China Financials 29 January 2016

Joy City Property (207 HK) Joy City Property

Target price: HKD1.52 Share price (28 Jan): HKD0.98 | Up/downside: +55.1%

Initiation: upcoming landlord for upcoming consumers

 Building a potential franchise for upcoming consumers in China Cynthia Chan (852) 2773 8243  Leveraging on its asset light model to boost scale further [email protected]  Initiating with a Buy (1) rating and target price of HKD1.52

Investment case: We see Joy City as an up-and-coming retail mall Share price performance operator and manager in China. Backed by asset injections from parent (HKD) (%) COFCO Corporation (one of the largest state-owned business groups in 2.7 180 China), Joy City now owns 8 Joy City complexes, with 29 property projects 2.2 155 in 8 cities as well as 8 hotels and other residential and commercial projects. 1.7 130 1.3 105 We think Joy City has developed a special product (Joy City mall) for China 0.8 80 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 malls that is gaining acceptance from the young and upcoming consumer groups, enabling its malls to remain resilient amid slower retail sales JCP (LHS) Relative to FSSTI (RHS) growth. Over the years, it has formed partnerships with many brands (both international and domestic), which bodes well for its prospects in terms of 12-month range 0.98-2.61 achieving above-average growth in foot traffic and retail sales. Market cap (USDbn) 1.53 3m avg daily turnover (USDm) 1.38 Joy City has kicked off its asset-light strategy with its mall business, which we Shares outstanding (m) 12,234 Major shareholder COFCO Corporation (66.8%) think could become a supplementary revenue growth driver to cushion the slowdown in retail sales growth. Under this strategy, it would either acquire a Financial summary (CNY) small stake in already-developed malls or help manage malls. We think that Year to 31 Dec 15E 16E 17E either way, there is the potential for it to achieve sustainable income growth, Revenue (m) 5,643 7,976 10,805 helped by the large number of poorly managed malls in China. Operating profit (m) 1,865 2,570 3,471 Net profit (m) 213 579 1,072 It reported 2015 contract sales of CNY3.2bn (+79%) and we expect its robust Core EPS (fully-diluted) 0.017 0.047 0.088 EPS change (%) (25.5) 172.0 85.2 sales growth to continue in 2016-17 (2016: +35%; 2017: +47%), on the back of Daiwa vs Cons. EPS (%) (47.2) (21.3) (17.6) CNY40bn of saleable resources. While we believe Joy City’s strong sales are PER (x) 47.5 17.5 9.4 sufficient to support its capex needs, we also think they will underpin our strong Dividend yield (%) 0.4 1.4 2.6 revenue growth forecasts for 2016-17 (2016: +41%; 2017: +35%). DPS 0.003 0.012 0.022 PBR (x) 0.4 0.4 0.4 Thanks to its steady recurrent income and to having COFCO Corporation EV/EBITDA (x) 17.9 13.4 10.0 ROE (%) 0.8 2.1 3.8 as its parent, Joy City has been able to enjoy low finance costs. Its overall Source: FactSet, Daiwa forecasts funding cost of 5.8% for 1H15 was lower than its peers’ average of 6.7%, and we forecast it to drop to 5.4% for 2016 and 5.2% for 2017. It recently issued 5-year domestic corporate bonds with a 3.2% coupon rate, one of the lowest rates among Hong Kong-listed China developers.

Catalysts: The potential share-price catalysts we see in 2016 are: 1) increased market recognition that Joy City has a sound and differentiated business model for its retail property business, 2) progress in the execution of its asset-light strategy, 3) the monetisation of its existing malls and the Joy City model, eg., securitisation, REIT, spinoff, partial stake disposal, etc.

Valuation: We initiate coverage with a Buy (1) rating and 12-month TP of HKD1.52, based on a 50% target discount applied to our end-2016E NAV of HKD3.04. Our target 50% NAV discount is at the lower end of the current 50- 70% discount to market NAV for the mid-cap HK-listed China property firms.

Risks: The key risks to our call include: 1) a further deterioration in China’s economy, which could impact retail sales and rents, and 2) difficulty in securing projects in good locations going forward.

See important disclosures, including any required research certifications, beginning on page 43

Joy City Property (207 HK): 29 January 2016

Table of contents

Joy City – a model that is gaining credential ...... 6 Currently owns 8 Joy City malls with 7 in operation ...... 6 A proven model with a solid track record...... 6 Targeting up-and-coming consumers ...... 7 A growing pool of partnering brands – local and international ...... 8 Joy City malls are strategically located ...... 10 Enhancement of customer value ...... 10 Growing credentials ...... 13 Strong rental income growth in 2016-17 ...... 14 Upside to EBITDA-to-cost ...... 14 Shift in strategy for the retail property business ...... 16 Setting up joint ventures for greenfield projects ...... 16 Asset-light strategy for new malls has kicked off ...... 16 Strong property sales to continue ...... 19 Support decent top-line growth in the next few years ...... 19 Strong support from SOE parent ...... 21 66.83% owned by COFCO Corporation ...... 21 SOE reform on the agenda for COFCO Corporation ...... 22 Earnings to decline in 2015 before picking up ...... 23 Earnings outlook ...... 23 Financial position ...... 25 Dividend policy ...... 26 Valuation ...... 27 Initiating with Buy (1) rating and target price of HKD1.52 ...... 27 Risks ...... 30 Appendix I: company background ...... 31 Commercial property developer and operator ...... 31 Appendix II: Joy City malls ...... 35 Appendix III: overview of the China retail market ...... 38 10.7% retail sales growth in 2015 ...... 38 Appendix IV: retail sales in Joy City’s cities ...... 40

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Joy City Property (207 HK): 29 January 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Joy City: revenue and core profit

As a result of a decline in property sales booked in 2015, (CNYm) we forecast both Joy City’s revenue and core earnings to 12,000 10,805 have dipped in 2015. However, in 2016, with more property sales to be booked (we forecast an 89% YoY rise in 7,976 property development revenue) and more malls to 8,000 6,809 5,713 5,643 contribute to rental income (set to rise by 33% YoY on our forecasts), we anticipate 41% and 172% surges in Joy 4,000 City’s revenue and core profit to CNY7,976m and 1,072 579 CNY579m, respectively, for 2016. We forecast its revenue 357 232 213 0 and earnings to rise by a further 35% and 85% YoY for 2013 2014 2015E 2016E 2017E FY17 to reach CNY10,805m and CNY1,072m, Revenue Core net profit respectively. Source: Company, Daiwa forecasts

Valuation Joy City: discount to NAV

Joy City is trading currently at a 68% discount to our end- (%) 16E NAV of HKD3.04, pretty much in line with its mid-cap 0 peers’ discount to market NAV of 50-70%. We think Joy City deserves to trade at a lower NAV discount to its peers (20) +1SD -14.2% due to its growing recurring income from its investment Mean -36.5% properties, amid a potential slowdown in residential sales (40) growth for property developers as a result of weaker housing demand. We believe the company’s property sales (60) in the next few years should be sufficient to cover its -1SD -58.8% required capex on investment properties. (80) 2014 2015

Source: Company, Daiwa

Earnings revisions Joy City: revisions to the Bloomberg-consensus EPS forecasts Our earnings forecast for 2015 is some 47% below that of (CNY) the Bloomberg-consensus mean estimate, and 19% below 0.15 the consensus median forecast as a result of 2 very high outliers. Our lower-than-consensus forecast is largely 0.10 attributable to our estimated higher profit attributable to minority interests from the booking of 2 projects in Sanya, namely The Signature and Brilliant Villa. Our earnings 0.05 forecast for 2016 is 21% below the mean consensus forecast, but only 7% below the consensus median 0.00 forecast. We believe the company’s lagging share-price Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 2015E consensus EPS 2016E consensus EPS performance over the past year has largely factored in an Source: Bloomberg, Daiwa expected earnings dip for 2015. Hence, we recommend that investors buy into Joy City on the recent share-price weakness.

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Joy City Property (207 HK): 29 January 2016

Financial summary Key assumptions Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Recognized GFA ('000 sqm) n.a. n.a. n.a. n.a. n.a. 36 48 80 Recognized ASP (CNY/sqm) n.a. n.a. n.a. n.a. n.a. 42,748 60,629 64,355 Rental income from Joy City malls n.a. n.a. n.a. 1,268 1,518 1,753 2,457 2,867 (CNY m) Hotel operation income (CNY m) n.a. n.a. n.a. 883 1,011 1,115 1,196 1,261

Profit and loss (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sale of properties n.a. n.a. n.a. 3,650 2,021 1,553 2,935 5,122 Gross rental income n.a. n.a. n.a. 1,694 2,009 2,209 2,940 3,366 Other Revenue n.a. n.a. n.a. 1,465 1,684 1,880 2,101 2,317 Total Revenue n.a. n.a. n.a. 6,809 5,713 5,643 7,976 10,805 Other income n.a. n.a. n.a. 60 42 50 55 61 COGS n.a. n.a. n.a. (3,138) (2,318) (2,600) (3,664) (4,925) SG&A n.a. n.a. n.a. (1,409) (1,473) (1,416) (1,978) (2,647) Other op.expenses n.a. n.a. n.a. 218 164 189 181 177 Operating profit n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471 Net-interest inc./(exp.) n.a. n.a. n.a. (626) (852) (888) (908) (953) Assoc/forex/extraord./others n.a. n.a. n.a. 3,685 1,911 15 17 20 Pre-tax profit n.a. n.a. n.a. 5,599 3,186 992 1,678 2,539 Tax n.a. n.a. n.a. (2,055) (1,239) (317) (570) (881) Min. int./pref. div./others n.a. n.a. n.a. (425) (274) (462) (529) (586) Net profit (reported) n.a. n.a. n.a. 3,118 1,673 213 579 1,072 Net profit (adjusted) n.a. n.a. n.a. 356 232 213 579 1,072 EPS (reported)(CNY) n.a. n.a. n.a. 0.513 0.168 0.017 0.047 0.088 EPS (adjusted)(CNY) n.a. n.a. n.a. 0.059 0.023 0.017 0.047 0.088 EPS (adjusted fully-diluted)(CNY) n.a. n.a. n.a. 0.059 0.023 0.017 0.047 0.088 DPS (CNY) n.a. n.a. n.a. 0.000 0.008 0.003 0.012 0.022 EBIT n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471 EBITDA n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471

Cash flow (CNYm) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Profit before tax n.a. n.a. n.a. 5,599 3,186 992 1,678 2,539 Depreciation and amortisation n.a. n.a. n.a. 284 340 343 377 410 Tax paid n.a. n.a. n.a. (686) (1,196) (317) (570) (881) Change in working capital n.a. n.a. n.a. (867) (1,986) 360 1,409 1,006 Other operational CF items n.a. n.a. n.a. (3,189) (1,239) 873 891 932 Cash flow from operations n.a. n.a. n.a. 1,141 (895) 2,251 3,785 4,007 Capex n.a. n.a. n.a. (873) (969) (928) (879) (885) Net (acquisitions)/disposals n.a. n.a. n.a. (1,081) (1,299) (2,093) (1,319) (1,811) Other investing CF items n.a. n.a. n.a. 3,095 (152) 550 576 623 Cash flow from investing n.a. n.a. n.a. 1,141 (2,419) (2,471) (1,621) (2,073) Change in debt n.a. n.a. n.a. 4,211 2,495 3,985 1,313 2,184 Net share issues/(repurchases) n.a. n.a. n.a. 3,016 3,768 5,054 0 0 Dividends paid n.a. n.a. n.a. (206) (168) (43) (145) (268) Other financing CF items n.a. n.a. n.a. (4,029) (5,742) (10,118) (1,575) (1,641) Cash flow from financing n.a. n.a. n.a. 2,993 352 (1,121) (407) 276 Forex effect/others n.a. n.a. n.a. 0 0 0 0 0 Change in cash n.a. n.a. n.a. 5,275 (2,962) (1,341) 1,757 2,209 Free cash flow n.a. n.a. n.a. 268 (1,864) 1,323 2,906 3,122 Source: FactSet, Daiwa forecasts

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Joy City Property (207 HK): 29 January 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Cash & short-term investment n.a. n.a. n.a. 9,042 6,489 5,115 6,872 9,081 Inventory n.a. n.a. n.a. 7,726 11,634 12,448 13,393 14,520 Accounts receivable n.a. n.a. n.a. 164 125 150 179 215 Other current assets n.a. n.a. n.a. 804 704 643 589 569 Total current assets n.a. n.a. n.a. 17,736 18,952 18,356 21,033 24,385 Fixed assets n.a. n.a. n.a. 5,392 5,963 6,420 6,843 7,233 Goodwill & intangibles n.a. n.a. n.a. 193 203 203 203 203 Other non-current assets n.a. n.a. n.a. 38,451 42,920 45,122 46,526 48,438 Total assets n.a. n.a. n.a. 61,772 68,038 70,102 74,605 80,260 Short-term debt n.a. n.a. n.a. 7,284 9,621 8,688 9,557 10,321 Accounts payable n.a. n.a. n.a. 1,789 1,132 1,189 1,308 1,412 Other current liabilities n.a. n.a. n.a. 6,649 10,105 5,726 7,480 9,045 Total current liabilities n.a. n.a. n.a. 15,722 20,858 15,602 18,344 20,779 Long-term debt n.a. n.a. n.a. 11,347 14,479 16,135 17,748 19,168 Other non-current liabilities n.a. n.a. n.a. 5,161 5,701 6,260 6,858 7,514 Total liabilities n.a. n.a. n.a. 32,229 41,037 37,997 42,951 47,461 Share capital n.a. n.a. n.a. 668 748 1,122 1,122 1,122 Reserves/R.E./others n.a. n.a. n.a. 24,921 22,783 27,296 26,561 27,366 Shareholders' equity n.a. n.a. n.a. 25,589 23,531 28,419 27,684 28,488 Minority interests n.a. n.a. n.a. 3,954 3,469 3,686 3,970 4,311 Total equity & liabilities n.a. n.a. n.a. 61,772 68,038 70,102 74,605 80,260 EV n.a. n.a. n.a. 23,562 31,110 33,409 34,401 34,696 Net debt/(cash) n.a. n.a. n.a. 9,588 17,610 19,707 20,433 20,408 BVPS (CNY) n.a. n.a. n.a. 4.207 2.366 2.323 2.263 2.329

Key ratios (%) Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E Sales (YoY) n.a. n.a. n.a. n.a. (16.1) (1.2) 41.3 35.5 EBITDA (YoY) n.a. n.a. n.a. n.a. (16.2) (12.3) 37.8 35.1 Operating profit (YoY) n.a. n.a. n.a. n.a. (16.2) (12.3) 37.8 35.1 Net profit (YoY) n.a. n.a. n.a. n.a. (34.8) (8.4) 172.0 85.2 Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. (60.2) (25.5) 172.0 85.2 Gross-profit margin n.a. n.a. n.a. 53.9 59.4 53.9 54.1 54.4 EBITDA margin n.a. n.a. n.a. 37.3 37.2 33.1 32.2 32.1 Operating-profit margin n.a. n.a. n.a. 37.3 37.2 33.1 32.2 32.1 Net profit margin n.a. n.a. n.a. 5.2 4.1 3.8 7.3 9.9 ROAE n.a. n.a. n.a. n.a. 0.9 0.8 2.1 3.8 ROAA n.a. n.a. n.a. n.a. 0.4 0.3 0.8 1.4 ROCE n.a. n.a. n.a. 2.6 4.3 3.5 4.4 5.7 ROIC n.a. n.a. n.a. 2.2 3.1 2.6 3.3 4.3 Net debt to equity n.a. n.a. n.a. 32.5 65.2 61.4 64.5 62.2 Effective tax rate n.a. n.a. n.a. 36.7 38.9 32.0 34.0 34.7 Accounts receivable (days) n.a. n.a. n.a. 4.4 9.2 8.9 7.5 6.7 Current ratio (x) n.a. n.a. n.a. 1.1 0.9 1.2 1.1 1.2 Net interest cover (x) n.a. n.a. n.a. 5.8 3.4 1.4 1.9 2.4 Net dividend payout n.a. n.a. n.a. 0.0 4.9 20.0 25.0 25.0 Free cash flow yield n.a. n.a. n.a. 2.7 n.a. 13.1 28.7 30.8 Source: FactSet, Daiwa forecasts

Company profile

Joy City Property is a commercial property developer and manager that focuses on the development, operation, sales, leasing and management of shopping malls under its “Joy City” brand and other commercial properties in Mainland China. Its parent, COFCO Corporation, is one of the 21 state- owned enterprises that have been granted approval to engage in real estate development in China.

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Joy City Property (207 HK): 29 January 2016

Joy City – a model that is gaining credential Currently owns 8 Joy City malls with 7 in operation Shanghai Joy City Phase Joy City is a commercial property developer and manager that focuses on the 1 North and Chengdu development, operation, sales, leasing and management of shopping malls under its “Joy Joy City commenced City” brand in Mainland China. It also develops residential and commercial properties. After operations in December 2 asset injections from its parent, COFCO Corporation (a state-owned enterprise), in 2013- 2015 14 and other project acquisitions from local governments and third parties, the company now owns 29 property projects in 8 cities, including 8 Joy City complexes, 8 hotels and other residential and commercial projects.

Of the 8 Joy City malls, 7 have already commenced operations. The newest malls are Shanghai Joy City Phase 1 North and Chengdu Joy City, both of which started operations in December 2015. Hangzhou Joy City, which was newly acquired in February 2015, is expected to start operating in 2018.

Joy City: retail mall portfolio 2014 1H15 Rentable Completion Average Rental Average Rental City Stake Total GFA GFA Date rent Occupancy income rent Occupancy income (sqm) (sqm) (CNY/sqm/day) (%) (CNY m) (CNY/sqm/day) (%) (CNY m) Bejing Xidan Joy City Beijing 100% 185,654 66,267 2008 33 95% 600 35.37 93% 310 Beijing Chaoyang Joy City Beijing 90% 405,570 112,538 2010 10.4 98% 420 10.5 99% 230 Shenyang Joy City Shenyang 100% 555,146 121,643 2011 3.7 86% 130 4.1 93% 78 Shanghai Joy City* Shanghai 100% 449,849 94,721 2015 8.8 98% 85 8.3 97% 42 Tianjin Joy City Tianjin 100% 531,369 83,965 2012 8.7 99% 250 9.9 99% 148 Yantai Joy City Yantai 51% 219,964 78,267 2014 2.4 96% 33 3.2 94% 42 Chengdu Joy City Chengdu 100% 314,560 95,200 2015 ------Hangzhou Joy City Hangzhou 55% 307,061 - 2017 ------Total 2,969,173 652,601 1,518 850

Source: Joy City, Daiwa Note: Shanghai Joy City Phase 1 South was completed in 2011, while Phase 1 North was completed in 2015.

A proven model with a solid track record Having the right strategy differentiates Joy City malls Joy City has come up Joy City has put in a lot of effort into developing the right strategy for its malls in past with a business model years. Through data mining and analysis and also trial and error, it has fine-tuned its that differentiates its strategy for its malls and come up with a business model that we believe enables its malls malls and enables them to succeed and stand out among their competitors. to succeed In terms of business strategy, Joy City mainly focuses on targeting the right group of customers, selecting the right brands, choosing a strategic location for its malls, and also enhancing customers’ value through the provision of value-added services and an O2O shopping experience.

Good track record resulting from the right strategy As a result of having the right target customers, the right brands, strategic locations and quality management, most of Joy City’s malls have seen decent growth in foot traffic and retail sales since the commencement of operations.

Joy City malls to stay resilient amid slowdown in retail sales growth With growth in the overall economy likely to slow further in 2016, retail sales growth is also likely to falter. Daiwa’s house forecast calls for nationwide retail sales growth of 9.6% YoY for 2016, down from 10.7% for 2015. Despite a potential slowdown in overall retail sales growth and more competitive retail market, we believe Joy City’s malls, with their right strategy, would be able to continue to grab market share and see retail sales growth exceed the nationwide average in 2016, as they have in the past few years. In the first half of 2015, total retail sales for Joy City’s malls increased by 22.1% YoY, while nationwide retail sales rose by only 10.4%.

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Joy City Property (207 HK): 29 January 2016

Targeting up-and-coming consumers One-stop shopping experience for middle-class younger generation Joy City malls target the Joy City’s malls are positioned as stylish and trendy shopping malls targeted at the middle middle-class younger class younger generation of 18-35 years old. Its malls aim to provide a one-stop shopping, generation of 18-35 entertainment and dining experience for these targeted customers, with their wide range of years old brands, different types of cuisine and various entertainment facilities.

Themed pedestrian streets popular amongst younger consumers To cater for the preference of the younger generation in particular, Joy City has created special attractions, such as themed pedestrian streets, at a few of its malls. For example, “Cheer Market”, which is located in Tianjin Joy City, is positioned as an indoor pedestrian art street, and features shipping containers where young entrepreneurs can set up shop and undertake their own interior design and decor. Another example is “Joy Yard” in Beijing Chaoyang Joy City. “Joy Yard” is considered an indoor utopia and nature setting, with 35% of its indoor space adorned by greenery and natural elements, such as stone, wood and water. The mall consists of 32 creative shops including trendy cafes and restaurants, a painting studio, a cultural bookstore, etc. Other special projects of Joy City that cater to the tastes of young customers include “No. 5 Garage” in Tianjin Joy City, “Mofang 166” in Shanghai Joy City and also, “Gulu School” in Chengdu Joy City.

Cheer Market at Tianjin Joy City Joy Yard at Beijing Chaoyang Joy City

Source: Joy City, Daiwa Source: Joy City, Daiwa

Major shift in consumption in China driven by younger generation 20-30 year olds set to become the core of the middle class in China Over the past 3 decades, the shopping habits of Chinese consumers have changed drastically as incomes have risen and new products and concepts have emerged in the Chinese market. Nowadays, the consumer market in China is largely driven by a new generation of young, prosperous and independent consumers who were born in the 1980s and later.

Since the one-child policy was implemented in China in 1979, parents have become more generous in providing financial support to their children and afforded them with more comfortable financial prospects and larger budgets. As people born in the 1980s and later, and with less experience with hardship than their parents and being more exposed to different cultures, these young people are usually characterised as being more independent-minded, less price-sensitive, quality conscious, loyal to brands and prefer niche products over mass-market products. Moreover, this younger generation is usually more attracted to Western products and are more accustomed to Western brands and products. According to AC Nielsen forecasts, the 20-30 age group will become the core of the middle class in China, and will contribute 35% to total consumption in China by 2020, up from 15% in 2014.

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Joy City Property (207 HK): 29 January 2016

Breakdown of population among age groups

100%

80%

60%

40%

20%

0% 2010 2011 2012 2013 2014

Below 20 years old 20-29 years old Above 29 years old

Source: NBS, Daiwa

With the expected increased contribution to nationwide consumption and the growing influence of the younger generation in the China consumer market, many companies have adapted to this new generation of young consumers by differentiating their products and adjusting their branding and marketing strategies to appeal to younger consumers. We think Joy City has chosen the right group of target customers for its malls and will continue to benefit from this strategic choice.

A growing pool of partnering brands – local and international 80 core brands, many of which are renowned international brands Joy City has good Joy City has around 300-400 shops in each of its Joy City malls. In order to maintain connections with its consistent quality in terms of the brands and products across all its malls, the company has core brands, which add developed a classification management system especially for its malls to integrate up to around 80 of them resources, adopt standardised management and ensure smooth and stable business operations.

In terms of the brands at the Joy City malls, they are classified into 3 classes. Some 30% of them are core brands, of which Joy City has around 80. Some examples of its core brands are Apple, ZARA, UNIQLO, Muji, Sephora, Starbucks and H&M. Then, 40% of the brands are picked from a list of non-core brands, with which Joy City has cooperated in the past. The remaining 30% of brands are chosen in accordance with either the shopping habits and behavior of local shoppers or the local culture and characteristics. For example, bars with trendy interiors and decor are popular in Chengdu.

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Joy City Property (207 HK): 29 January 2016

Joy City: core brands

Source: Company, Daiwa

Foreign fashion brands gaining popularity, especially among the young With increasing product knowledge and stronger purchasing power, consumers in China, especially the younger generation, are increasingly demanding quality and comfort in clothing. Moreover, with more exposure to the Western media, Chinese consumers are now more aware of global fashion trends, and are less price-conscious but more brand- conscious. They generally trust foreign brands for their strong brand image, services, quality, fit and cut.

The younger generation As Chinese consumers increasingly demand stylish, quality products, foreign brands, in generally prefers foreign particular fast fashion retailers like Zara, H&M and Uniqlo, are expected to see decent fashion brands over retail-sales growth in China over the next few years. By focusing on China’s booming local brands middle class, these brands have sought to lure the younger generation by offering stylish designs at cheaper prices and customised promotions. These foreign fashion brands use big data to spot market trends and have developed a good understanding of consumer behavior. They monitor consumer behavior of different age groups in stores and then adjust their designs accordingly. From the below table, we can see that foreign fashion brands (ie, UNIQLO, Zara and H&M) have been gaining market share in the past few years, while local apparel and footwear brands like Belle and Meters/bonwe have been losing market share.

Market share of domestic and foreign apparel/footwear brands

2011 1.0 1.2 1.9 0.9 2.6 1.2 1.3 1.1 0.9 1.5 2012 1.3 1.3 1.8 1.0 1.9 1.1 1.3 1.0 0.9 1.0 2013 1.5 1.4 1.6 1.1 1.4 1.0 1.1 0.9 0.8 0.9 2014 1.6 1.5 1.5 1.2 1.1 1.0 0.9 0.8 0.8 0.7 Source: CKGSB Knowledge, Euromonitor; Note: *Owned by Belle International

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Joy City Property (207 HK): 29 January 2016

Joy City malls are strategically located Located in popular business hubs or areas with huge potential for development Joy City malls are Of Joy City’s 8 shopping malls, 3 are located in tier-1 cities (Beijing and Shanghai) and the strategically located remaining 5 are in upper tier-2 cities (Shenyang, Tianjin, Yantai, Chengdu and Hangzhou) either in popular where the purchasing power of local shoppers is typically higher than that in the lower-tier business hubs or areas cities. Moreover, as the Joy City malls are designed and developed with an aim to become with huge potential for the focal point of their respective areas, and also to add value to adjacent areas within the development city, they are also strategically located in each of the cities.

Beijing Xidan Joy City is a landmark located in the centre of the Xidan commercial area, a popular business hub in Xicheng District in Beijing. It is well-connected to transportation networks and is in close proximity to metro stations and bus stops. Beijing Chaoyang Joy City is situated in the core of Chaoqing area to the east of Beijing and is also connected by metro lines and bus stops. Due to the eastward shift in the city’s development focus, the Chaoqing area has more and more high-end residential buildings and is becoming a “central living district”.

Tianjin Joy City is located in a core area within the Inner Ring in Tianjin and is at the intersection point of the city transportation network. It is close to other tourist attractions like cultural street and Gulou commercial streets, and within 5km of the mall lives a population of 3.3m. Shanghai Joy City is in the core of the Suhewan in Zhabei District in Shanghai and is in close proximity to the Nanjing East Road and People’s Square business hub. With its core location, it can divert and attract some of the shoppers in the Nanjing East Road business hub and has the potential to become the centre of a new Suhewan business hub.

Chengdu Joy City, which commenced operations in December 2015, is situated in Wuhou District in Chengdu, a high-tech cultural district. This area comprises a lot of mid-to-high end residential projects and has a permanent population of around 0.5m, which could increase to 1.5m in the medium to long term. Hangzhou Joy City, the newest addition to Joy City’s shopping mall portfolio, is located in a new Yunhe business hub in Gongshu District in Hangzhou and is some 20 minutes away from the city centre. This new business hub will be one of the development focuses of the local government and will include a cruise terminal next to the Jinghang Canal. Two metro lines close to Hangzhou Joy City are expected to start operating in 2019-20.

Enhancement of customer value Data collection to identify target customers’ needs and interests Joy City relies on big To identify the needs and interests of target customers, Joy City has been consistently data to identify collecting data from each customer through different channels, eg, consumption records customers’ interests and through WeChat payment, customers’ age and gender and frequently visited places consumption behaviour through WeChat and Unionpay, customers’ consumption pattern and duration of stay in each of the stores through wifi data. Using this collected data, the company predicts customers’ consumption behaviour and possible visits to stores, and applies tailor-made marketing to each of the customers.

Moreover, Joy City has developed a foot traffic forecasting system which collects foot traffic statistics and allows the company to predict foot traffic and adjust the allocation of tenants to optimise the shopping experience of customers.

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Joy City Property (207 HK): 29 January 2016

Valuation creation for customers Membership programme to add value Joy City has developed a membership programme named “Joy Citizen” for customers at its malls, whereby members can enjoy discounts at selected stores, participate in activities exclusively for members, enjoy free parking, use baby strollers and nursing room at the malls, obtain bonus points to redeem gifts, etc.

Promotion activities for Joy City’s members “Joy Citizen”

Source: Joy City

Tianjin Joy City achieved As at June 2015, Joy City had over 1m members nationwide in its Joy Citizen programme satisfactory results as a and nearly 950,000 WeChat followers. Tianjin Joy City alone had 200,000 members and result of its special- 110,000 WeChat followers. Besides having special-themed streets like “Cheer Market”, themed streets and its “Shen Shou Si”, “0618 Street” and “No. 5 Garage”, Tianjin Joy City launched “Taste Good”, member experience the first O2O member experience platform nationwide. This platform comprises an online platform shopping mall and offline physical stores, whereby members can collect bonus points and redeem gifts. “Taste Good” even collaborated with China Merchants Bank and set up its first branch outside Joy City at the China Merchants Bank Anxi Road branch, where members of China Merchants Bank can also enjoy the services provided by “Taste Good”.

11

Joy City Property (207 HK): 29 January 2016

“Taste Good” membership centre

Source: Joy City, Daiwa

All of Joy City’s malls At Shanghai Joy City, an intelligent shopping system – WeChat electronic membership was have some sort of O2O launched. This electronic membership on WeChat makes shopping more convenient for platform or business to members as it includes information on promotion coupons, discounts, membership create value and activities, bonus points, etc. enhance customers’ shopping experience WeChat electronic membership for customers at Shanghai Joy City

Source: Joy City, Daiwa

Collaboration with O2O service providers Joy City has collaborated the tenants at its malls with O2O service providers (ie, Baidu Waimai, Meituan) in order to provide value-added services to customers, and at the same time, increase promotion for its tenants. For example, customers will receive shopping coupons at Joy City malls upon the browsing and purchases on the O2O services providers’ websites.

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Joy City Property (207 HK): 29 January 2016

O2O mobile payments To further enhance customers’ shopping experience, Joy City has introduced O2O mobile payment methods for customers at its malls. These payment methods include QR Code payment, WeChat payment, Shake n Pay, Sound Wave payment, etc.

Growing credentials Decent growth in foot traffic, retail sales and rental for existing malls Most Joy City malls saw As a result of having the right target customers, the right brands, strategic locations and decent growth in foot quality management, most of Joy City’s malls have seen decent growth in foot traffic and traffic and retail sales in retail sales since commencement of operations. the past few years Higher foot traffic for most malls in past years Looking at the below table that depicts foot traffic, all of Joy City’s malls besides Shanghai Joy City Phase 1 South have recorded sequentially higher YoY foot traffic in the past few years. Tianjin Joy City, which started operations in 2012, saw very strong YoY foot traffic growth of 51% and 29% for 2013 and 2014, respectively. We expect its foot traffic in 2015 to also see decent growth, given that in 1H15 foot traffic was already some 26% higher than that for 1H14. Yantai Joy City, on the other hand, is also expected to record strong foot traffic growth in 2015 as it commenced operations only in 2014.

Joy City: foot traffic at its Joy City malls (m persons) 2008 2009 2010 2011 2012 2013 2014 1H15 Bejing Xidan Joy City 19.2 28.7 27.9 31.5 25.6 29.3 29.5 13.2 Beijing Chaoyang Joy City 7.5 14.5 15.0 21.0 23.4 10.9 Shenyang Joy City 2.4 9.2 18.5 19.9 21.9 22.1 10.8 Shanghai Joy City Phase 1 South 6.6 5.8 6.1 5.8 2.9 Tianjin Joy City 9.4 14.3 18.4 10.9 Yantai Joy City 5.1 5.3 Total 19.2 31.1 44.5 71.1 75.8 92.6 104.3 54.0

Source: Joy City, Daiwa

Retail sales growth at Joy City’s malls likely to exceed nationwide average Basically, all of Joy City’s malls saw retail sales growth in the past few years, including Shanghai Joy City, which recorded declining foot traffic during the period. Not surprisingly, Tianjin Joy City saw especially strong YoY retail sales growth of 92% and 48% for 2013 and 2014, respectively. Beijing Xidan Joy City saw the slowest retail sales growth in the past few years, having only recorded 2% YoY sales growth in each of 2013 and 2014. However, the mall generated the largest amount of retail sales of CNY3,601m among Joy City’s 6 malls in operation in 2014, which is a quite sizeable amount for individual malls in China. Besides, Xidan Joy City saw a decent 28% YoY increase in retail sales for 1H15, and hence, the mall’s retail sales growth for the whole of 2015 should meet expectations.

Nationwide retail sales growth has been slowing in the past few years, and with economic growth likely to slow further in 2016, slower growth in retail sales during the year is also very likely. Daiwa’s house forecast calls for nationwide retail sales growth of 9.6% YoY for 2016, down from 10.5% for 2015E.

Retail sales growth at Despite the potential for a slowdown in overall retail sales growth, we believe Joy City’s Joy City malls has malls, with their right target group, favourable locations, international brand focus and outperformed the positioning, would be able to record better retail sales growth than the nationwide average, nationwide average over as they have in the past few years. In 2013, while nationwide retail sales recorded 13.2% the past few years, and YoY growth, retail sales at Joy City’s malls increased by 23.5% YoY for the year. In 2014, we expect this to the 16.8% YoY growth in Joy City malls’ retail sales again outperformed nationwide retail continue sales growth of 12.0%. In 1H15, total retail sales for Joy City’s malls grew by 22.1% YoY, while nationwide retail sales only rose by 10.4%.

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Joy City Property (207 HK): 29 January 2016

Joy City: retail sales at its Joy City malls (CNY m) 2008 2009 2010 2011 2012 2013 2014 1H15 Bejing Xidan Joy City 899.8 1,529.7 2,191.0 3,198.9 3,448.6 3,513.7 3,601.4 2,049.2 Beijing Chaoyang Joy City 404.2 1,055.0 1,377.3 2,156.1 2,516.9 1,301.7 Shenyang Joy City 59.0 296.7 505.4 607.3 639.0 880.5 631.0 Shanghai Joy City Phase 1 South 376.5 408.1 420.6 431.4 215.5 Tianjin Joy City 701.8 1,348.7 2,001.0 1,103.6 Yantai Joy City 241.7 295.9 Total 899.8 1,588.7 2,891.9 5,135.8 6,543.0 8,078.1 9,672.9 5,596.9

Source: Company, Daiwa

Strong rental income growth in 2016-17 Contribution from two new malls starting in 2016 We forecast 40% and In 2014, Joy City’s rental income from its Joy City retail malls amounted to CNY1,518m, 16% rental income accounting for around 27% of its total revenue. We forecast aggregate rental income of growth for Joy City malls CNY1,724m for the malls in 2015, which is a 13.6% YoY increase. For 2016, we anticipate for 2016 and 2017, a strong 39.6% YoY jump in rental income to reach CNY2,407m, due largely to an income respectively contribution of CNY498m from the 2 new malls (Shanghai Joy City Phase 1 North and Chengdu Joy City), and also steady organic rental income growth of 11.7% from the other 5 Joy City malls. We forecast a further 15.7% YoY increase in rental income for the company to CNY2,784m in 2017.

Joy City: rental income from Joy City malls (CNY m) 3,000 2,784 2,407 2,500

2,000 1,724 1,518 1,500 1,268

1,000

500

0 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Upside to EBITDA-to-cost Most EBITDA-to-cost upside for Yantai Joy City and Shanghai Joy City Joy City achieved an overall EBITDA-to-cost ratio of 8.6%, or a yield on cost of 7.2%, for its 6 malls under operation in 1H15. During 1H15, its Beijing Xidan Joy City achieved the highest EBITDA-to-cost of 22%, followed by 10% for Beijing Chaoyang Joy City, and around 6% for each of Tianjin Joy City and Shenyang Joy City. Meanwhile, Shanghai Joy City and Yantai Joy City saw low EBITDA-to-cost ratios of around 2% and 1%, respectively.

Joy City: EBITDA-to-cost of its malls Joy City recorded an 25% average EBITDA-to-cost 22% of 8.6% for its malls 20% under operation, and we see more upside to this 15% 10% number over the next 10% few years 6% 6% 5% 2% 1% 0% Bejing Xidan Joy City Beijing Chaoyang Joy Tianjin Joy City Shenyang Joy City Shanghai Joy City Yantai Joy City City Phase 1 South

Source: Company, Daiwa

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Joy City Property (207 HK): 29 January 2016

For its Joy City malls operating at different stages, the company has set different targets for EBITDA-to-cost. It has set an EBITDA-to-cost target of 6.0-6.5% for malls in their third year of operations, while the EBITDA-to-cost targets for malls in their sixth year and eighth year of operations are 8.0-8.5% and around 10%, respectively.

Of Joy City’s newer malls, the operating performance of Tianjin Joy City is most in line with the company’s targets set when it commenced operations. Yantai Joy City only commenced operations in 2014, and hence there is upside to its EBITDA-to-cost in subsequent years. Meanwhile, with the opening of Shanghai Joy City Phase 1 North in December 2015, which is larger than the already-developed Shanghai Joy City Phase 1 South and encompasses more shops and entertainment facilities, Joy City expects Shanghai Joy City Phase 1 South to benefit and believes its operating performance will see an improvement. Thus, we also see further upside to the EBITDA-to-cost of Shanghai Joy City Phase 1 South.

Existing malls likely to stay resilient amid slowdown in nationwide retail sales growth While Joy City plans to add new malls to its retail property portfolio, its existing malls should continue to see high foot traffic and better-than-nationwide retail sales growth due to the company’s right strategy, right positioning, right target group, right brands and right location, in our view. Moreover, a few of its newer malls are likely to see even more upside than the older Joy City malls in foot traffic and retail sales in the next few years.

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Joy City Property (207 HK): 29 January 2016

Shift in strategy for the retail property business Setting up joint ventures for greenfield projects Lower capex requirements Joy City currently owns 8 shopping malls under its Joy City brand, of which 5 are wholly owned by the company (ie, Beijing Xidan Joy City, Tianjin Joy City, Shanghai Joy City, Shenyang Joy City and Chengdu Joy City), while it holds a controlling stake in the remaining 3 malls (namely, Beijing Chaoyang Joy City, Yantai Joy City and Hangzhou Joy City).

Joy City is targeting to The company is targeting to own 20 malls under its Joy City brand in 5 years’ time. One own 20 Joy City malls in way to achieve this is to develop greenfield projects from scratch, and the other way is to 5 years’ time, including acquire a minority stake in already developed malls that are either poorly developed or its 8 currently owned poorly managed, and operate them under the Joy City brand. malls However, unlike some of its previous greenfield malls in which Joy City owned the entire stake, the company plans to set up joint ventures (JV) with third parties for all its newly developed malls going forward, but would have a controlling stake in them. This shift in strategy on new malls is intended to lower the capex requirement upfront amid intense competition in the retail property market.

Joy City aims to acquire at least one greenfield project each year in the tier-1 and major tier-2 cities like Nanjing, Ningbo, Xiamen, Wuhan, Chongqing, Qingdao, etc.

Established JV with GIC that operates 2 malls Of the 3 Joy City malls Joy City does not own entirely, 2 are JV projects with the Government of Singapore Investment Corporation (GIC), Joy City’s second-largest shareholder with an 8.17% stake. Yantai Joy City, which commenced operations in 2014, is the first Joy City mall that was jointly developed by Joy City and GIC. In December 2015, GIC acquired a 45% stake in Hangzhou Joy City, which is currently under development and will not commence operations until 2018.

Other existing malls could be securitised to form a commercial REIT For the other 5 completed Joy City malls that are wholly owned by Joy City, there is the possibility of the securitization of these malls to form a commercial real estate investment trust (REIT) in order to increase their value. The initial idea is for Joy City to manage the trust and that part of the trust would be sold to pension funds or sovereign funds. Nonetheless, there is no fixed timetable on this.

Asset-light strategy for new malls has kicked off A supplementary growth driver to cushion slowdown in retail sales growth Under its asset-light Another way for Joy City to build up its retail mall portfolio under its asset-light strategy is strategy, Joy City will to acquire malls that are already developed. Under this strategy, the company plans to either acquire a small focus on 2 business models for its new malls, both of which would lead to Joy City owning stake in malls that are only a small, or even a zero, stake in its new malls. already developed, or manage malls in which it Business model No.1: acquire a small stake in already developed malls and does not have a stake operate them under the Joy City brand Under the first asset-light business model, Joy City would acquire a minority stake in a number of already developed malls, refurbish them and operate them under its Joy City brand. Besides operating the malls and receiving a portion of the rental income, Joy City would also be responsible for the management of the malls and receive management fees under this business model.

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Joy City Property (207 HK): 29 January 2016

Business model No.2: management-only contracts on existing malls Under the second asset-light business model, Joy City would look for existing malls, advise on redevelopment and subsequently help manage them. The company would not own a stake in the malls, and hence, these malls would not be branded as “Joy City” malls. There are 3 types of fees that Joy City could collect in these cases: 1) advisory fees before the refurbishment of the malls, 2) consultancy fees during the redevelopment process, and 3) management fees for management of the malls.

Criteria for the 2 business models For the malls to be operated under its first asset-light business model, in which Joy City has a stake, the company would focus mainly on tier-1 and tier-2 cities, eg, Shanghai, Guangzhou, Shenzhen, Suzhou, Nanjing, Wuxi, Xiamen, Quanzhou, Chongqing, Wuhan, Xi’an, etc. The ideal mall size for this business model is around 100,000-150,000sqm. The malls that are smaller than this ideal size are more likely to be considered for the second asset-light business model, in which Joy City does not have a stake and only manages them. Moreover, the malls under this business model are more likely to be located in smaller tier-2 and tier-3 cities.

Recurrent income at low costs The initial capex required to develop malls from scratch is huge and the payback period is usually long. Joy City’s decision to switch to an asset-light strategy for its malls would save it a lot of costs upfront. For its first asset-light business model, the largest capex would be the costs involved in the re-modeling and renovation of existing malls, which Joy City only has to contribute a fraction of it. For its second asset-light business model, the costs involved would even be lower as Joy City does not have a stake in the malls. The labour costs, which would be incurred under both asset-light business models, would be accounted for by the owner and operator of the malls.

Hence, while Joy City would be able to enjoy steady recurrent income from its asset-light malls, the capex and costs needed are low. In 2015, the capex spent by Joy City was around CNY4bn due to the opening of 2 new malls, but for 2016, the capex amount is expected to be much lower at CNY2-2.5bn.

Joy City acquired its first asset-light project in December 2015 Joy City will receive Joy City announced its first asset-light project in Tianjin in December 2015. Tianjin Heping advisory and Joy City, the company’s second Joy City complex in Tianjin, will become its first asset-light management fees from project. This project, first opened in 2001, is owned by GIC, and while Joy City has no its first asset-light stake in it, the mall is an exception in being branded Joy City, largely due to the company’s project in Tianjin close relationship with GIC. It is located in one of the busiest business districts in Tianjin, namely the Binjiang Road and Nanjing Road business district. It comprises a total GFA of 180,000sqm, including 68,000sqm of retail mall, 82,000sqm of offices and 38,000sqm of hotel. The mall will undergo refurbishment and will re-open by the end of 2016.

Joy City is responsible for the commercial operations and management of Tianjin Heping Joy City. It will participate in the planning, architectural design, tenant enrolling, operations and lease management of the commercial portion of the project. It will receive advisory fees before the refurbishment of the project and management fees after the re-opening of the mall.

Like its own Joy City malls, Joy City plans to position the mall to target customers in the 22-35 age group. It will promote the theme of “slow but quality living” and will include many small and exclusive designer stores. Joy City will also introduce to this mall its “themed street” approach, which adopts different themes for different floors at the mall.

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Joy City Property (207 HK): 29 January 2016

Tianjin Heping Joy City (formerly named The Exchange Mall)

Source: Joy City, Daiwa

Carefully choosing other new projects from a list of 30-35 malls Joy City has a list of 30- On top of Tianjin Heping Joy City, Joy City is looking to choose new malls from a list of 30- 35 projects to choose 35 already developed malls to operate under its asset-light strategy. Going forward, the from for its asset-light company targets to add at least 1 mall each year under its new strategy. business Joy City’s strategy and track record differentiate it from other mall operators While competition for the acquisition of poorly-operated and managed malls in China could become more intense, we believe Joy City, with its reputation, its SOE background, its right strategy on malls and its good track record, will stand out among mall operators and enable it to turn poorly operated or managed malls into popular and well-run malls with more foot traffic.

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Joy City Property (207 HK): 29 January 2016

Strong property sales to continue Support decent top-line growth in the next few years CNY3.2bn of property sales achieved in 2015, up 79% YoY Joy City set a contract sales target of CNY2-2.5bn for 2015, compared to CNY1.8bn of sales achieved in 2014. For the whole of 2015, Joy City achieved contract sales of around CNY3.2bn, some 79% higher than that for 2014.

In November 2015, Joy City launched 2 more residential projects, namely Joy Mansion One in Shanghai (the residential portion of Shanghai Joy City) and Joy Mansion in Hangzhou (the residential portion of Hangzhou Joy City). Joy Mansion One in Shanghai launched 85 units, and some 60 of them were sold on the first day of launch, fetching around CNY1.2bn in contract sales. Meanwhile, during the same month, Joy Mansion in Hangzhou had sold over 7,000sqm of units of the 11,000-12,000sqm launched, fetching some CNY200m of sales. These 2 projects alone generated CNY1.4bn of sales in November.

Joy City: development property portfolio Project City Product type Stake Total GFA Attributable GFA (sqm) (sqm) Ocean One Shanghai Residential 100% 3,294 3,294 Shanghai Joy City Shanghai Residential 100% 61,350 61,350 Shanghai Retail 100% 20,000 20,000 Shanghai Office 100% 87,641 87,641 Shanghai Qiantan Project Shanghai Residential 50% 40,000 20,000 Shanghai Office 50% 43,613 21,807 Chengdu Joy City Chengdu Retail 100% 13,299 13,299 Chengdu Office 100% 10,000 10,000 Tianjin Joy City Tianjin Residential 100% 212 212 Tianjin Office 100% 61,254 61,254 Hangzhou Joy City Hangzhou Residential 100% 23,700 23,700 Hangzhou Retail 100% 80,362 80,362 Hangzhou Office 100% 90,000 90,000 Brilliant Villa Sanya Residential 41% 64,403 26,405 Hongtang Bay Project Sanya Residential 51% 157,768 80,462 Andingmen Project Beijing Office 65% 62,500 40,625 Total 819,396 640,410

Source: Company, Daiwa

We forecast CNY4.26bn in property sales for 2016 Backed by CNY10bn of saleable resources We forecast 35% and For 2016, Joy City will continue to sell its existing projects, including the Shanghai Ocean 47% contract sales One residential project, Sanya Brilliant Villa residential project, Tianjin Joy City residential growth for Joy City in portion, Hangzhou Joy Mansion and Shanghai Joy Mansion One. Shanghai Joy Mansion 2016 and 2017, One has over 200 units available-for-sale in 2016 and assuming an ASP of around respectively CNY100,000-110,000/sqm, this project alone could already fetch some CNY4.0bn in sales. The new projects that could be launched in 2016 include the Sanya Hongtang Bay project, the residential portion of the Shanghai Qiantan project and the office portion of Tianjin Joy City. According to Joy City, total saleable resources in 2016 could amount to as much as CNY10bn.

If we assume a 40-45% sell-through rate in 2016, similar to Joy City’s sell-through for 2015, we anticipate around CNY4.26bn in contract sales to be achieved in the following year, which is 35% above the company’s achieved sales of CNY3.2bn for 2015.

For 2017, we anticipate further strong 47% YoY growth in Joy City’s property sales to reach CNY6.25bn.

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Joy City Property (207 HK): 29 January 2016

Joy City: contract sales value (CNY m)

8,000 6,252 6,000 4,259 4,000 3,165

1,766 2,000

0 2014 2015 2016E 2017E

Source: Company, Daiwa forecasts

CNY40bn saleable resources for current portfolio to support strong sales growth and capex needs According to Joy City, its current portfolio of 9 property development projects has total saleable resources of about CNY40bn, of which 48% is for residential usage and the remaining 52% for commercial usage. We believe this CNY40bn in saleable resources is sufficient to support strong sales growth for the company in the next 3-4 years, and in turn would support its capex needs in those years.

While Joy City spent about CNY4bn in capex for 2015 due to the opening of 2 new malls, its capex requirements in the next few years should be considerably lower due to its switch to an asset-light strategy for its malls. We estimate around CNY2-2.5bn in capex requirements for the company in 2016, which should be well-supported by CNY4.3bn of property sales during the year, per our forecasts.

Sizeable contribution to top-line growth starting in 2016

Revenue from property sales to see 89% and 75% jumps in 2016E and 2017E We expect a turnaround As a result of a decline in property sales booked for Shanghai Ocean One and Tianjin Joy in Joy City’s property City in 2015 compared to 2014, and also that Shanghai Joy Mansion One and Hangzhou development revenue in Joy Mansion will only start to contribute to earnings in 2016, we expect a lower revenue 2016 after the dip in 2015 contribution from property development in 2015. We forecast revenue from property sales of CNY1,554m for 2015, down 23% from CNY2,021m in 2014.

For 2016, with Shanghai Joy Mansion One and Hangzhou Joy Mansion starting to contribute to earnings and with the offices at Tianjin Joy City likely to be sold and booked, we look for a 89% YoY jump in Joy City’s revenue from property sales in 2016 to CNY2,935m. For 2017, with more units at Shanghai Joy Mansion One to be booked and Shanghai Qiantan project to start booking, we anticipate a further 75% YoY increase in Joy City’s property development revenue to CNY5,122m.

Joy City: property development income (CNY m)

6,000 5,122

4,000 3,650 2,935

2,021 2,000 1,554

0 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

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Joy City Property (207 HK): 29 January 2016

Strong support from SOE parent 66.83% owned by COFCO Corporation One of the SOEs approved by the central government to engage in the property business Joy City is 66.83% held by its parent, COFCO Corporation, which is one of the 21 SOEs to have obtained the approval of the State-owned Assets Supervision and Administration Commission (SASAC) to develop and invest in property projects. It has been engaged in the property development and investment businesses in Mainland China since the 1990s. As its only offshore listed property platform (COFCO Corporation has an onshore listed property company called COFCO Property [000031 CH, Not rated]), Joy City, should benefit from COFCO Corporation’s long-standing relationships with various government departments in the real-estate industry.

Joy City enjoys very low finance costs Most importantly, we believe Joy City will be able to leverage on COFCO Corporation’s track record in the property industry and obtain favorable financing terms from banks and financial institutions, ie, low finance costs. In fact, Joy City enjoyed very low overall funding costs of around 5.8% for 1H15, below the average reported number of 6.7% for its peers. We expect its average funding cost go even lower, to around 5.4% by the end of 2016 and 5.2% by the end of 2017.

Joy City: weighted average borrowing cost

8%

6% 5.70% 6.01% 5.20% 5.40% 4%

2%

0% 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Average borrowing costs of the China property companies for 1H15 Joy City’s overall 10% funding cost of 5.8% for 8% Average - 6.7% 1H15 was well below the 6% average of its peers, at 6.7% 4% 2%

0%

COLI

Joy Joy City

CR LandCR

Evergrande

SunacChina

CIFI Holdings

ChinaJinmao

Agile Property

KWG Property

Yuexiu Property Country Garden

ShimaoProperty Guangzhou R&F

Sino-OceanLand GreentownChina Longfor Properties Longfor Source: Companies, Daiwa

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Joy City Property (207 HK): 29 January 2016

Issued CNY1.5bn in 5-year domestic bonds at a 3.2% coupon rate, one of the lowest among the China developers In December 2015, Joy City received approval to issue CNY7.4bn of domestic corporate bonds and in January 2016, the company issued its first tranche of CNY1.5bn 5-year domestic bonds at a coupon rate of 3.2%. This is the one of the lower coupon rates enjoyed by the China developers so far for their domestic bonds. And we expect any other of Joy City’s domestic bonds issued later to enjoy similarly low coupon rates, which in turn would lower the overall financing cost of the company.

SOE reform on the agenda for COFCO Corporation Ownership diversification being carried out at some subsidiaries The Third Plenum of the 18th Central Committee of the Chinese Communist Party held in November 2013 set the agenda for a new round of reforms for SOEs and these reforms were outlined by the Fourth Plenum in October 2014. The main principles of the SOE reforms point to the conversion of a large batch of SOEs into enterprises with mixed ownership to increase efficiency and implement management incentives tied to company performance (ie, share options). The reforms also call for the separation of capital management from on-the-ground operations for the State-owned Assets Supervision and Administration Commission (SASAC), China’s supervisory body for SOEs.

In July 2014, the SASAC announced that COFCO Corporation was among the first batch of key SOEs to be included in a reform pilot programme. Since then, the company has begun to decentralise the business ownership of some of its subsidiaries (ie, Joy Come and Womai) by diversifying the types of shareholders (ie, financial investors or strategic investors) and the shareholding structure, and improving the corporate governance. Moreover, it has also enhanced the professionalism of its management and adopted an incentive mechanism for the managements of its subsidiaries. It is widely expected by the market that the reforms will be gradually extended to all of the company’s other businesses.

No set timetable for reform at Joy City yet COFCO Corporation unlikely to dispose of shares at below the cost it paid for them of HKD1.70-1.80/share According to the SOE As part of the reforms of COFCO Corporation, Joy City, being one of COFCO reform on business Corporation’s subsidiaries, would have to reform its business ownership. This means that ownership, COFCO COFCO Corporation would have to dispose of some of its 67.03% stake in Joy City to an Corporation would have unrelated third party until it no longer holds a controlling stake (less than 50%) in the to dispose of shares in company. The timetable for COFCO Corporation’s stake disposal is unknown at this point, Joy City, but no as it is not likely to dispose of its stake at below the cost it paid to it (ie, HKD1.70- timetable has been set 1.80/share). However, if the stake disposal were to occur, COFCO Corporation would likely for this sell its stake to financial investors (eg, insurance companies) or strategic investors, which would boost Joy City’s business development.

Besides the decentralization of business ownership, we believe Joy City will also adopt a management incentive mechanism as part of the reforms, ie, by issuing share options to the management team. Nonetheless, as the management incentive mechanism has to be carried out at the same time as the business ownership diversification, there is also no set timetable yet for the introduction of the incentive mechanism.

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Joy City Property (207 HK): 29 January 2016

Earnings to decline in 2015 before picking up Earnings outlook Strong property development revenue growth expected for 2016-17E For 2015, we forecast Joy City’s recognised GFA to decline by 27% YoY to reach 36,300sqm, on the back of lower sales and lower bookings for its Shanghai Ocean One and Tianjin Joy City projects. Nonetheless, we expect its recognised ASP for 2015 to rise by 5% to CNY42,748/sq m. Further, we forecast the company’s revenue from property development to be CNY1,554m for 2015, down 23% YoY.

A huge leap in Joy City’s For 2016, we expect to see a 33% surge in Joy City’s recognised GFA to 48,400sq m, as it property development starts to book its Joy Mansion One residential project at Shanghai Joy City. We also expect revenue in 2016 is the company’s recognised ASP to jump by 42% YoY jump for 2016 to CNY60,629/sq m, as expected due to the a result of the booking of Joy Mansion One, which has very high ASPs. We forecast its booking of Shanghai Joy total property development revenue to be CNY2,935m for 2016, up 89% YoY. Mansion One and Tianjin Joy City office In 2017, we anticipate higher recognised GFA of 79,600sq m and forecast Joy City’s recognised ASP to rise by a further 6% YoY to reach CNY64,355/sq m. This is due to the company’s booking of high ASP projects, including Joy Mansion One at Shanghai Joy City, some retail shops in Shanghai Joy City and, also its Shanghai Qiantan project. We forecast a property development revenue in 2017 of CNY5,122m, 75% higher YoY.

Joy City: recognised GFA and ASP

('000 sqm) (CNY/sqm) 160 80,000 64,355 60,629 120 60,000

40,850 42,748 79.6 80 40,000 49.5 48.4 36.3 40 20,000

0 0 2014 2015E 2016E 2017E

Recognized GFA Recognized ASP (RHS)

Source: Company, Daiwa forecasts

Joy City: property development revenue

(CNY m)

6,000 5,122

4,000 3,650 2,935

2,021 2,000 1,554

0 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

23

Joy City Property (207 HK): 29 January 2016

Improved rental income growth for 2016-17E due to the start of operations at new malls We expect 33% YoY We forecast a 10% YoY increase in Joy City’s rental income from its investment property growth in Joy City’s 2016 portfolio to reach CNY2,209m for 2015. With Shanghai Joy City Phase 1 North and rental income, driven by Chengdu Joy City commencing operations at the end of 2015, we forecast the company’s the contribution from 2 rental income to see a jump of 33% YoY for 2016, reaching CNY2,940m. We believe the new malls rental income growth brought about by these two new malls will continue into 2017, and we forecast a further 14% YoY growth in Joy City’s rental income for 2017, at CNY3,366m.

Joy City: gross rental income from investment properties

(CNYm)

4,000 3,366 2,940 3,000 2,209 2,009 2,000 1,694

1,000

0 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Revenue and core profit to dip for 2015E before picking up in 2016-17E Due to the limited number of properties being developed and delivered by Joy City in 2015, we expect its revenue and core net profit to decline in 2015, before seeing better growth in 2016 and 2017, as more projects are booked.

We expect lower revenue We estimate that the company will see declines of respective 1% and 8% YoY in its and core profit in 2015 revenue and core profit for 2015, to CNY5,643m and CNY213m. We attribute the big before seeing a jump in expected decline in core profit to the payment of interest to the holders of Joy City’s 2016 perpetual instruments, which were issued in October 2014. For 2016, we expect Joy City’s revenue and core profit to rise by 41% and 172% YoY, to CNY7,976m and CNY579m, respectively, as a result of more higher-margin projects being booked and also on a higher revenue contribution from its Joy City malls as Shanghai Joy City Phase 1 North and Chengdu Joy City started operations in late-2015. For 2017, we expect 35% and 85% YoY growth in revenue and core profit to CNY10,805m and CNY1,072m respectively.

Joy City: revenue breakdown by business

(CNYm)

15,000 10,805 12,000 7,976 9,000 6,809 5,713 5,643 6,000

3,000

0 2013 2014 2015E 2016E 2017E

Sale of properties Gross rental income Hotel operations Property management Others

Source: Company, Daiwa forecasts

24

Joy City Property (207 HK): 29 January 2016

Joy City: revenue and core net profit (CNYm)

12,000 10,805

7,976 8,000 6,809 5,713 5,643

4,000 1,072 357 232 213 579 0 2013 2014 2015E 2016E 2017E Revenue Core net profit

Source: Company, Daiwa forecasts

Our 2016-17E earnings factor in our house forecast of CNY7.50 to the USD Our earnings forecast for 2015 factors in the impact of a 4.4% depreciation in the CNY for last year. Meanwhile, our earnings forecasts for 2016 and 2017 factor in Daiwa’s forecast that the CNY will be at 7.50 against the USD at the end of both 2016 and 2017.

A 5% depreciation in the If the CNY were to depreciate further by 5% from our base-case scenario (7.50 by end- CNY from our base-case 2016 and 2017), we estimate that Joy City’s earnings for 2016 and 2017 would decline by scenario would lead to a 2.0% and 1.9% to reach CNY567m and CNY1,051m, respectively. 2% drop in 2016 and 2017 earnings Gross margin likely to be maintained at above 50% for the next few years Thanks to the low cost of projects acquired from its parent in 2013-14 and the high proportion of rental income revenue from investment properties, Joy City saw a high gross margin of above 50% for both 2013-14. And we expect its gross margin to be maintained at over 50% for 2015-17, significantly higher than the sector average of 25-30% (on the Bloomberg consensus forecasts).

Joy City’s overall gross For 2015, we forecast a gross margin of 53.9% for Joy City, lower than the 59.4% for 2014, margin in 2016-17E on the back of fewer bookings for Ocean One in Shanghai, for which we expect a high should remain high at gross margin of 70% for 2015. Meanwhile, we expect the company’s overall gross margin >50% to rise slightly for both 2016 and 2017, at 54.1% (+0.4pp) and 54.4% (+0.3pp), respectively.

Joy City: gross margin

70%

59.4% 60%

54.1% 53.9% 53.9% 54.4% 50%

40% 2013 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Financial position Net gearing to remain acceptable Joy City’s net debt rose from CNY9,588m for 2013 to CNY17,610m for 2014 due to it issuing USD800m in guaranteed notes and its acquisition of numerous projects from its parent. Nonetheless, the net gearing ratio as at end-2014 was still acceptable at 65.2%. And for 2015-17, we forecast the net debt to rise further, reaching CNY19,707m for 2015 (+12% YoY), CNY20,433m for 2016 (+4% YoY) and CNY20,408m for 2017 (-0% YoY). In

25

Joy City Property (207 HK): 29 January 2016

terms of net gearing, we expect this to remain at acceptable levels of 61.4% for 2015 (- 3.8pp), 64.5% for 2016 (+3.1pp) and 62.2% for 2017 (-2.3pp) – these levels are below its net gearing target of 65%.

Joy City: net debt and net gearing

(CNYm) 40,000 80% 65.2% 64.5% 61.4% 62.2% 30,000 60% 19,707 20,433 20,408 17,610 20,000 32.5% 40% 9,588 10,000 20%

0 0% 2013 2014 2015E 2016E 2017E Net debt Net gearing (RHS)

Source: Company, Daiwa forecasts

Average borrowing cost on a down trend We expect Joy City’s For 2015-17, we expect to see a steady decline in Joy City’s average borrowing cost, average borrowing cost which in 1H15 was lower than the average of its peers. For 2015, we expect its average to decline from 5.80% in borrowing cost to see a considerable decline, reaching 5.70% as at end-2015, on the back 1H15 to 5.20% for 2017 of the 5 interest rate cuts in China since November 2014. For 2016, we expect a further decline in the average borrowing cost to 5.40%, as the company is planning to issue a CNY7.4bn domestic corporate bond at a lower finance cost (has already issued CNY1.5bn with a 3.2% coupon rate as at early-January 2016) to repay its higher-cost debt. As for 2017, we forecast a slightly lower average borrowing cost of 5.20%, on the back of our in- house forecasts of more interest rate cuts and because it is issuing domestic bonds at a lower finance cost.

Joy City: weighted average borrowing cost

8%

6% 5.70% 6.01% 5.20% 5.40% 4%

2%

0% 2014 2015E 2016E 2017E

Source: Company, Daiwa forecasts

Dividend policy Dividend payout to rise progressively to 20-35% of core profit For 2014, Joy City declared and paid a final dividend of HKD0.01/share, representing a dividend payout of c.5% of the reported net profit. In the longer run, the company is targeting to increase this gradually to 20-35% of core profit. For 2015, we forecast the dividend payout to be maintained at around 20%, while for 2016 and 2017, it should rise to 25%. We estimate that the dividend yield for 2015, 2016 and 2017 will be 0.4%, 1.4% and 2.6%, respectively.

26

Joy City Property (207 HK): 29 January 2016

Valuation Initiating with Buy (1) rating and target price of HKD1.52 NAV estimate and target discount to NAV NAV is our preferred approach to value property companies We regard the NAV as the best way to value property companies, as it is based on the market value of a company’s property assets. Moreover, property companies typically trade at a discount to their appraised NAV to reflect: 1) their capability in project execution and property sales, as well as their long-term sales growth potential, 2) their market risk and business diversification, and 3) their corporate risk (eg, corporate governance and financial position).

We value Joy City at end-2016E NAV of HKD3.04/share Based on Joy City’s investment property and hotel portfolio, and its existing development property pipeline, we estimate an end-2016 total gross asset value (GAV) of CNY57,014m by discounting its estimated future net cash flow to be generated using a WACC of 12.09%. The company’s development properties account for only 28% of the GAV, and its investment properties account for the remaining 72%.

Assuming an end-2016 net debt of CNY20,433m and outstanding land premium of CNY800m, we calculate an end-2016 NAV of CNY35,781m. Based on the outstanding share capital of 12,234m shares as at end-June 2015, we derive a NAV per share of CNY2.92 or HKD3.04 for Joy City.

Joy City: WACC Rate assumptions Risk-free rate 2.9% Risk premium 12.9% Beta 1.05 Cost of equity 16.4% Cost of debt 4.1% Debt/Assets 35.0% WACC 12.1%

Source: Daiwa forecasts

Joy City: NAV breakdown Joy City’s investment (CNYm) End-2016 NAV % of GAV properties and Development properties: Shanghai 8,811 15.5 development properties Sanya 2,346 4.1 account for 72% and Beijing 2,379 4.2 Hangzhou 1,837 3.2 28% of its end-2016E Tianjin 526 0.9 total GAV, respectively Chengdu 77 0.1 Development property NAV 15,975 28.0 Investment properties: Beijing 18,355 32.2 Shanghai 7,570 13.3 Hangzhou 1,714 3.0 Tianjin 4,130 7.2 Chengdu 3,161 5.5 Sanya 2,514 4.4 Shenyang 1,972 3.5 Hong Kong 718 1.3 Yantai 567 1.0 Nanchang 187 0.3 Suzhou 151 0.3 Investment property NAV 41,039 72.0 GAV 57,014 100.0 Net debt (20,433) Outstanding land premium (800) NAV 35,781 Shares (m) 12,234 NAV/Share (CNY) 2.92 NAV/Share (HKD) 3.04

Source: Daiwa forecasts

27

Joy City Property (207 HK): 29 January 2016

We apply a 50% discount to Joy City’s NAV Based on our estimated NAV of HKD3.04/share for Joy City and its last trading price of HKD0.98 on 28 January, its shares are now trading at a 68% discount to NAV. Joy City’s current NAV discount is in line with that of its Hong Kong-listed mid-cap peers’ average of 50-70% discount to market NAV.

We believe Joy City deserves to trade at a narrower NAV discount compared to its peers due to its large exposure to investment properties, which would bring about steady recurring income and cash flow. Even though investment properties require a lot of capex upfront to build, we think this should not be a problem for Joy City as its property sales should be sufficient to cover its required capex. Hence, we apply a 50% target discount to Joy City’s NAV, which is at the low end of the current valuation range of the mid-cap Hong Kong-listed China property companies.

Initiate coverage with a Buy (1) rating and target price of HKD1.52 Applying a 50% target discount to Joy City’s end-2016 NAV per share of HKD3.04, we arrive at our 12-month target price of HKD1.52. As the stock was trading at HKD0.98 (28 January), our target price of HKD1.52 represents 55% upside potential from current share price levels. We initiate a Buy (1) rating on Joy City.

High PER to come down over the next few years Joy City’s high PER Based on our estimates, Joy City’s 2015E PER is very high at 47.5x, on the back of its should come down over likely low earnings. This is well above the sector average 2015E PER of 8.8x (on both our 2016-17, while its PBR is and the consensus forecasts). However, as we anticipate strong earnings growth for the below the sector average company for both 2016-17, we expect its PER to fall to 17.5x and 9.4x for 2016E and 2017E, respectively.

Meanwhile, we forecast a 2015E and 2016E PBR for Joy City of 0.4x and 0.4x, respectively, below the sector average of 0.6x for both years (on our and the consensus forecasts).

China property companies: valuation 2014 2014 2015E 2015E 2016E 2016E Company Ticker Market cap PER PBR PER PBR PER PBR (USD m) (x) (x) (x) (x) (x) (x) Agile Property* 3383 HK 1,866 3.8 0.3 3.5 0.3 3.3 0.3 Beijing Capital Land* 2868 HK 1,120 3.1 0.5 3.1 0.5 2.5 0.4 China Jinmao* 817 HK 2,768 5.6 0.5 5.9 0.5 5.2 0.4 China Overseas Grand Oceans 81 HK 768 4.8 0.5 3.5 0.4 2.1 0.4 China Overseas Land 688 HK 28,356 7.7 1.4 7.7 1.1 6.6 1.0 China Resources land 1109 HK 16,853 9.4 1.1 9.4 1.0 8.5 0.9 China Vanke* 2202 HK 39,085 10.0 1.8 9.0 1.6 7.6 1.4 CIFI Holdings* 884 HK 1,251 3.7 0.7 3.3 0.6 2.8 0.5 Country Garden* 2007 HK 8,642 5.2 0.9 5.5 0.8 4.9 0.7 Dalian Wanda Commercial Properties* 3699 HK 21,593 4.6 0.9 7.6 0.8 6.2 0.7 Evergrande Real Estate* 3333 HK 8,934 4.1 1.1 8.4 0.8 6.9 0.8 Greentown China* 3900 HK 1,621 5.0 0.4 3.7 0.3 3.3 0.3 Guangzhou R&F 2777 HK 3,442 5.7 0.6 3.3 0.6 2.9 0.5 Joy City 207 HK 1,864 4.5 0.4 47.5 0.4 17.5 0.4 KWG Property 1813 HK 1,873 4.7 0.6 4.0 0.5 3.4 0.5 Longfor Properties* 960 HK 7,385 5.6 0.9 6.4 0.9 5.7 0.8 Poly Property* 119 HK 982 n.a. 0.2 24.0 0.2 15.8 0.2 Shimao Property* 813 HK 4,815 4.1 0.6 3.6 0.6 3.4 0.5 Sino-Ocean Land* 3377 HK 3,762 5.3 0.5 6.3 0.5 5.5 0.5 SOHO China* 410 HK 2,403 10.0 0.4 17.3 0.4 20.1 0.4 Sunac China* 1918 HK 2,086 3.9 0.8 3.4 0.7 3.0 0.6 Yuexiu Property* 123 HK 1,783 5.6 0.4 6.3 0.4 5.5 0.4 Average 5.5 0.7 8.8 0.6 6.5 0.6

Source: Bloomberg, Daiwa forecasts for stocks not marked with * Note: *are stocks not covered by Daiwa and are based on Bloomberg estimates

28

Joy City Property (207 HK): 29 January 2016

Share-price performance Slow share-price performance largely factors in the near-term negatives We think Joy City’s In the past month (29 December-28 January), share prices in the China property sector lagging share-price have fallen by 20% on average, in line with the 18% decline in the HSCEI index. During performance over the this period, Joy City’s share price declined by 18%, in line with its peers. Compared to a past year has largely year ago, its share price has come down by 36%, vs. the 19% overall decline for the China factored in its likely property players. We think this could be due to the market expecting lower earnings for the weak 2015 results company for 2015. Besides, Joy City’s contract sales performance for 9M15 was slow in terms of sales target completion, as it only launched its Shanghai Joy Mansion One and Hangzhou Joy mansion residential projects in November 2015.

We believe the company’s lagging share-price performance over the past year has largely factored in the near-term negatives, ie, a significant decline in earnings for 2015. Hence, we recommend investors Buy into Joy City on its recent share price weakness.

Joy City: share price (HKD)

6 Announcement of the first asset injection 5 Announcement of the 4 second asset injection 3

2

1

0 Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16

Source: Bloomberg, Daiwa

29

Joy City Property (207 HK): 29 January 2016

Risks

Deterioration in economy to impact retail sales and rents Joy City’s rental income from its retail malls account for a decent proportion of its total revenue and is likely to stay that way in the next few years. With overall growth in the China economy likely to slow further in 2016, nationwide retail sales growth is likely to be dragged down as well in the years to come. Daiwa’s house view calls for nationwide retail sales growth of 9.6% YoY for 2016, down from 10.7% for 2015. Lower retail sales would have a direct impact on turnover rents and potential indirect impact on base rents. We would see this as the main risk to our Buy (1) rating on Joy City stock.

The rise of e-commerce The increase in the number of online retail platforms, such as Alibaba and JD.com, has meant that online shopping is now playing a more prominent role in the retail environment. According to the China Internet Information Centre, Internet retail sales in China rose by 41% YoY to CNY1,850bn in 2013, representing a CAGR of 81% over 2005-13. Over that period, online retail sales’ proportion of China’s total retail sales of consumer goods increased from just 0.2% of 2005 to 7.8% in 2013. We believe the increasing significance of online retail poses a threat to physical stores in department stores, shopping malls and pedestrian streets.

Difficulty in securing projects in good locations going forward The good operating performance of most of Joy City’s existing malls is to some extent attributable to their strategic locations. Hence, the success of Joy City’s asset-light strategy on its retail malls and the operating performance of its new malls would depend to a degree on whether or not Joy City would be able to secure quality projects in good locations. With competition over quality projects in the upper-tier becoming more and more intense, we are concerned that it would be difficult for Joy City to obtain projects that would offer returns as good as its existing projects.

Slow property sales which would lead to pressure on cash flow Joy City’s capex for its malls in the next few years would be largely supported by its proceeds from property sales, which we expect to see strong growth in 2015-17. However, a slower economy could also lead to slower property sales as well as retail sales, which in turn could put pressure on cash flow, as incoming cash would not be sufficient to support capex.

30

Joy City Property (207 HK): 29 January 2016

Appendix I: company background Commercial property developer and operator Project exposure in 11 major cities Joy City is a commercial property developer and manager that focuses on the development, operation, sales, leasing and management of shopping malls under its “Joy City” brand and other commercial properties in Mainland China. It also develops residential properties and operates hotels in a few major cities. As at end-June 2015, the company had 20 residential and commercial projects and 8 hotels in 11 cities, including Beijing, Shanghai, Tianjin, Shenyang, Yantai, Chengdu, Hangzhou, Sanya, Hong Kong, Nanchang and Suzhou. It had 0.9m sqm of leasable commercial properties, 0.4m sqm of attributable operational area in hotels and 0.6m sqm attributable GFA of property development projects.

Joy City: map of its landbank

Source: Company, Daiwa Note: The numbers in the boxes next to the city names represent the number of the respective type of properties in each of the cities.

31

Joy City Property (207 HK): 29 January 2016

The sole commercial property business platform of COFCO Corporation Joy City is 66.83% owned by its parent, COFCO Corporation, and is the only commercial property business platform of the group. COFCO Corporation is a conglomerate operating different businesses, of which 8 are listed in Hong Kong or China. It is one of the 21 state- owned enterprises that has been granted approval by the SASAC to engage in real estate development, investment and management. Besides Joy City, COFCO Corporation also has an onshore listed property company, COFCO Property (000031 CH, Not rated), which is engaged mainly in residential property development.

History of Joy City Joy City was formerly named The Hong Kong Parkview Group, an investment holding company engaged in property investment business in Hong Kong. Its principal asset is an office premises on the 11/F of World-Wide House in Central. In July 2012, COFCO Corporation acquired a 73.5% interest in The Hong Kong Parkview Group to create a shell company for its property assets. This was followed by 2 major asset injections by COFCO Corporation.

The first major asset injection Joy City has received 2 The first asset injection was announced in September 2013, whereby COFCO Corporation asset injections from its injected 12 property projects into The Hong Kong Parkview Group, including Chengdu Joy parent in the past and City, Beijing COFCO Plaza, 2 other commercial properties in Hong Kong and Shanghai, 7 altogether has acquired hotels and some properties in Sanya. The total consideration for this asset injection was 18 projects HKD14.17bn, representing a 25% discount to the net asset value of the properties of HKD14.45bn as at end-June 2013 plus HKD3.33bn of shareholders’ loans. The consideration was satisfied by the placing of 1.955bn of shares at HKD2/share to professional and institutional investors, and also the issuance of 1.095bn of convertible preference shares and 5.988bn of consideration shares to COFCO Corporation. The asset injection was completed in December 2013 and the company name was changed to COFCO Land Holdings Limited.

The second major asset injection The second asset injection was announced in September 2014, whereby COFCO Corporation injected 6 mixed-use complexes under the flagship brand “Joy City” and a further stake in Beijing COFCO Plaza and Shanghai COFCO Tower into COFCO Land. The total consideration was HKD12.46bn, which was based on a 42.69% discount to the net asset value of the properties of HKD20.0bn as at end-June 2014 plus HKD0.996bn of shareholders’ loans. The consideration was satisfied partly by the issuance of USD800m 3.625% guaranteed notes due in 2019 and partly by a 1-for-2 rights issue at a subscription price of HKD1.35/share. The asset injection was completed in December 2014 and the company name was changed to Joy City Property Limited.

Joy City: summary of key milestones 2007 Grand opening of Beijing Xidan Joy City 2009 Grand opening of Shenyang Joy City 2010 Grand opening of Beijing Chaoyang Joy City Grand opening of Southern Tower of Phase 1 of Shanghai Joy City 2011 Grand opening of Tianjin Joy City 2012 COFCO Corporation acquired 73.5% stake in The Hong Kong Parkview Group Limited Announced and completed the acquisition of 12 property projects from COFCO Corporation, including Chengdu Joy City, Beijing 2013 COFCO Plaza, 2 commercial properties in Hong Kong and Shanghai, 7 hotels and a few properties in Sanya Company name changed from The Hong Kong Parkview Group Limited to COFCO Land Holdings Limited 2014 Further acquired stake in projects in Shanghai and properties in Sanya Grand opening of Yantai Joy City Announced and completed the acquisition of 6 "Joy City" malls 2015 Company name changed from COFCO Land Holdings Limited to Joy City Property Limited Acquisition of land plots to develop Hangzhou Joy City Acquisition of 50% stake in Shanghai Qiantan project Acquisition of further stake in Beijing Andingmen project

Source: Company, Daiwa

32

Joy City Property (207 HK): 29 January 2016

Rental income to account for 39% of total revenue for 2015E Typically, for Joy City’s mixed-use projects, around 60% of GFA (ie, residential, office and podium retail portion) would be available for sale while the remaining 40% (ie, shopping malls) would be held as investment properties. In 2015, we estimate gross rental income from investment properties accounted for the largest proportion of 39% of Joy City’s total revenue, followed by 27% from property sales and 20% from hotel operations. However, in 2016-17, while we forecast rental income to see strong growth, we anticipate revenue from property sales to account for a larger proportion of total revenue due to more saleable projects and the booking of more projects during the period.

Joy City: total revenue in 2013-17E Joy City: revenue breakdown by business in 2015E

(CNYm) Others Property 8% management 15,000 10,805 6% Sale of properties 12,000 7,976 27% 9,000 6,809 5,713 5,643 6,000 Hotel operations 20% 3,000

0 2013 2014 2015E 2016E 2017E Gross rental Sale of properties Gross rental income Hotel operations income 39% Property management Others Source: Company, Daiwa forecasts Source: Company, Daiwa forecasts

Experienced management team Joy City has an experienced management team. Most of the team have been with the company for a long time and have extensive experience in operations, management or the property business.

Joy City: management profile Position Brief introduction Zhou Zheng Chairman and executive director Mr Zhou has over 20 years of experience in corporate management and is currently a council member of the China Real estate Association. He was appointed an executive director in August 2012 and was appointed as Chairman in December 2013. He is also the Chairman of COFCO Property (000031 CH) and a vice president of COFCO Corporation. Han Shi General manager and executive director Mr Han joined COFCO Corporation in August 1990 and has over 20 years of management experience in project management, project investment and general management. Since 2007, he has been responsible for the commercial real estate business of the COFCO Group and also, the establishment and development of the "Joy City" brand. Shi Zhuowei Non-executive director Mr Shi joined COFCO Corporation in July 1993 and was the chairman of COFCO Land from July 2011 to May 2013. He has extensive experience in project management, project investment, human resources development and general management. Ma Jianping Non-executive director Mr Ma was Chairman and executive director of Joy City but resigned as Chairman and was re-designated as non-executive director in December 2013. He joined COFCO Corporation in August 1986 and has been its vice president and its strategy department director since May 2010 and January 2006 respectively. He is currently also a director of COFCO Property, the deputy managing director of COFCO (HK) and a director of certain other subsidiaries of COFCO Corporation. Ma Wangjun Non-executive director Mr Ma joined COFCO Corporation in August 1988 and is currently the chief accountant of COFCO Corporation. He has extensive experience in corporate finance and asset management. Jiang Hua Non-executive director Ms Jiang joined COFCO Corporation in September 2004 and was a director of COFCO Corporation during September 2004 to December 2012. She was re- appointed as director of COFCO Corporation since December 2013. She has extensive experience in corporation management, administrative management and government relations.

Source: Company, Daiwa

33

Joy City Property (207 HK): 29 January 2016

Joy City: landbank summary Name of project City Product type Stake Total GFA Attributable GFA Leasable GFA No. of guestrooms Attributable End-16 NAV ('000 sqm) ('000 sqm) ('000 sqm) (CNY m) Property investment Xidan Joy City Beijing Retail/office 100% 185,654 185,654 66,267 - 10,734 Chaoyang Joy City Beijing Retail 90% 405,570 365,013 112,538 - 4,176 Shenyang Joy City Shenyang Retail 100% 555,146 555,146 121,643 - 1,972 Shanghai Joy City Shanghai Retail 100% 449,849 449,849 94,721 - 6,941 Tianjin Joy City Tianjin Retail 100% 531,369 531,369 83,965 - 4,130 Yantai Joy City Yantai Retail 51% 219,964 112,182 78,267 - 567 Chengdu Joy City Chengdu Retail 100% 314,560 314,560 95,200 - 3,161 Hangzhou Joy City Hangzhou Retail 100% 307,061 307,061 92,118* - 1,714 Beijing COFCO Plaza Beijing Office/retail 100% 118,632 118,632 107,743 - 2,308 Fraser Suites Top Glory Shanghai Shanghai Serviced apartments 100% 49,212 49,212 48,465 - 629 Hong Kong Top Glory Tower Hong Kong Office/retail 100% 20,003 20,003 15,738 - 650 11th floor of Hong Kong World-Wide House Hong Kong Office 100% - - 1,309 - 68 Yuechuan Plaza Sanya Office 51% 2,445 1,247 2,445 - 4 Administration Center Sanya Office 51% 33,392 17,030 28,383* 77 Yalong Bay Mountain Ocean Park Sanya Theme park 51% 26,197 13,360 - - 47 Sub-total 3,219,054 3,040,318 920,419 - 37,177 Property development Ocean One Shanghai Residential 100% 3,294 3,294 - - 156 Shanghai Joy City Shanghai Residential/retail/office 100% 168,991 168,991 - - 7,371 Shanghai Qiantan Project Shanghai Residential/office 50% 83,613 41,807 - - 1,284 Chengdu Joy City Chengdu Retail/office 100% 23,299 23,299 - - 77 Tianjin Joy City Tianjin Residential/office 100% 61,466 61,466 - - 526 Hangzhou Joy City Hangzhou Residential/retail/office 100% 194,062 194,062 - - 1,837 Brilliant Villa Sanya Residential 41% 64,403 26,405 - - 580 Hongtang Bay Project Sanya Residential 51% 157,768 80,462 - - 1,765 Andingmen Project Beijing Office 65% 62,500 40,625 - - 2,379 Sub-total 819,396 640,410 - - 15,975

Hotel operations The St. Regis Sanya Yalong Bay Resort Sanya Hotel 51% 90,869 46,343 - 401 650 MGM Grand Sanya Sanya Hotel 100% 108,332 108,332 - 675 1,555 Cactus Resort Sanya By Gloria Sanya Hotel 51% 38,500 19,635 - 563 182 Waldorf Astoria Beijing Beijing Hotel 51% 44,180 22,532 - 173 250 W Beijing - Chang'an Beijing Hotel 100% 62,805 62,805 - 353 630 Xidan Joy City Hotel Beijing Hotel 100% 32,885 32,885 - 300 258 Gloria Grand Hotel Nanchang Nanchang Hotel 100% 37,329 37,329 - 327 187 Gloria Plaza Hotel Suzhou Suzhou Hotel 100% 26,255 26,255 - 288 151 Sub-total 441,155 356,116 - 3,080 3,862

Total 4,479,605 4,036,844 920,419 3,080 57,014

Source: Company, Daiwa forecasts Note: *estimated as not disclosed

34

Joy City Property (207 HK): 29 January 2016

Appendix II: Joy City malls

Beijing Xidan Joy City: description and operating results

(CNY/sqm/day) 40 100%

98% 30 96% 20 94% 10 92%

0 90% 2011 2012 2013 2014 1H15 Rent Occupancy rate (RHS)

Location Xicheng District, Beijing Stake 100% Leasable GFA 66,922 sq m Date of completion January 2008 Retail sales in 2014 CNY3,601m Foot traffic in 2014 29.5m Rental income in 2014 CNY600m

Source: Company, Daiwa

Beijing Chaoyang Joy City: description and operating results

(CNY/sqm/day) 15 100%

10 95%

5 90%

0 85% 2011 2012 2013 2014 1H15 Rent Occupancy rate (RHS)

Location Chaoyang District, Beijing Stake 100% Leasable GFA 112,538 sq m Date of completion August 2010 Retail sales in 2014 CNY2,517m Foot traffic in 2014 23.4m Rental income in 2014 CNY420m

Source: Company, Daiwa

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Joy City Property (207 HK): 29 January 2016

Tianjin Joy City: description and operating results

(CNY/sqm/day) 10 100%

8 95% 6 90% 4 85% 2

0 80% 2012 2013 2014 1H15 Rent Occupancy rate (RHS)

Location Gulou District, Tianjin Stake 100% Leasable GFA 83,965 sq m Date of completion 2012 Retail sales in 2014 CNY2,001m Foot traffic in 2014 18.4m Rental income in 2014 CNY250m

Source: Company, Daiwa Shanghai Joy City Phase 1 South: description and operating results

(CNY/sqm/day) 10 100%

8 98%

6 96%

4 94%

2 92%

0 90% 2011 2012 2013 2014 1H15 Rent Occupancy rate (RHS)

Location Zhabei District, Shanghai Stake 100% Leasable GFA 29,272 sq m Date of completion 2011 Retail sales in 2014 CNY431m Foot traffic in 2014 5.8 m Rental income in 2014 CNY85m

Source: Company, Daiwa

Shenyang Joy City: description and operating results

(CNY/sqm/day) 5 100%

4 90% 3 80% 2 70% 1

0 60% 2011 2012 2013 2014 1H15 Rent Occupancy rate (RHS)

Location Dandong District, Shenyang Stake 100% Leasable GFA 121,643 sq m Date of completion December 2011 Retail sales in 2014 CNY880m Foot traffic in 2014 22.1 m Rental income in 2014 CNY130m

Source: Company, Daiwa

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Joy City Property (207 HK): 29 January 2016

Yantai Joy City: description and operating results

(CNY/sqm/day) 4 100%

98% 3 96% 2 94% 1 92%

0 90% 2014 1H15 Rent Occupancy rate (RHS)

Location Zhifu District, Yantai Stake 100% Leasable GFA 78,573 sq m Date of completion 2014 Retail sales in 2014 CNY242m Foot traffic in 2014 5.1 m Rental income in 2014 CNY33m

Source: Company, Daiwa

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Joy City Property (207 HK): 29 January 2016

Appendix III: overview of the China retail market 10.7% retail sales growth in 2015 China retail market expected to become world’s biggest by 2018 China is expected to Economic growth in China has decelerated from the double-digit growth in early 2000s to only surpass the US to 6.8% in 2015. However, relative to other developing markets, its economic growth and retail become the world’s sales growth are unparalleled, as its retail sales in 2015 grew by a decent 10.7% to reach biggest retail market by CNY30.1tn. According to PricewaterhouseCoopers (PwC), although retail sales growth has 2018 dropped from 15.6% in 2009, China’s retail market is expected to see annual retail volume growth of 8.7% in the next few years to overtake the US to become the world’s biggest retail market by 2018.

Annual retail sales volume growth in countries in Asia Territory 2011 2012 2013 2014 2015 2016 2017 2018 Australia -0.5 0.9 1.5 1.3 2.6 2.3 2.0 2.2 China 9.1 8.7 9.3 8.8 8.7 8.6 8.0 7.9 Hong Kong 18.6 5.5 6.6 * 3.1 2.0 -1.0 0.4 1.3 India 5.7 2.7 1.7 4.0 5.6 6.2 6.2 6.6 Indonesia 6.0 5.3 4.3 3.8 5.1 5.4 5.0 5.0 Japan 0.1 1.5 0.7 0.2 0.0 0.3 0.4 0.6 Malaysia 4.6 4.7 6.4 5.4 5.3 4.6 4.6 4.8 New Zealand -1.9 2.4 6.3 3.2 2.9 2.2 2.7 2.5 Pakistan 9.2 -0.8 5.1 3.9 4.1 3.8 4.3 4.3 Philippines 3.2 5.4 4.4 4.2 5.3 5.4 5.4 5.5 Singapore 1.7 1.1 1.2 4.6 1.5 2.2 3.0 3.5 South Korea 2.1 1.3 -0.1 1.6 2.9 3.1 2.8 2.9 Taiwan 3.6 0.6 2.5 2.9 2.5 2.4 2.7 2.3 Thailand 1.4 4.9 -2.4 -0.6 0.7 3.6 3.4 4.3 Vietnam 6.7 3.9 3.8 9.5 8.4 7.8 6.0 6.5 Source: Economist Intelligence Unit Figure for 2014 onwards are forecast. Prior years are actuals or estimates *0.6% (Growth figure released by the HK Census and Statistics Department on 2 Feb 2015) Source: PwC

Achieved retail sales of various retail property assets in China in 2014 (CNYm) 8,000 6,000 4,000 2,000

0

Guangzhou…

HarbinGrand…

NanjingGolden…

Shenzhen MIXc

ShanghaiGrand…

HangzhouTower…

NanjingXinjiekou… ShanghaiQingpu…

Wuhan Int'lPlaza

ChangchunOuya…

ShanghaiNanjing…

ShanghaiYaohan…

NanjingDeji Plaza

ShanghaiPlaza 66

NanjingZhongyang…

ChangchunCharter…

Guangzhou Guangzhou Mall Tee

Chengdu Wangfujing…Chengdu

Shenyang Zhongxing…

ShijiazhuangBei Guo…

BeijingJoy Xidan City

BeijingYansha Outlets Guangzhou Hui Taikoo BeijingShin Kong Place Source: linkshop.com, Google, Daiwa

Shopping malls to continue gaining market share against department stores For the retail property sector in China, quality is the key, in our view. In general, we think the culture of shopping in malls has just started to form in China, and believe shopping malls will continue to gain market share against department stores and pedestrian streets, which have been the dominant retail formats in China in the past. While many Chinese cities have abundant retail space and shopping malls, those under systematic and professional management are limited, in our view.

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Joy City Property (207 HK): 29 January 2016

China retail property sector

Source: Daiwa

39

Joy City Property (207 HK): 29 January 2016

Appendix IV: retail sales in Joy City’s cities

Retail sales in Beijing Retail sales in Shanghai

(CNY bn) (CNY bn)

1,000 1,000

800 800

600 600

400 400

200 200

0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015

Source: CEIC, Daiwa Source: CEIC, Daiwa

Retail sales in Tianjin Retail sales in Shenyang

(CNY bn) (CNY bn)

500 400

400 300 300 200 200 100 100

0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014

Source: CEIC, Daiwa Source: CEIC, Daiwa

Retail sales in Yantai Retail sales in Chengdu

(CNY bn) (CNY bn)

300 500

400 200 300

200 100 100

0 0 2010 2011 2012 2013 2014 2010 2011 2012 2013 2014

Source: CEIC, Daiwa Source: CEIC, Daiwa

Retail sales in Hangzhou

(CNY bn)

400

300

200

100

0 2010 2011 2012 2013 2014

Source: CEIC, Daiwa

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Joy City Property (207 HK): 29 January 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities

Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Banking; Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

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Joy City Property (207 HK): 29 January 2016

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Joy City Property (207 HK): 29 January 2016

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Joy City Property (207 HK): 29 January 2016

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Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.  In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.  In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.  For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.  There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.  There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.  Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

Corporate Name: Daiwa Securities Co. Ltd. Financial instruments firm: chief of Kanto Local Finance Bureau (Kin-sho) No.108 Memberships: Japan Securities Dealers Association, The Financial Futures Association of Japan Japan Securities Investment Advisers Association Type II Financial Instruments Firms Association

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