Equities / Initial Coverage Company Report

Shenzhen Investment (604 HK) 3 August 2016 HK & China / Property Uprising with Shenzhen Headquartered in Shenzhen and having listed on HKEx for over 19 BUY years, SZI is the largest property developer operated under the Share Target administration of Shenzhen SASAC. Owning 12 projects in Upside Shenzhen and 17 in other cities covering industrial, commercial Price Price and residential estates, SZI’s business is mainly divided into three HK$3.21 HK$5.05 57.32% components: property development, property leasing and operating, property management. (as of 1 August 2016)  Unparalleled advantage in land acquisition. Benefiting from being the largest exchange-listed real estate developer under August Zhan Shenzhen SASAC, SZI has been enjoying the surging Shenzhen (852) 2106 8172 market ever since the corporate shifted its prime focus back to [email protected] Shenzhen in 2012. In FY15, SZI recorded 7.02 million sq m net

sales area in Shenzhen, contributing for 57% of its total FY15 52 Range (HK$) 2.4-3.72 contracted sales, and the ASP for Shenzhen area was Rmb52,598/sq m compared with nationwide Rmb16,857/sq m. In DVD yield % 5.03 FY15, the gross profit margin for Shenzhen projects stood at 49.6% compared with 39.8% for other tier-1 cities and 10.5% for Latest Key Data tier-2 cities and under. FF no of shares (m) -H share 2,898  Solid yet ambitious financial position. With SZI’s further FF (%) -H share 39.24 issuance of domestic corporate bonds (approved quota of FF market cap (HK$ m) 9,302 Rmb20bn, around 45% was issued by the end of FY15) and new 12M daily turnover (HK$ m) 43.20 capital shares, we expect its cost of borrowing to further decline to 12M volatility (%) 47.92 below 4.5% in FY16E and 4.2% in FY18E. Meanwhile, its net 12M Hi/Lo (HK$) 2.4-3.72 PEG FY15-18E (x) 0.09 gearing ratio kept declining correspondingly from 79.9% in FY14 to RoAE FY16E (%) 10.0% 36.5% in FY15 and is expected to drop further to 12.0% in FY16E. P/B FY16E (x) 0.62  Strong contracted sales in FY16-18E. With the assumption that Net debt/equity FY16E (%) 12.1 Shenzhen’s housing price will keep increasing, we expect the ASP for SZI will remain strong in the next three years, coming in at Performance (%) Rmb23238/sq m, Rmb27168/sq m and Rmb29922/sq m respectively; and the booked sales will enjoy a 27.8% CAGR, at HK$20708m, 1M YTD 12M HK$25279m and HK$28679m in FY16-FY18E accordingly. Absolute 2.9 (12.4) (12.4) Relative to HSCEI (0.3) (5.5) 6.8  Initiation with Buy, target price at HK$5.05. Our valuation is the sum of the NAV from both the development properties and investment properties, following by a deduction of the 2016E Major Shareholders (%) outstanding debts (HK$5453m). We then apply a 60% discount to Shumyip Holdings 30.8 this NAV estimate and divided total amount of shares outstanding Free float 39.24 (7350 mn) to arrive at a target price of HK$5.05, suggesting a potential upside of 57.32%. We initiate coverage of this company Price Chart with a Buy rating. (HK$) Turnover (HK$ m) Investment Summary Shenzhen Investment HSI FY-end Dec 2014 2015 2016E 2017E 2018E 5.00 160 4.50 140 Turnover (HK$ m) 13,827 18,428 21,843 30,398 343,44 4.00 120 Growth (%) 41.4 33.3 18.5 39.2 13.0 3.50 3.00 100 Net Profit (HK$ m) 3,506 3,087 3,706 4,475 4,889 2.50 80 Growth (%) 13.0 (11.9) 20.0 20.8 9.2 2.00 60 1.50 EPS (HK$) 0.54 0.29 0.39 0.47 0.44 40 1.00 Growth (%) (8.3) (45.0) 32.7 19.7 (5.7) 0.50 20 PER (x) 4.16 10.71 8.08 6.75 7.15 0.00 0 P/B (x) 0.49 0.60 0.62 0.69 0.63 EV/EBITDA (x) 17.76 11.03 5.92 3.77 2.83 DPS (Rmb) 0.16 0.16 0.25 0.30 0.29 27/07/2015 27/08/2015 27/09/2015 27/10/2015 27/11/2015 27/12/2015 27/01/2016 27/02/2016 27/03/2016 27/04/2016 27/05/2016 27/06/2016 27/07/2016 Yield (%) 5.1 5.1 8.0 9.5 9.0 Sources: Bloomberg, CER estimates Sources: Company data, CER estimates China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page

HK & CHINA / PROPERTY

Company Overview

Background

We found Shenzhen Investment (“SZI”) (0604 HK) as a mid-cap property company possessing the following noteworthy characteristics: 1) Clean cash flow featuring low net gearing ratio; 2) sufficient amount of land banks in top-tier cities accumulated during the past couple years to guarantee future growth potential; 3) strong asset injection pipelines from parental holding companies and compelling business relationship with local SASAC. Headquartered in Shenzhen and having listed on HKEx for over 19 years, SZI is the largest property developer operating under the administration of SASAC. Owning 12 projects in Shenzhen and 17 in other cities covering industrial, commercial and residential estates, SZI’s business is mainly divided into three components.

1) Property development (approximately HK$15,057m, representing 81.7% of FY16E revenue): over 30 years of trackable property development and sales history in Shenzhen, including landmark complexes such as Terra Golden Valley, comprising three main components: industrial, residential and commercial properties;

2) Property leasing and operating (approximately HK$789m, representing 4.3% of FY16E revenue ): over 900,000 sq m of properties under leasing, of which 90% are located in downtown Shenzhen area, and the leasing and operating of asset-light projects featuring the new “development-sales-holding” strategy of the management will be the fastest-growing driver of the company in the next couple years; and

3) Property management and hotels (approximately HK$1,369m, representing 7.4% of FY16E revenue ): holding three high-quality property management companies in China and as of end-December 2015, total area under SZI’s management exceeded 40 million sq m. In terms of scale and its reputation, SZI is industry leading in the sector.

Figure 1: SZI corporate structure

ShumShum Yip Yip Holdings Holdings Public Investors CompanyCompany Limited Limited and Others*

60.68% 39.32%

Shum Yip Pengji Holdings Co., Ltd. Road King Infrastructure Limited (Stock Code: 1098.HK) Shum Yip Terra (Holdings) Co., Ltd.

Shum Yip Southern Land (Holdings) Co., Ltd.

Shum Yip Land Co., Ltd. Coasted Greenland Limited Shum Yip East China Property (Stock Code: 1124.HK) Development Co., Ltd. Shum Yip Taifu Logistics Group Holdings Co., Ltd.

Shenzhen Nongke Holdings Co., Ltd. Principal Subsidiaries Xin Wang Industry Development (Shenzhen) Ltd. Principal Associates Source: Company data *Including approximately 0.08% interests held by existing directors

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 2

HK & CHINA / PROPERTY

Figure 2: SZI revenue breakdown FY2016E

Manufacture Other 2.3% Property 4.2% Investment 4.3%

Property Mangement 7.4%

Property Development 81.7%

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 3

HK & CHINA / PROPERTY

Competitive Strengths

Unparalleled advantage in land acquisition comparing to local peers In December 2015, SZI acquired Huangbeiling project from Benefiting from being the largest exchange-listed real estate developer under Shenzhen SASAC, SZI has been enjoying the surging Shenzhen market ever since the corporate shifts its prime focus back to Shenzhen in 2012. As we witnessed an over 59.8% YoY ASP upwind in Shenzhen housing market (Rmb51,155 per sq m as of 8 May), the corporate will continue to outperform its peers in the Shenzhen market for its unparalleled advantage in land acquisition. SZI gains steady yet quality asset injection from its parent, Shum Yip Hldg. Unlike most of the private developers in Shenzhen who struggle for expensive and time-consuming land purchasing through open auctions and tendering or urbane redevelopment programs, SZI has been enjoying asset injections from its parent, averaging at one property package per year since 2012. Major asset injections in the past three years include: For commercial properties, Xinming China demonstrated that it is capable of developing large-scale, integrated commercial complexes that serve as a one-stop shopping centre for consumers. Examples are Xinming International Household Products Mall and Wenshang Times • Red Star Macalline Household Products Market. These commercial complexes focus on specialized type of goods and services (such as household goods).

1) Shumyip Dongling at a total consideration of Rmb1.91bn, at 95% stake and taking up net debt of Rmb2.00bn. The Huangbeiling project will create total attributable GFA of 238,000 sq m at an average land premium of Rmb16,428/sq m.

2) In May 2014, SZI acquired Shumyip Zhongcheng project at a total consideration of Rmb5.59bn and net debt of Rmb2.44bn, at 100% stake and funded by new share issuance of 1.06 billion shares at 21.0% of market premium (HK$3.28 per share). The project contributed 385,000 sq m attributable GFA at an average cost of Rmb20,857/sq m.

3) In January 2013, SZI acquired Shumyip Upperhills project at a total consideration of Rmb4.15bn and net debt of Rmb4.82bn, at 100% stake and funded by new share issuance of 1.40 billion shares at 9.1% of market premium (HK$3.67 per share). The project contributed 789,000 sq m attributable GFA at an average cost of Rmb11,369/sq m.

All the above transactions were competitively-priced and enabled the company to secure a net profit margin that is higher than its peers in the next three years.

Besides asset injections from parental companies, SZI also diversifies its land acquisition channels by participating in Shenzhen urban redevelopment projects and cooperating with its sister company Shenzhen Int’l for converting existing logistics and industrial warehouses into residential or commercial projects. Currently there are four potential land plots located in strategic valuable area in Shenzhen that are transformable: South China Logistic Park at 611,000 sq m, Huatongyuan Logistic Center at 116,000 sq m, SZ Airport Express Center at 32,000 sq m, and Western Logistic Park at 380,000 sq m, rounding up to 1.139 million sq m of land plots at cost significantly lower than the market average. We estimate that by 2H16, around 40% of the above stated site area will be injected to SZI as its land bank and the rest 60% will be settled within the next two years. In addition to the cooperation with sister company, SZI takes advantage of its SOE background and has participated in the Chegongmiao urban redevelopment project since 2014. The ground secured around 150,000 sq m of land as of May 2016 which will commence construction in the next 12 months. The total site area of Chegongmiao Urban Redevelopment project is estimated for over 500,000 sq m, at the heart of Futian-Nanshan boarder.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 4

HK & CHINA / PROPERTY

As the management clearly stated its intention of asset-light strategy for future projects, we expect more joint-venture activities between SZI and other Shenzhen-based SOEs. In 2015, the Tanglang City project hits the spotlight for its Rmb2,082m contracted sales contribution (around 13.02% of FY15 total contracted sales). With the above land injection pipelines, we estimate that SZI’s landbank will expand at 10% CAGR (planned GFA), increasing from 3.75 million sq m by the end of FY15 to 4.99 million sq m by the end of FY18.

Figure 3: SZI land bank distribution by city tier

Tier 1 25.3% Tier 3&4 50.9% Tier 2 23.8%

Sources: Company data, CER estimates

It has been, is, and will always be about Shenzhen As the market has been shifting towards an unfavorable cycle for property developers, maintaining double-digit net profit margin has been an increasingly challenging task for most of the companies in the industry. While the majority of the developers continue to suffer from high inventory levels (averaging 47 months with current contracted sales data) for tier-2 cities and under and strive to expanding their land reserve in top-tier cities with unattractive land costs, SZI has been enjoying the housing price upsurge in Shenzhen ever since 2012 when the management shifted its focus back to the city. In FY15, SZI recorded 7.02 million sq m net sales area in Shenzhen, contributing for 57% of its total FY15 contracted sales, and the ASP for Shenzhen area was Rmb52,598/sq m as compared with nationwide Rmb16,857/sq m. In FY15, gross profit margin for Shenzhen projects stood at 49.6% as compared with 39.8% for other tier-1 cities and 10.5% for tier-2 cities and under.

Figure 4: SZI land bank in Shenzhen vs peers

Attr GFA (Mn Sq m; LHS) Percentage (%; RHS) 2.50 0.40 2.15 37.5% 0.35 2.00 1.72 0.30 24.5% 1.50 0.25 0.20 0.85 1.00 0.15 0.10 0.50 0.05 6.8% 0.00 0.00 SZI Logan LVGEM

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 5

HK & CHINA / PROPERTY

Besides the unparalleled advantage of securing land plots in Shenzhen at competitive rates, one other major factor that enables the company to facilitate its high gross profit margin in Shenzhen is its premium location selection. Upper Hills in Futian core district, featuring ASP of Rmb69,351/sq m and contributing Rmb6.71bn for FY15 contracted sales revenue, was launched in 2013 and will complete in FY18, The project highlights a FY15 gross profit margin of 48.38%; Chegongmiao redevelopment project located in Nanshan-Futian boarder, with FY16E ASP of Rmb45,000/sq m and gross profit margin of 45.35%, will be launched in 2H16 and continue to contribute till FY17. Other notable Shenzhen core projects to mention that feature attractive high gross profit margin are Shumyim Zhongcheng with attributable GFA of 0.36 million sq m, Tanglang city with attributable GFA of 0.13 million sq m, Qingshuihe Auto Park Phases 3 & 4 with attributable GFA of 0.06 million sq m.

Figure 5: SZI key Shenzhen project distribution

Leyuan Xinhong City Dongcheng International

Longhua Guanlan Rose Garden Longgang Bao’an

Nanshan Luohu Yantian

Qingshuihe Liantang Project Futian Sungang Shumyip Upperhill Huangbeiling Overseas Shumyip Chinese Zhongcheng Bagualing Project Town Project Shangbu Project Shahe Industrial Park CBD Chegongmiao Luohu Shahe Shopping Mall- Redevelopment Checkpoint Guantang Xiangmu Terra Building Shahe Golden Triangle Potential projects Qianhai Project SZI projects SZI redevelopment

Source: Company data

In FY15, the company started newly-constructed GFA of 1.56 million sq m with saleable GFA of 0.93 million sq m. Five out of 12 projects are located in Shenzhen with total saleable GFA of 0.47 million sq m, with FY17E ASP of Rmb73,637/sq m and FY18E ASP of Rmb88,765/sq m. Given SZI’s rich saleable area in Shenzhen, we estimate overall gross profit margin for SZI’s property development section in FY16E will grow 3.8% YoY to 38.4%. Meanwhile, we expect the proportion of contracted sales revenue of Shenzhen properties to keep inclining from approximately 75% in FY15 to 81.7% in FY16E. As the company is actively disposing its landbanks in lower-tier cities mainly by negotiating with government for repurchases with consistent focus on the Shenzhen market, we estimate its gross profit margin will remain strong at 31.7%, 29.9% and 30.4% in FY16-18 respectively.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 6

HK & CHINA / PROPERTY

Figure 6: SZI key Shenzhen project highlights

Source: Company data

Solid yet ambitious financial position

Individual company’s financial position and capital management during down cycles is one major concern for the China property sector, but SZI shines through its peers by continuously lowering its average cost of borrowing from 5.5% in FY14 to 4.9% in FY15. With SZI’s further issuance of domestic corporate bonds (approved quota of Rmb20bn, around 45% was issued by the end of FY15) and new capital shares, we expect its cost of borrowing to further decline to below 4.5% in FY16 and 4.2% in FY18. Meanwhile, its net gearing ratio kept declining correspondingly from 79.9% in FY14 to 36.5% in FY15 and is expected to drop further to 12.0% in FY16.

Figure 7: SZI net gearing ratio

SZI Peer's average

1.00 0.79 0.72 0.75 0.63 0.6 0.54 0.64 0.48 0.50 0.62 0.37

0.25 0.12

0.00 -0.12

-0.25 -0.37

-0.50 FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 7

HK & CHINA / PROPERTY

There are three major financing pipelines for SZI to access funds at attractive rates: 1) issuance of domestic corporate bonds 2); issuance of new capital shares; 3) related-party transactions from parent company. In June 2015, the company timely and successfully placed 670 million new shares to institutional investors in the capital market at a placing price of HK$4.13 per share and raised approximately HK$2.7bn. We expect the company to issue domestic corporate bond in an amount of Rmb20bn in 2H16 to substitute offshore USD-denominated syndicated loans and further strengthen its overall financial position.

Figure 8: SZI interest coverage ratio

SZI Peer's average 7.00 6.32 6.00

5.00 3.82 4.00 2.64 3.00 3.38 2.49 2.00 2.48

1.00

0.00 FY 2013 FY 2014 FY 2015

Sources: Company data, CER estimates

Meanwhile, due to its SOE background, SZI holds advantages in both bond and equity issuance market. During market downturns, SZI could issue equity to its parent company at competitive rates as seen in 2013 and 2014. During market upturns, SZI could issue shares to institutional investors at higher premium. In 2015, SZI successfully seized the market window and issued 670 million shares at HK$4.13 apiece, or 9.1% discount to market price. Meanwhile, as SZI’s parent company, Shum Yip Hldg. possesses a higher sovereignty rating, so it could issue new corporate bond and transfer the proceedings through related-party transactions to SZI to further reduce its financial costs.

Figure 9: SZI effective interest rate

SZI effective interest rate (%) Peer's average

8.00% 7.30% 6.90% 6.70% 7.00% 6.00% 5.90% 5.70% 5.60% 6.00% 5.50% 4.90% 4.50% 4.50% 5.00% 4.20% 4.00%

3.00%

2.00%

1.00%

0.00% FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 8

HK & CHINA / PROPERTY

Growth Outlook

Plenty of noteworthy growth drivers to pipeline revenue increase During FY15, the company achieved solid results for property investment and management. Total investment areas reached 1 million sq m which are mainly located in Shenzhen, generating a total rental income of HK$789.5m, representing a 15.9% YoY increase, and gross profit margin of 87.8%. Meanwhile, in FY15, the company achieved HK$432.1m revenue by diversifying its investment property portfolio by transferring properties completed and held-for-sale to rental property, further strengthening the land strategic value. Such dramatic increase came from the premium location selection for existing projects and the booming Shenzhen property market. Meanwhile, as the company diversified its property investment portfolio by launching Upperhills and Taifu Square in 2H15, we expect the rental income for FY16 to maintain an over 25% YoY increase with the luxury shopping mall and office building offering. As the company strengthens its asset-light strategy in the future, we expect to see its investment property portfolio continue to expand and the investment property revenue contribute around 5% of its overall revenue by FY18.

Figure 10: SZI growth overview

Revenue Gross profit Net profit Profit attriutable to shareholders Linear (Profit attriutable to shareholders)

60% 50% 40% 30% 20% 10% 0% -10% -20% FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

Figure 11: SZI growth overview FY-end 31 Dec FY 2014 FY 2015 FY 2016E FY2017E FY2018E Growth (%) Revenue 41.4% 33.3% 18.5% 39.2% 13.0% Gross profit 13.1% 56.5% 8.6% 31.0% 15.1% EBITDA 1.8% 93.0% 42.9% 32.9% 10.8% EBIT -24.1% 143.5% 11.9% 42.7% 19.1% Net profit 12.7% -11.9% 20.0% 20.8% 9.2%

Sources: Company data, CER estimates

The company has been taking firm actions on disposing land in lower-tier cities with poor profitability. In January 2016, an agreement was reached with the relevant government department of Heyuan to return about 620,000 sq m of undeveloped land in Heyuan Saina Bay to the local government. The company plans to proceed with the disposal of inefficient projects in Taizhou, Sanshui, Jiangyan, Changzhou and Maanshan. As the market values of certain projects in the third- and fourth-tier cities may be lower than their book values and for the

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 9

HK & CHINA / PROPERTY sake of accounting prudence, the group made a provision for impairment of certain projects in the third- and fourth-tier cities amounting to HK$372.4m during the year.

SZI’s associates achieved solid performance during FY15 as well. Currently the company holds 75% of stake in Shum Yip Terra which mainly focuses on developing and operating industrial parks in Shenzhen. The company holds various local high growth SMEs: 97.57% stake in Shumyip Taifu which focuses on logistic park development and management for infrastructure; 27.7% of stake in Road King Infrastructure which focuses on railway and highway development in Pearl River Delta and Bohai ring, holding investment property portfolio of HK$34.0bn; and 15.10% of stake in Coastal Greenland. Total revenue contribution from subsidiaries of SZI rounded up to Rmb600.75m.

Below are key assumptions for SZI contracted and booked sales through FY2016-18E. They are based on our estimate of how much GFA presold for each project and the expected construction completion date. Contracted sales will be recognized upon completion of construction and delivery to the customers.

Figure 12: Key ASP estimates FY-end 31 Dec FY 2014 FY 2015 FY 2016E FY2017E FY2018E Operating Statistics Contracted Sales (HK$ m) 8,994 19,166 26,724 31,243 33,512 GFA Sales (Mn Sq m) 0.63 0.95 1.15 1.15 1.12 ASP (Rmb/Sq m) 14,173 20,227 23,238 27,168 29,922

Sources: Company data, CER estimates

Figure 13: SZI ASP trend

SZI ASP (Rmb/Sq m) Peer's average Linear (SZI ASP)

35,000 29,922 30,000 27,168

25,000 23,238 20,227 20,000 15,826 14,173 15,000

10,000

5,000

0 FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 10

HK & CHINA / PROPERTY

Financial Analysis

Strong contracted sales in FY16-18E As the company currently focuses on launching two premium projects in core area of Shenzhen in 2H16, we expect to see continuous strong pre-sales from SZI this year. According to our estimation, the group’s contracted sales will round up to HK$26.72bn in FY16, HK$31.42bn in FY17 and Rmb33.51bn in FY18, representing a CAGR of 12.0%. In FY16, Shumyip Zhongcheng, Shumyip Shangcheng and Chegongmiao redevelopment projects will contribute roughly 45.5% to total contracted sales, as to 61.2% in FY17. In FY17, the group will launch the Huangbeiling project from the recent asset injection in 2015 and the estimated contracted sales area from such project will reach 25734 sq m with ASP of Rmb 62000/sq m, contributing a total of Rmb1.595bn. Meanwhile, the group started the construction of the Shumyip Zhongcheng (Land plot 05-01 and 05-05) with total saleable area of 245,380 sq m; Qingshuihe Auto Park Phase 3 with saleable area of 15,000 sq m; Tanglang City West project with saleable area of 105,960 sq m. We expect the above Shenzhen-based projects to start to contribute for contracted sales in FY17 and forward. Thus, with the assumption that Shenzhen’s housing price will keep increasing, we expect the ASP for SZI will remain strong in the next three years, coming in at Rmb23238/sq m, Rmb27168/sq m and Rmb29922/sq m respectively; and the booked sales will enjoy a 27.8% CAGR, at HK$20708m, HK$25279m and HK$28679m in FY16-FY18E accordingly.

Figure 14: SZI FY16E contracted sales by months

FY2016 (LHS) YoY change (%, RHS) 4,500 600% 570% 4,000 500% 3,500 400% 3,000 2,500 270% 300% 184.70% 2,000 140.4% 200% 79.1% 1,500 87.3% 56.9% 14.30% 100% 1,000 124.8% 500 0% 8.30% -4.70% 4.3% 0 -100%

ril E rch p E E Jan Feb A May g E p E u e Oct E Ma June E July A S Nov Dec

Sources: Company data, CER estimates

Figure 15: Contracted sales growth comparison

SZI Peer's average 150% 125% 100% 75% 50% 25% 0% -25% -50% FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 11

HK & CHINA / PROPERTY

Besides solid upcoming contracted and booked sales estimates, we are still optimistic about SZI’s profitability. We expect the revenue to continue to expand at 25.4% CAGR from FY16 to FY18, at HK$21.84bn, HK$30.40bn and HK$34.34bn respectively; the SG&A to remain steady at HK$13.59bn, HK$13.68bn and HK$13.78bn. Thus, we expect SZI to continue to improve its gross and net margin in the upcoming three years from 34.6% and 16.8% in FY15 to 31.7% and 17.0% in FY16E. Core profits will improve at 16.6% CAGR from FY15 to FY18E, booked at HK$48.89bn in FY18E. The forecasted EPS for the company marks at HK$0.39 per share in FY16E, representing a 32.7% YoY increase compared to FY15.

Figure 16: SZI margin overview

Gross EBITDA EBIT Core net Linear (EBITDA) 40% 35% 30% 25% 20% 15% 10% 5% 0% FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

Figure 17: Margin comparison

SZI Peer's average 40% 35% 30% 25% 20% 15% 10% 5% 0% Gross margin Core margin

Sources: Company data, CER estimates

Meanwhile, we expect to see improved ROE for SZI in the next three years as well due to its lower financing costs compared to its peers and optimized project portfolio in Shenzhen area. The estimated ROE for the next three fiscal years is: 10.0%, 11.3% and 10.4% accordingly.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 12

HK & CHINA / PROPERTY

Figure 18: SZI ROE and ROA

SZI ROE SZI ROA Peer's average ROE 16% 14% 12% 10% 8% 6% 4% 2% 0% FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

Improving financial position with high dividend pay-out ratio

In terms of financial position, we expect SZI’s overall liabilities level to remain steady in the next three year. As the group issued shares that were worth HK$2.7bn in 2H15 and aggressively brought the net interest-bearing borrowing down from HK$29.40bn in FY14 to HK$21.38 bn in FY15, and the group haven’t invested on land purchasing in FY15 as previous years, we see the net gearing ratio decline sharply from 79.9% in FY14 to 36.5% in FY15. Such low net gearing is likely to maintain in FY17 as the company clearly stated its intent on conservative land reserve expansion starting from 2H16. Thus, we forecast SZI’s net gearing for the next three years to be at 12.1%, -11.7% and -36.9% respectively.

The company intended to maintain a relatively high dividend payout ratio, to reward its investors during unclear China property market in next few years. We expect its dividend payout ratio maintains high at:0.50, 0.52, 0.52 for FY16-18E respectively, significantly higher than industry average of 0.30 in FY15.

Figure 19: SZI net gearing ratio

SZI Peer's average

1.00 0.79 0.75 0.72 0.63 0.6 0.54 0.64 0.48 0.50 0.62 0.37

0.25 0.12

0.00 -0.12

-0.25 -0.37

-0.50 FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 13

HK & CHINA / PROPERTY

Figure 20: SZI dividend payout ratio

0.60 0.58 0.56 0.54 0.52 0.50 0.48 0.46 0.44 FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

Earnings estimates (2016-18E) We estimate the SG&A to sales ratio to be 15.8% to 16.5% in FY2016-18E. We also assume 100% capitalization of interest cost and a corporate tax rate of 25% in FY2016-18E. Taken together we estimate earnings per share to increase on a 14.4% CAGR from FY15-18E, at HK$0.39, HK$0.47, HK$0.44 respectively for next three years.

Figure 21: SG&A to sales

Annual sales (HK$ m) SG&A percentage (%) 35,000 20.0% 18.0% 30,000 16.0% 25,000 14.0% 20,000 12.0% 10.0% 15,000 8.0% 10,000 6.0% 4.0% 5,000 2.0% 0 0.0% FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

Figure 22: Estimated EPS

Baisc Diluted 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E

Sources: Company data, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 14

HK & CHINA / PROPERTY

Valuation

We used: 1) The DCF approach to determine the attributable appraised value of each property development project, such number arrives at HK$71793m.

2) Applying a 5% cap rate on 2016E net rental Income, such number arrives at HK$13672m.

The NAV is then determined by summing up the NAVs of the above three components and net of liabilities carried on the book. We then apply a discount to the NAV based on the peer comparison and arrive at the final valuation of the company. The total NAV for FY 2016E arrives at HK$80030m.

Our discounted cash flow calculation uses a WACC of 9.2% which is based on: a) risk free rate of 1.6%; b) market risk premium of 7.7%; c) beta of 0.61 which is obtained through re-leveraging the beta of a listed mid-size China property developer; d) cost of debt of 4.5%; e) tax rate of 48%; f) a debt-equity mix of 38%:62%; and a small-cap discount of 5.0%. (Source: Bloomberg)

Figure 23: WACC assumptions Risk free rate 1.6% Beta 0.61 Market risk premium 7.7%

Cost of equity 5.3% Cost of debt 4.5% Tax rate 48% After-tax cost of debt 2.3%

Debt 38% Equity 62%

WACC 4.2% small cap discount 5.0% Final discount rate 9.2%

Sources: Bloomberg, CER estimates

We compare Shenzhen Investment against a list of Hong Kong-listed Chinese property developers. Currently, the sector average of discount to NAV in 2015 (market-capital weighted) is around 40.1%; the average of discount to NAV for companies under Rmb25 bn market cap is 70.4%. Given the relatively mid-cap size of Shenzhen investment and its strong growth potential, we believe the company should trade at around 60% discount to its NAV.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 15

HK & CHINA / PROPERTY

Figure 24: Peer comparison Net NAV per Discount PEG P/B Yield ROE gearing Company Code Curr Price* Mkt cap PER (x) share (HK$) to NAV (%) (x) (x) (%) (%) (%) (HK$) (HK$ m) 16E 17E 18E 16E 17E 16E 17E 16-18E 16E 16E 16E 16E PRC peers (HK-listed) Shenzhen Investment 604 HK HKD 3.19 23,555 6.4 5.3 4.6 8.5 10.7 -62 -70 0.2 0.5 7.7 10.8 45.8 3383 HK HKD 4.47 17,509 5.3 4.4 4.0 12.3 12.8 -64 -65 0.2 0.4 7.0 8.4 77.7 China Overseas Grand Oceans 81 HK HKD 2.25 5,135 3.7 3.2 3.2 10.6 8.3 -79 -73 0.1 0.3 2.4 13.1 76.1 China Overseas Land 688 HK HKD 25.9 255,389 7.8 6.8 6.2 32.3 27.7 -20 -6 0.1 1.0 3.1 16.0 6.6 1109 HK HKD 19.26 133,490 8.1 6.9 6.2 36.8 23.2 -48 -17 0.1 0.9 3.8 14.0 23.0 CIFI Holdings Group 884 HK HKD 1.99 13,349 4.2 3.6 3.1 4.9 4.9 -59 -59 0.2 0.7 9.6 19.2 59.4 2007 HK HKD 3.19 71,033 6.2 5.1 4.6 4.5 4.3 -30 -27 0.2 0.8 5.9 15.3 58.6 Glorious Property 845 HK HKD 0.74 5,767 7.8 14.8 N/A 3.7 3.7 -80 -80 0.4 0.1 N/A 5.2 190.1 Guangzhou R&F 2777 HK HKD 11.42 36,799 5.0 4.5 4.1 17.2 55.2 -34 -79 0.1 0.6 7.5 14.3 138.1 Kaisa Group 1638 HK HKD 1.56 8,011 1.9 2.3 N/A 7.6 4.5 -79 -66 0.1 0.7 N/A N/A N/A KWG Property 1813 HK HKD 4.72 14,414 3.9 3.5 3.4 14.9 10.8 -68 -56 0.1 0.4 8.8 13.5 76.3 Longfor Properties 960 HK HKD 10.84 63,267 6.6 5.9 5.3 17.5 14.0 -38 -22 0.1 0.8 4.7 14.1 55.0 119 HK HKD 2.07 7,579 21.3 23.8 18.2 9.1 8.7 -77 -76 0.1 0.3 1.0 0.6 120.8 China Holdings 1918 HK HKD 4.8 16,320 5.0 3.9 3.0 14.2 9.6 -66 -50 0.3 0.6 5.0 16.2 98.4 813 HK HKD 9.96 34,400 4.4 4.0 3.7 28.1 23.9 -65 -58 0.1 0.5 7.8 12.8 63.9 Sino Ocean Land 3377 HK HKD 3.28 24,646 6.4 5.2 4.8 9.7 7.6 -66 -57 0.2 0.4 6.1 8.9 65.3 Soho China Ltd 410 HK HKD 3.71 19,290 32.0 28.3 28.1 8.6 8.9 -57 -58 0.1 0.4 4.0 1.9 25.1 123 HK HKD 1 12,401 8.5 7.5 6.2 4.3 2.8 -77 -64 0.2 0.4 5.2 4.9 N/A Weighted-average 7.6 6.7 6.0 23.3 20.5 -40.1 -29.6 0.1 0.8 4.6 13.7 39.5 For mkt cap <= HK$25bn 6.6 6.8 4.6 9.0 7.7 -70.4 -65.1 0.1 0.4 5.5 9.1 67.2 For mkt cap <= HK$10bn 5.0 6.2 2.4 5.8 5.3 -68.2 -67.1 0.2 0.5 5.8 14.6 94.0 Sources: Bloomberg, CER estimates. Last updated as of 3 August 2016.

In our base case, our valuation is the sum of the NAV from both the development properties and investment properties, following by a deduction of the 2016E outstanding debts (HK$5453m). We then apply a 60% discount to this NAV estimate and divided total amount of shares outstanding (7350 mn), to arrive at a target price of HK$5.05, suggesting a potential upside of 57.32%. We initiate coverage of this company with a Buy rating.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 16

HK & CHINA / PROPERTY

Risks

 Uncertainty in Shenzhen housing price and government policy

The greatest risk comes from future uncertainty of Shenzhen housing price and the government’s policy. As Shenzhen market is currently undergoing an ASP hike since 1H15 and we currently estimate such hike would not be over till 1H17, near-term gross profit margin for SZI remains strong. However, with the government’s resolve in maintaining steady housing price growth in upper-tier cities, SZI could potentially be exposed to great housing price turbulence as its investment portfolio is mainly located in Shenzhen.

 Renminbi Depreciation Risk

Currently the company is holding offshore debt in an amount of HK$12.30bn, representing 40.1% of its total interest-bearing borrowings in FY15. With upcoming Fed rate hike and continuous downward pressure for China macroeconomy, we expect to see a weakened foreign exchange rate. Such trend is unfavorable towards SZI’s financial position, but it could undergo new placement of onshore bonds to substitute offshore debts for hedging purpose.

 Continuous land disposal increases impairment losses

Land disposal in lower-tier cities results in significant increase in impairment losses. As SZI plans to dispose multiple land plots in tier-3 and tier-4 cities in the next few years, we expect to see around 600 million sq m of GFA being disposed averagely per year, resulting in roughly HK$750m impairment losses per year.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 17

HK & CHINA / PROPERTY

Profit & Loss (Consolidated)

FY-end in Dec 31 (HK$ m) FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E Revenue 9,779 13,827 18,428 21,843 30,398 34,344 Cost of sales (6,177) (9,754) (12,054) (14,919) (21,324) (23,897) Gross profit 3,602 4,073 6,374 6,925 9,074 10,447 Other income and gains 1,611 2,449 615 852 743 357 (Decrease)/increase in fair value 1 (2) 1 0 1 2 Increase in fair value of investment properties 624 764 1,082 1,352 1,655 1,724 Recognition of change in fair value 0 847 432 0 0 0 Selling and distribution expenses (255) (412) (483) (492) (501) (511) Administrative expenses (737) (1,000) (867) (867) (867) (867) Other expenses (185) (820) (543) (550) (550) (550) Finance costs (636) (743) (708) (700) (690) (700) Share of profits and losses of: 0 0 0 0 0 0 Joint venture 219 46 7 20 20 20 Associates 832 650 601 620 632 624 Profit before tax from continuing operations 5,077 5,853 6,511 7,160 9,516 10,547 Income tax expense (1,976) (2,349) (3,423) (3,454) (5,041) (5,657)

Sources: Company, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 18

HK & CHINA / PROPERTY

Balance Sheet (Consolidated)

FY-end in Dec 31 (HK$ m) FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E Current Assets 49,719 59,686 55,498 58,647 61,229 72,225 Cash and cash equivalents 6,534 8,375 9,708 15,982 24,153 36,455 Restricted cash 913 1,251 4,111 4,111 4,111 4,111 Pledged deposits 14 31 0 0 0 0 Inventories 126 136 99 95 92 89 Completed properties held for sale 8,435 14,708 9,032 9,483 9,957 10,455 Properties under development 28,357 30,795 30,312 26,512 20,159 18,021 Trading biological assets 0 10 10 10 10 10 Trade receivables 416 715 528 500 500 500 Prepayments, deposits and other 4,117 3,661 1,696 1,950 2,243 2,579 Equity investments at fair value through profit or loss 11 3 4 4 4 4 Assets of a disposal group classified as held for sale 795 0 0 0 0 0

Non-current Assets 27,173 34,819 35,587 36,083 36,667 37,145 Property, plant and equipment 2,698 3,241 4,144 4,206 4,150 4,000 Prepaid land lease payments 45 43 40 40 40 40 Goodwill 323 323 323 323 323 323 Investment properties 15,300 20,019 20,908 20,908 20,908 20,908 Investments in associates 5,930 6,135 6,310 6,941 7,635 8,399 Investments in joint ventures 344 1,904 565 565 565 565 Available-for-sale investments 40 140 124 100 120 95 Other long term assets 1,584 1,793 1,779 1,779 1,779 1,779 Deferred tax assets 893 1,214 1,387 1,214 1,140 1,029 Breeding biological assets 0 7 7 7 7 7 Pledged deposits 17 0 0 0 0 0

Total Assets 76,892 94,505 91,085 94,730 97,896 109,370

Liabilities ------Current Liabilities 30,817 34,843 30,677 33,511 34,581 39,130 Interest-bearing bank and other borrowings 12,122 12,057 5,274 4,953 4,510 4,500 Trade payables 1,029 4,314 1,013 1,013 1,013 1,013 Other payables and accruals 10,135 9,976 13,921 13,921 13,921 13,921 Due to the immediate holding company 31 51 158 50 50 50 Due to the ultimate holding company 3,898 3,055 3,816 4,121 4,876 4,021 Tax payable 3,177 5,390 6,495 9,452 10,211 15,624 Liabilities directly associated with the assets classified as 424 0 0 0 0 0 held for sale Net Current Assets 18,902 24,842 24,821 25,137 26,648 33,095

Non-current liabilities 18,496 26888 24,839 24,248 23,747 23,403 Interest-bearing bank and other borrowings 12,168 17,342 16,101 15,500 15,000 14,657 Due to the immediate holding company 0 323 349 349 349 349 Due to the ultimate holding company 1,221 1,413 966 966 966 966 Deferred income 0 28 32 42 41 40 Deferred tax liabilities 5,107 7,782 7,391 7,391 7,391 7,391

Total Liabilities 49,312 61,731 55,516 57,758 58,328 62,533

Net assets 27,579 32,774 35,569 36,972 39,568 46,837

Shareholders’ Equity Total equity 27,579 32,774 35,569 36,972 39,568 46,837 Equity attributable to owners of the parent 25,338 30,496 33,326 34,729 37,325 44,594 - Share capital 11,235 14,565 17,478 16,734 17,984 21,487 - Other reserves 13,457 15,066 15,847 17,996 19,340 23,107 - Proposed final dividend 646 865 0 0 0 0

Non-controlling interests 2,242 2,278 2,243 2,243 2,243 2,243 Sources: Company, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 19

HK & CHINA / PROPERTY

Cash Flow (Consolidated)

FY-end in Dec 31 (HK$ m) FY2013 FY2014 FY2015 FY2016E FY2017E FY2018E Operating Cash Flow (134) 1,634 11,839 10,812 13,015 15,547 EBITDA 2,550 2,596 5,009 7,160 9,516 10,547 Change in Working Capital (1,890) 112 10,253 7,323 7,952 10,317 Tax payment (793) (1,074) (3,423) (3,671) (4,453) (5,316)

Investing Cash Flow (12) (2,431) 472 265 354 83 Purchase of PP&E (204) (117) (117) (117) (117) (117) Addition of Investment Properties (517) (359) 0 100 100 100 Investment in Associate (1) (1,520) 0 50 50 50 Investment in Joint Ventures 0 0 0 0 0 0 Proceeds from Disposals 0 0 0 0 0 0 Others 710 (435) 589 232 321 50

Financing Cash Flow 56 2,638 (10,979) (4,803) (5,198) (3,327) Debt raised 15,113 20,780 5,000 8,500 8,500 9,500.00 Debt repaid (13,880) (15,382) (16,179) (10,500) (10,500) (9,500.00) Interest expenses (1,587) (1,850) (1,385) (1,257) (1,190) (1,254.58)

Sources: Company, CER estimates

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 20

HK & CHINA / PROPERTY

Financial Summary

FY-end 31 Dec FY 2013 FY 2014 FY 2015 FY 2016E FY2017E FY2018E Growth (%) Revenue - 41.4% 33.3% 18.5% 39.2% 13.0% Gross profit - 13.1% 56.5% 8.6% 31.0% 15.1% EBITDA - 1.8% 93.0% 42.9% 32.9% 10.8% EBIT - -24.1% 143.5% 11.9% 42.7% 19.1% Net profit - 12.7% -11.9% 20.0% 20.8% 9.2% Margins (%) Gross 36.8% 29.5% 34.6% 31.7% 29.9% 30.4% EBITDA 26.1% 18.8% 27.2% 32.8% 31.3% 30.7% EBIT 24.8% 13.3% 24.3% 23.0% 23.5% 24.8% Net 31.8% 25.4% 16.8% 17.0% 14.7% 14.2% Others (%) Effective tax rate 38.9% 40.1% 52.6% 48.2% 53.0% 53.6% Dividend Payout ratio 49.0% 58.0% 55.0% 50.0% 52.0% 52.0% ROCE 5.3% 3.1% 7.4% 8.2% 11.3% 12.1% Average ROE 11.3% 10.7% 8.7% 10.0% 11.3% 10.4% Average ROA 4.0% 3.7% 3.4% 3.9% 4.6% 4.5% Interest cover (x) 3.82 2.48 6.32 7.17 10.37 12.17

Sources: Company, CER estimates

Company Description Headquartered in Shenzhen and having listed on HKEx for over 19 years, SZI is the largest property developer operated under the administration of Shenzhen SASAC. Owning 12 projects in Shenzhen and 17 in other cities covering industrial, commercial and residential estates, SZI’s business is mainly divided into three components: property development, property leasing and operating, property management.

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page 21

China Everbright Research Limited Rating System

Buy Expected to outperform the benchmark index by >15% over the next six months Accumulate Expected to outperform the benchmark index by 5 - 15% over the next six months Hold Expected to outperform or underperform the benchmark index by <5% over the next six months Reduce Expected to underperform the benchmark index by 5 - 15% over the next six months Sell Expected to underperform the benchmark index by >15% over the next six months

Analyst Certification

The research analyst(s) primarily responsible for the preparation of this report hereby certify that – (1) All of the views expressed in this report accurately reflect his or her or their personal views about the subject company or companies and its/theirs securities; (2) No part of his or her or their compensation was/were, is/are or will be directly or indirectly, related to the specific recommendations or views expressed in this report or any specific investment banking function; (3) He/she/they are not directly supervised by, and do not directly report to, investment banking functions; (4) He/she/they has/have not breach the quiet period restriction of dealing in the securities covered in this report; (5) He/she/they is/are not an officer and do(es) not hold any directorship in the company or companies this report covered.

Disclosure

Our firm does not have financial interests (including stock holding) that equal 1% or more of the market capitalization of the listed company under review at the date this report is published; does not have investment banking relationship with the listed company under review within the past 12 months; and does not have market-making activities in the stock. None of our staff is an officer of the listed company.

Disclaimer

This report has been prepared by China Everbright Research Ltd. China Everbright Research Limited does not guarantee, either expressed or implied, the completeness, reliability and accuracy of the materials contained in the report.

This report has been prepared for general reference and no part of this report is to be constructed as an offer, invitation, advertisement or inducement whatsoever, or form to buy or sell any securities or financial instruments whether referred to herein or otherwise. Opinions in this report are subject to change by the original writer without notice. China Everbright Research Limited does not accept any liability whatsoever, directly, indirectly, consequential or incidental that may arise from the use of or reliance on the contents of this report.

China Everbright Research Limited and its affiliates and their respective associates, directors, employees or officers may from time to time have long or short positions in securities, warrants, futures, options, derivatives or any other interests and/or underwriting commitments in the securities or financial instruments referred to in this report.

Reports by China Everbright Research Limited do not have regard to the specific investment objectives, financial situation, risk tolerance or the particular needs of any investor. Before enter into any investment contract, individual should exercise judgment or seek for professional advice when necessary. The information contained herein is believed to be reliable. Its completeness and accuracy are, however, not guaranteed.

All copyrights are reserved by China Everbright Research Limited, this report or any part of its contents must not be reproduced in whole or in part without the prior written approval of China Everbright Research Limited.

China Everbright Research Limited is licensed by the Securities and Futures Commission (SFC) and is governed under the rules and regulations of the SFC and the Securities and Futures Ordinances and its subsidiary legislation.

Address: 24/F., Lee Garden One, 33 Hysan Avenue, Causeway Bay, Hong Kong. Contact No.: (852) 2106-8101

China Everbright Research Limited Please read the analysts and company disclosure and the disclaimer in the last page