our supplementary analysis, as we believe Vanke’s credit risk profile is better than the peer average. In our view, Vanke has a high score for its high-quality land bank and properties, strong brand recognition and setting the standard for the industry, as well as its outstanding operating efficiency in terms of cash flow efficiency and profitability.

We estimate that tier-1 and 2 cities accounted for 73% of its attributable land bank in 2018. The higher concentration of low- cost land bank in tier-1 and 2 cities and high ASP among these cities boost the Company’s profitability. Vanke has shortened its land bank life to around two to three years, which is optimal for contracted sales growth in the next two to three years. Vanke has established a strong brand through its quality products and services as evidenced by various awards it gained. Vanke’s high sell-through rate, cash collection and profitability demonstrate its outstanding operating efficiency. Therefore, we believe Vanke’s overall competitiveness enables it to maintain its leading market position in the next few years. Company Background

Founded in 1984 and headquartered in Shenzhen, Vanke is one of the top property developers in China. The Company focuses on small to medium residential properties. In the first half of 2019, property development contributed 95% of revenue, followed by 4% from property management and the rest from businesses such as logistics and warehousing services. Vanke recorded total contracted sales of RMB607 billion, with GFA of 40.4 million sqm sold.

As of June 2019, Vanke is 29% owned by Shenzhen Metro Group Co., Ltd., which is wholly-owned by the Shenzhen Supervision and Administration Commission of the State Council (SASAC), 8% by Shenzhen Jushenghua Industrial Development Co., Ltd. and 6% by Anbang Life Insurance Co.,Ltd. Peer Comparison

We selected eight domestic players as Vanke’s peers in this section. We currently have ratings on the following developers, namely Shimao Property Holdings Limited (BBB-/Stable), Central China Real Estate Limited (BB/Stable) and Ronshine China Holdings Ltd. (BB/Stable). We have not assigned ratings to other selected peers of Vanke.

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Table 3: Vanke’s Peers CGHC Holdings Co. Ltd. (CGHC) was established in 1992. YANGO focuses on property development, construction, decoration, property investment, as well as hotel development and management in China. In 2018, CGHC recorded contracted sales of RMB502 bn, with total GFA of 54.2 million sqm sold in 2018. PREG Group Co., Ltd. (PREG) was founded in 1992 and is based on Guangzhou. PREG mainly engages in residential and commercial property development in China and internationally. PREG is also involved in the construction, agency, asset management, engineering design and consulting services. In 2018, its contracted sales reached RMB405 billion, with total GFA of 27.7 million sqm sold. COLI China Overseas Land & Investment Ltd. (COLI) was founded in Hong Kong in 1979. COLI is a subsidiary of China State Construction Engineering Corporation. COLI has three major businesses, namely residential development, urban services and design services in China, Hong Kong, Macau, New York, Sydney and Singapore. In 2018, its contracted sales and GFA sales were RMB301 billion and 15.9 million sqm respectively. CEGG China Ltd. (CEGG) is founded in 1996. CEGF focuses on property development, with supporting businesses such as cultural tourism and health services. CEGG owns more than 810 projects in over 280 cities. CEGG is the largest property developer based on contracted sales in 2018. CEGG record contracted sales of RMB551 billion, with total GFA of 55.1 million sqm sold. GLHG Greenland Holding Group Company Ltd. (GLHG) was established in 1992 and headquartered in Shanghai. The company focuses on property development, infrastructure engineering, hotel management, car, loans and other business in China. GLHG also had some exposure in Hong Kong, Korea, United States, Australia and Canada. GLHG recorded contracted sales of RM388 billion, with total GFA of 36.6 million sqm sold in 2018. Shimao Shimao Property Holdings Ltd. (Shimao) was founded in 2001. The company focuses on the development of large-scale mid-to-high end integrated residential, hotel, office and commercial properties in China. SHIMAO develops its commercial properties through its 58.92%- owned subsidiary, Shanghai Shimao, which is listed on the Shanghai Stock Exchange (600823 SS). Shimao Property focuses on residential property development as well as hotel investment and operations in China. In 2018, SHIMAO recorded contracted sales of RMB176 billion and total GFA of 10.7 million sqm sold. CCRE Central China Real Estate Limited (CCRE) was founded in 1992. The company is engaged in branded properties in Henan Province. As of 30 June 2018, the company has a presence in Henan’s 18 prefecture-level cities and 70 county-level cities. In 2018, contracted sales was RMB54 billion, with GFA of 7.4 million sqm sold. Ronshine Ronshine China Holdings Ltd. (Ronshine) was founded in 2003 and is headquartered in Shanghai. RONSHINE engages in property development in China. Its properties primarily include high-end residential properties and commercial properties such as office buildings, shops, and hotels. RONSHINE had contracted sales of RMB122 billion, with total GFA of 5.6 million sold in 2018. Source: Pengyuan International estimates Table 4: Vanke’s Peer Comparison (3-year average 2016-2018) (RMB million) Vanke CGHC PREG COLI CEGG GLHG Shimao CCRE Ronshine Contracted Sales 354,233 383,890 224,197 188,740 455,727 293,220 100,397 27,953 37,095 Revenues 260,351 253,022 165,224 146,762 329,554 295,254 71,742 13,256 25,360 EBITDA 56,521 45,341 30,933 44,198 88,288 25,016 17,669 2,023 3,518 FFO 34,144 23,067 10,045 24,001 68,003 3,097 19,003 1,681 1,756 Operating cash flows 37,609 37,816 -23,718 -1,021 -21,630 4,445 2,360 2,664 -13,760 Capital expenditures 5,568 -9,264 -9,680 -2,240 -26,196 -8,645 -2,805 85 -1,661 Free cash flow (FCF) 32,041 47,080 -14,038 1,219 4,566 13,091 5,165 2,579 -12,099 Discretionary cash flow 17,996 40,721 -20,006 -6,891 -6,570 7,977 2,418 2,450 -12,099 Cash and short-term investments 156,875 177,364 76,266 105,854 268,062 80,337 35,974 14,533 20,555 Gross Debt 202,826 226,671 194,372 160,447 653,557 275,352 90,736 16,724 57,833 Net Debt 61,586 68,015 121,975 60,905 518,634 211,964 60,818 4,428 41,195 Equity 194,657 123,878 150,445 232,493 247,772 90,691 91,686 8,377 27,515 Ratios Debt to Net Inventory 22% 32% 48% 13% 60% 66% 39% 32% 84% Contracted Sales to Gross Debt 1.8x 1.7x 1.2x 1.2x 0.7x 0.9x 1.1x 1.6x 0.6x Debt/ EBITDA 0.5x 1.7x 3.9x 1.3x 6.9x 8.7x 3.5x 2.4x 14.5x FFO/Debt 61% 32% 8% 48% 12% 2% 31% 39% 4% EBITDA interest coverage 6.2x 3.3x 2.3x 5.9x 1.6x 1.6x 2.5x 1.5x 0.8x Gross Debt/Total Capitalization 50% 64% 55% 41% 73% 75% 48% 67% 66% Operating Cash Flow/ Debt 80% 68% -13% -10% -8% 3% 3% 64% -38% Free Cash Flow/Debt 73% 81% -4% -4% -3% 7% 8% 61% -34% EBITDA margin 21% 17% 19% 30% 25% 9% 24% 15% 13% ROIC 20% 13% 9% 11% 9% 7% 7% 9% 5% ROA 6% 5% 5% 11% 7% 3% 6% 4% 4% Source: Company, Pengyuan International estimates

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Rating Scores Summary

Business Profile Strong Industry and Operation Risk Profile Strong Macroenvironment Risk Low Financial Profile bbb+ Preliminary Leverage Profile bbb- Cash Flow Variations Neutral Debt Structure and Financial Policy Neutral Financial Volatility Neutral Investment Neutral Final Leverage Profile bbb- Indicative Credit Score (ICS) bbb Adjustment Factors Corporate Structure and Governance Neutral Liquidity Excellent Supplementary Analysis +1 Notch Standalone Credit Profile (SACP) bbb+ External Support Parental Support NA Government Support NA Issuer Credit Rating (ICR) BBB+ Note: Ratings mentioned in this report are unsolicited ratings. Related Criteria

General Corporate Rating Criteria (15 March 2019)

Industry Credit Guidelines Chinese Homebuilders and Property Developers (31 August 2019)

Corporate Financial Adjustments and Ratio Definitions (7 May 2019)

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The Company does not receive compensation for its unsolicited credit ratings. The rated entity did not participate in the rating process. The unsolicited credit rating has not been disclosed to the rated entity or to its related party and, following such disclosure, the credit rating has not been amended before being issued.

The Company reserves the right to disseminate its credit ratings and reports through its website, the Company’s social media pages and authorised third parties. No content published by the Company may be modified, reproduced, transferred, distributed or reverse engineered in any form by any means without the prior written consent of the Company.

The Company’s credit ratings and reports are not indented for distribution to, or use by, any person in a jurisdiction where such usage would infringe the law. If in doubt, please consult the relevant regulatory body or professional advisor to ensure compliance with applicable laws and regulations.

Copyright © 2019 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.

10 September 2019 Page | 10 RA02020200015