SOHO (410) Initial coverage

Buy May 13, 2008

Trendy Builder in

 Focus on central area in Beijing. We initiate the coverage for SOHO Samson Man, CFA China. SOHO is famous for its innovative property design and strong brand (852)-2532-1539 name. Innovative design attracts the customers and results in a higher profit [email protected] margin. Secondly, “SOHO” brand is built up as a dynamic lifestyle brand due to the contribution from its trend-setting founders. Lastly, SOHO is the major commercial property developer in CBD area in Beijing. We believe that SOHO should benefit from the booming economic activities in Beijing and is less affected by austerity measures. Industry China Properties

 Limited land band but ample of cash. SOHO is in strong financial position with RMB 15 bn cash on hand. However, the company lacks of Price HK$ 4.92 sufficient land bank for its coming 5 years development. SOHO is keen on land replenishment. At present, land bank of SOHO amounts to 838k sqm. Target price HK$ 7.27 The company is looking to enlarge its land bank through private negotiation and public auction. Furthermore, SOHO is working to acquire Qianmen (+47.8%) Project from its founder. Stock code 410

 No factor in Qianmen Project acquisition. We believe that investors ignore Qianmen Project injection effect. We agree that there are a lot of uncertainties of this asset injection. But it will become share price Market cap. HK$25,743mn catalyst if asset injection materializes. We estimate that it will bring NAV accretion of RMB 2.06 per share. O/S shares 5,232mn

52wk high/low HK$ 11.98/3.9  Lock up 68% of 08 revenue. We forecast that GFA completion will be 142k sqm, 200k sqm and 266k sqm in 2008-10. Net profit is estimated to be NAV per share HK$7.74 RMB 1,716m, RMB 2,531m and RMB 3,782m in 2008-10, respectively. Using sum-of-the-parts valuation method, we project that end-08 NAV of SOHO is HK$7.74 based on 15.0% WACC and 6% cap rate. Our target price is HK$7.27 representing a 10% discount to GAV plus net cash position. Major shareholder Marita Pan Upside potential is 47.8%. BUY (63.5%)

HK$1=RMB0.9

Earning Summary Price Performance

HK$ Year-end 31 Dec FY06A FY07A FY08E FY09E FY10E 14

Turnover (RMB m) 1,740 6,954 5,561 6,400 9,299 12

Growth (%) (55) 300 (20) 15 45 10

Net Profit (RMB m) 342 1,966 1,716 2,531 3,782 8

Growth (%) (52) 476 (13) 48 49 6

EPS (RMB) 0.091 0.477 0.328 0.484 0.723 4 Growth (%) N.A. 424 (31) 48 49 2 PER (x) 48.6 9.3 13.5 9.2 6.1 0 DPS (RMB) 0.000 0.100 0.100 0.120 0.160 10/07 11/07 12/07 1/08 2/08 3/08 4/08 5/08 Yield (%) 0.0 2.3 2.3 2.7 3.6 Source: Company information, FSSL Source: Bloomberg

First Securities Limited www.mystockhk.com First Shanghai Securities Limited May 2008

Centre in Beijing

Focus on commercial Pan Shiyi and co-founded SOHO China (SOHO) in 1995. The company buildings focuses on the commercial property development in Beijing, especially in CBD area (Central Business District). Through the attractive outlook and innovative design, SOHO won many recognitions and awards in China and internationally. Furthermore, “SOHO” brand name is highly recognized in China because of innovative design of the buildings as well as high profile directors.

Successful track record SOHO completed 4 commer cial projects with total GFA 1.48m sqm in Beijing CBD in 2001-07. Namely, SOHO Newtown, SOHO Shangdu, Jianwai SOHO, Chaowai SOHO. In addition, two hotels, Commune by the Great Wall in Beijing and Boao Kempinski in Hainan, are owned by SOHO. Currently, anot her 4 projects with total GFA of 788k sqm are under construction and will be delivered in 2008-11.

IPO price at HK$8.3 In October 2007, SOHO successfully listed on the Stock Exchange of Hong Kong and received 169 times over-subscription in IPO. IPO pric e was HK$8.3 per share and the company raised about RMB 11.4 bn.

Design & brand name are the keys In fact, success of SOHO mainly came from two factors. One is its innovative design and the other is the brand name.

Avant-garde design SOHO works with internationally recognized avant-garde architects and is capable to convert innovative designs into trend-setting marketable products. The company

closely monitors and participates in discussion on trends in architecture and real estate development. Furthermore, the architect will work closely with SOHO’s in-house design team to convert the overall design idea into concreted buildings. We know that location is the important factor for property investment. But we think that quality of the building or layout should be the second most important factor for property investment.

Figure 1: Chaowai SOHO Figure 2: SOHO Shangdu

Source: Company Source: Company

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One of the “Most On the other hand, a good and reliance brand name can give customers confidence to Admired Companies” in the products. Two founders have worked hard to build up themselves with the image of China trendsetters. Then, “SOHO” brand is easily became a dynamic lifestyle brand and the company is famous for developing commercial properties with innovative designs.

Furthermore, SOHO was named as one of the “Most Admired Companies” in China by Fortune Magazine (Chinese edition) in 2006. So a well-known brand name not only assures the company attracti ng a nationwide and loyal customer base, but also increasing opportunity to secure prime land site in Beijing as well as enjoying a premium selling price of its properties.

The company actively promotes the brand of “SOHO” by leverage the personal profile s of two founders. Being an active commentator on China real estate industry, Pan Shiyi has created a blog on sina.com.cn with a hit rate of more than 33 million times.

Higher margin amongst Beijing developers Gross margin at 52% Due to the premium pricing, SOHO enjoys a higher margin than its peers. Average and net margin at 22% gross margin and average net margin of SOHO were 52% and 22% respectively. In addition, they were 17-28% and 2-11% higher than other three developers in Beijing respectively. Since SOHO focuses on the commercial properties in CBD, we believe the advantage in margin can be sustainable in the future.

Figure 3: Gross Margin of Beijing Developers Figure 4: Net Margin of Beijing Developers

60% 35% 50% 30% 25% 40% 20% 30% 15% 20% 10% 10% 5% 0% 0% SOHO Sino-Ocean BJ Capital BJ North SOHO Sino-Ocean BJ Capital BJ North Land Land Star Land Land Star

05 06 07 Average 05 06 07 Average

Source: FSSL Source: FSSL

Offices are less affected by austerity measures Less affected by Chinese Government implemented austerity measures in order to cool down the austerity measures booming property market. We see that its major target should be residential properties and pay less a ttention to commercial ones. Since SOHO mainly focuses on the commercial properties development, this translates that the effect of austerity measures on SOHO is less serious compared with other developers, especially the ones focus on residential projects. Based on the existing land bank, only SOHO Beijing Residences and part of SOHO belong to residential usage and other projects belong to commercial properties. Therefore, SOHO is partly immune to austerity measures.

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Thin land bank Land bank amounts to By the end-07, land bank of SOHO amounted to 850,588 sqm, of which 787,779 sqm 851k sqm were the properties under development and 62,809 sqm were investment properties. Obviously, SOHO owns the least land bank amongst Chinese property companies but this would not hurt the company short-term profitability. As SOHO concentrates on the prime location commercial property development, its margin is huge. The company enjoyed gross margin of 48-55% and net margin of 18-28% in last three years. We expect its gross margin and net margin will reach 46-60% and 33-41% in next three years respectively. Therefore, strong margin can support SOHO’s profitability in the future.

Apart from small size, SOHO’s land bank concentrates in Beijing City. Except the proj ect of Boao Kempinski, all the projects are located in Beijing, especially in CBD area. Thus, the company will suffer if Beijing property market collapses.

Besides the existing land bank, SOHO has RMB 15 bn cash on hand. Strong financial position can secu re the company having the edge for land acquisition. SOHO is planning to purchase the Tiananmen South (Qianmen) Project from Pan Shiyi. Furthermore, the company also plans to enlarge its land bank by the way of private negotiation and public auction.

Table 1: Land Bank

Properties under development Project Interest Total GFA (sqm) Guanghualu SOHO 95% 75,766 Beijing SOHO Residences 95% 66,333 Sanlitun SOHO 95% 465,680 Guanghualu SOHO II 95% 180,000 Sub-total 787,779

Investment Properties Project Interest Total GFA (sqm) Commune by Great Wall 95% 30,544 Boao Kempinski 90% 20,316 Chaowai SOHO (Self-used office) 100% 11,949 Sub-total 62,809

Total 850,588 Source: Company, FSSL

Guanghualu SOHO All units in Guanghualu Guanghualu SOHO is situate d in Beijing CBD. This project is commenced the SOHO are sold out construction in 1Q07 and expected to complete at the end-08. It comprises four commercial towers with a total GFA of 75,766 sqm. The basement and the first to the fourth floor of the four towers will be conne cted and are used for retail purpose and the other floors will be offices.

By the end-07, 96% or 56,583 sqm of saleable area had been sold out with an average selling price of RMB 38,024 per sqm. The management reveals that all units in Guanghualu SOHO ar e sold out now. We estimate that total sales proceeds of RMB 2,576m can be generated if all units are sold out.

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Figure 5: Guanghualu SOHO

Source: Company

Beijing SOHO Residences Only pure residential Beijing SOHO Residences is at the Lufthansa Business Circle in central Beijing and is a project in SOHO high-end apartment project with a total GFA of 66,333 sqm. This project was acquired on 2 November 200 7 with total consideration of RMB 1,412m. It will provide 220 residential units. All units will be furnished and equipped with domestic appliances.

By the end-07, SOHO had pre-sold a saleable area of 9,677 sqm The pre-sale amount had reached RMB 453m wit h an average selling price of RMB 46,812 per sqm. And now about 40% of units are pre-sold. We estimate that this project can generate total sales proceeds of RMB 2,985m.

Figure 6: Beijing SOHO Residences

Source: Company - 5 - This report is not to be distributed to the US, Canada, Japan or to any US person First Shanghai Securities Limited May 2008

Sanlitun SOHO An entertainment Sanlitun SOHO is located close to the second embassy district and the Workers’ complex in Sanlitun Stadium in Beijing. With a total GFA of 465,680 sqm, Sa nlitun SOHO will be one of the largest commercial and residential complexes in Beijing. Office and residential towers will be built on tops of shopping malls, which are linked by an outdoor piazza. Development will be divided into two phases. Phase I and P hase II are expected to be completed in 4Q09 and 3Q10 respectively. A marketing party for Sanlitun SOHO was launched in May 2007. Pre-sales are expected to commence soon.

Figure 7: Sanlitun SOHO

Source: Company

Guanghualu SOHO II Land leveling now Guanghualu SOHO II is located at the opposite of Guanghualu SOHO and in Beijing CBD. Total GFA amounts to 180,000 sqm, of which 128,000 sqm are above-ground a nd 52,000 sqm are basement. Guanghualu SOHO II will be developed into a prime commercial and retail complex with avant-garde architectural features. It was purchased on 2 November 2007 with the total consideration of RMB 1,029m. Guanghualu SOHO II is under going land leveling and is planned to commence construction in 4Q08.

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Figure 8: Guanghualu SOHO II

Source: FSSL

Minimal investment property Stylish hotels in Beijing SOHO owns two hotel projects in Beijing and Hainan. We perceive that th ese two hotel and Hainan projects are the image building tools for SOHO. Commune by the Great Wall has been used as venues for concerts, product launches, photographic exhibitions and other corporate events by many international brands and multinational corporations. These activities organized by international brands can enhance SOHO corporate image amongst target customers.

Commune by the Great Wall is a boutique hotel which is located besides the Great Wall and is considered as a showcase project. Total GFA is 30,5 44 sqm, comprised 11 unique houses in Phase 1 and another 32 houses & a conference centre in Phase II. Both Phases are in operation now. Commune by the Great Wall is managed by the Kempinski Group.

Boao Kempinski is a resort community with a total GFA of 20,316 sqm and is situated at Boao Forum for Asia Special Planning District, Hainan. It is also managed by Kempinski Group.

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Figure 9: Land Bank based on project (850,588 sqm) Figure 10: Land Bank based on 08 GAV (RMB 20,953m)

Boao Boao Chaow ai Guanghualu Commune Chaow ai Guanghualu Commune Kempinski Kempinski SOHO SOHO by Great SOHO SOHO Beijing by Great 2% 2% 2% 11% Wall 1% 9% SOHO Wall 4% Residences 3% Beijing Guanghualu 8% Guanghualu SOHO SOHO II SOHO II Residences 21% 17% 13%

Sanlitun Sanlitun SOHO SOHO 55% 52%

Source: Company information, FSSL Source: Company information, FSSL

Future Acquisition 7 plots of land are under On the one hand, SOHO owns ample of cash in the amount of RM B 15 bn. On the other negotiation hand, land bank of SOHO is not sufficient for its long-term development. The company is eager to enlarge its land bank. Now, it is negotiating with other developers to acquire properties projects in Beijing. Seven projects in Beijing with total GFA of 1.7m sqm are under negotiation, of which five are located in 2 nd Ring Road. We believe these acquisitions can enhance the shareholders’ value because SOHO has a good track record in its project of Beijing SOHO Residences.

Participate into public Furthermore, la nd acquisition plan not only limits to private negotiation method, but also auction includes public auction or public tender. Now, SOHO eyes on four sites in Beijing which may go to public auction in the future. Three of them are located at CBD while another one is located in 2 nd Ring Road. These four sites can provide a total GFA of 1.2m sqm.

Tiananmen South (Qianmen) Project Qianmen Project is SOHO is planning to acquire Tiananmen S outh (Qianmen) project from the company pending Government owned by Pan Shiyi and this acquisition is pending to the Government approval. Pan approval owns a 49% equity interest in Beijing Tianjie which has received the Construction Land Planning Permit and Construction Planning Opin ion for the Tiananmen South (Qianmen) Project.

It is located in the Qianmen area that is south of Tiananmen Square. Total GFA is 360,000 sqm. This project is divided into two parts. One is included 33 parcels of land (33 Parcels) and the other is included 11 parcels of land (11 Parcels). Pan’s private

company has acquired the titles of 33 Parcels with a total GFA of 165,000 sqm. The transfer of 49% interests in 33 Parcels is waiting for Government approval.

Acquire more land in The 11 Parcels will open for public tender. Thes e 11 Parcels are located at the eastern Qianmen through tender side and southern sides of the 33 Parcels. SOHO may bid these 11 Parcels through fully owned subsidiary or Beijing Tianjie that depends on whether SOHO can acquire Beijing Tianjie before the tender starts. Although 3 plots of land of these 11 Parcels are put up for tender in Feb 2008. At last, the tender was cancelled.

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The new architecture in Qianmen project will be in the hutong style and there will be an 845-meter long pedestrian shopping boulevard in the project. If Qianmen Project can be injected into SOHO, the company will sell less than 50% of the saleable GFA and keep the remaining properties for long-term investment purpose.

Figure 11: Tiananmen South (Qianmen) project

Source: FSSL

Jackpot does not factor A strong cash cow As Qianmen Project has the historical and geographical advantages, we believe it has huge economic value. If it is managed properly, Qianmen Project can become a famous

tourist spot in Beijing. Since SOHO plans to retain half of Qianmen Project for long-term investment purpose, it will provide a solid cash flow to SOHO.

NAV accretion RMB 2.06 We have done a simple calculation. If SOHO can successfully obtain 33 Parcels and 11 per share Parcels, these will bring NAV accretion of RM B 2.06 per share. As the transfer of 49% interest in 33 Parcels and the tender of 11 Parcels are still uncertain, we think share price of SOHO does not reflect these issues. They will become share price catalyst once they are materialized.

Table 2: Tiananmen South (Qianmen) Project Financial modeling

Market Total Market Value added Total GFA Value Cost Value Total Cost per share Land plot Interest (sqm) (RMB/sqm) (RMB/ sqm) (RMB m) (RMB m) (RMB) 33 Parcels 49% 165,000 60,000 21,000 9,900 3,465 0.60 11 Parcels 100% 195,000 60,000 21,000 11,700 4,095 1.45 360,000 2.06 Source: FSSL

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SWOT Analysis

Strengths Weaknesses

 Strong brand name with celebrity management  Projects over-concentrate on CBD and Beijing city  Solid track record of developing commercial  Thin land bank of less than 1m sqm properties in CBD, Beijing  Lack of recurrent income  Avant-garde and innovative design  Earning volatility arises from fluctuated in GFA  High margin projects completion  Strong financial position with RMB 15 bn cash on hand  Focus on commercial properties that are least affected by austerity measures

Opportunities Threats

 Huge demand of commercial properties in Beijing  China may implement austerity measures  Qianmen Project has huge economic potential  Global economic slow down  Mainland assets benefit from RMB appreciation  Global credit crunch  Tightening of second home mortgage may reduce demand

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Financial Analysis Lock up 68% of 08 Revenue Net profit is expected to SOHO has only two projects completed in 2008, namely, Guanghualu SOHO and be RMB 1,716m in 2008 Beijing SOHO Residences. We estimate that both projects will contribute about RMB 5.6 bn into revenue in 2008. Since all units of Guanghualu SOHO are sold out and about 40% of Beijing SOHO Residences are sold out, we believe about 68% of 08 revenue is lock-up now. Although we estimate that gross profit margin may narrow to 44% in 2008 from 55% one year ago due to the higher acquisition cost for the project of Beijing SOHO Residences. However, investment period of this project is around 1 year. So faster turnover rate would explain its smaller margin. Since GFA completed for sales in 2008 is expected to be 142 ,099 sqm (vs 250,505 sqm in 2006), we forecast that net profit will shrink 13% to RMB 1,716m in 2008.

Net profit is estimated to Phase I and Phase II of Sanlitun SOHO will be completed in 2008-09. We estimate that be RMB 2,531m in 2009 GFA completion in 2009 and 2010 will be 200,000 sqm and 265,680 sqm respectively. and RMB 3,782m in Sanlitun SOHO will be the major profit contributor in 2009 and 2010. Gross profit 2010 margin is expected to be 56% and 60% in 2009 and 2010 respectively because this project was acquired in 2006 by private negotiation. We forecast that revenue an d net profit will increase by 15% to RMB 6,400 m and by 48% to RMB 2,531m in 2009, respectively. In 2010, revenue and net profit are expected to increase by 45% to RMB 9,299 m and by 49% to RMB 3,782m respectively.

Figure 12: Revenue & Profit Figure 13: Profit Margin

(RMB m) 10,000 70% 60% 8,000 50% 6,000 40% 4,000 30% 20% 2,000 10% 0 0% 05 06 07 08E 09E 10E 05 06 07 08E 09E 10E Revenue Net Profit Gross Margin Net Margin

Source: Company, FSSL Source: Company, FSSL

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Strong Balance Sheet

In a credit crunch market, high gearing is a liability. We find that high-gearing stocks faced a more serious co rrection in the share price performance last 6 months. We think

that credit crunch situation will be last in 2008. Thus, a company with strong financial position should out-perform the market.

RMB 15 bn cash on hand Be the end-07, SOHO was in net cash position after finishing a RMB 11 bn IPO in Hong Kong. The company owned RMB 15 bn cash on hand. After deduction of bank

borrowing of RMB 2 bn, SOHO still owned net cash of RMB 13 bn or HK$2.48 per share. In fact, our model only factors in a capex of RMB 5-6 bn each year for land acquisition in coming years. Thus, SOHO is expected to maintain in net cash position in coming 3 years. If Qianmen project is injected into SOHO, capex will be higher and financial position will change.

Figure 14: Financial Position

(RMB m)

25,000 20,000 15,000 10,000 5,000 0 05 06 07 08E 09E 10E Cash Borrowing

Source: Company, FSSL

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Valuation

NAV per share is Since SOHO only has four projects under development, we appraise these four projects HK$7.74 worth RMB 19,471m based on discount cash flow method with 15.0% WACC. Furthermore, investment properties include two hotels and self-used office in Chaowai

SOHO that we appraise as RMB 1,490m. Using Sum-of-the-parts valuation method, gross asset value (GAV) is estimated to be RMB 20,961m by end-08. Adding estimated net cash position of RMB 13,849m, NAV of SOHO at end-08 is forecasted to be RMB 34,809m or HK$7.74 per share based on exchange rate of HK$1 = RMB 0.86 at end-08.

HK$7.27 target price We will use an adjusted NAV discount valuation method to determine our 12-month target price. We still u tilize a discount rate to reflect the operating risk and financial risk but we only apply this discount rate to gross asset value but not on net cash position. As SOHO is in net cash position, we use 10% discount rate to its GAV. Thus our target price is HK$ 7.27 and implies a 47.8% upside potential. Meanwhile, our target price does not reflect Qianmen Project acquisition that may bring in HK$2.4 per share NAV accretion. We initiate with a BUY recommendation.

Table 3: 08 NAV estimation

NAV/share % of (RMB m) (HK$ m) (HK$) NAV Remark Properties under development 19,471 22,640 4.33 56% WACC of 15.0% Investment Properties 1,490 1,733 0.33 4% 6% cap rate Gross Amount 20,961 24,373 4.66 60% Add: Net Cash 13,849 16,103 3.08 40% Dec-08 NAV 34,809 40,476 7.74 100% No. of shares 5,232 5,232 NAV per share 6.65 7.74 Source: FSSL End-08 exchange rate: HK$ 1=RMB 0.86

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Risk

Interest Rate Risk . Due to the huge inflow of Foreign Direct Investment and robust growth of M2 in China, it is expected that China will continue to raise interest rate again in 1H08. Thus, it may affect the market sentiment and increase SOHO’s interest expense.

Further austerity measures . Chinese Government introduced several measures to control the property market last few years , such as issue rules on foreign people investing China properties, set up regional bureaus monitoring land sales and enforce a 20% capital gain tax for property trading. Furthermore, Central Government declared to adopt tightening monetary policy in 2008. We are afraid that further administrative policy would seriously dampen the market sentiment.

Appreciation of RMB . After China widened trading band in July 2005, RMB was appreciating. Now, it is trading at US$1 to RMB 6.988, comp ared with RMB 8.28 in July 2005. Since all of SOHO’s assets are in China, appreciation of RMB would bring positive effect to SOHO’s valuation and earnings.

Projects delay due to construction suspension in Olympic period . Beijing City will host 2008 Olymp ic Games. Around August 2008, construction work in Beijing City must be stopped. Thus, it may result in the delay of completion of SOHO’s projects, which in turn affects the earnings.

Global economy slowdown . It may result in global economy slowdown if hi gh oil price sustains at a longer period. Furthermore, the U.S. economy is shadowed by the sub-prime issue. Then, China economy will suffer and in turn adversely affect Mainland property market.

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Appendix 1: Beijing Property Market

Beijing economy grew Beijing is the capital of China and is also one of four municipalities in China. With the 15.9% in 2007 population of 17.4m, Beijing is second largest city in China, after Shanghai. Beijing is recognized as the political, educational and cultural centre w hile Shanghai is the financial centre. Beijing GDP increased 15.9% to RMB 900.6 bn and GDP per capita was US$ 7,370 in 2007.

Recently, Beijing city government has announced that it is planning to build Beijing as an international financial centre. Financi al Street and CBD will become major hub for domestic and multinational financial corporations.

Beijing Office Market Office rent and price By end-07, prime office space in Beijing amounted to 6.76m sqm . Following robust soared 11.7% & 6.1% economic activities in Beijing, office take up surprised the market expectation. Net absorption surged by 160% yoy to 942,602 sqm in 2007. According to DTZ Research , rental value in Beijing offices rose 2% yoy to RMB 223 per sqm per mon th and capital value in Beijing stayed flat at RMB 23,667 per sqm in 4Q07.

Excluding to the new supply that completed within 2007, vacancy rate was at 7.8%, while that in CBD was at 6.5%.

Rent faced pressure in Because of a forecast of 1m sqm of new office supply in Beijing i n 2008, rental rate is 08 expected to face the pressure. Although demand will continue to be strong, vacancy will climb and result in the decrease on average rentals.

Figure 15: DTZ Beijing Office Index

140

130

120

110

100

90

1 2 3 3 4 5 6 7 0 0 0 Q0 Q0 Q0 Q04 Q05 Q0 Q0 1 3Q01 1 3Q02 1 3Q 1 3Q 1 3Q 1Q06 3 1Q07 3

Rent Price

Source: DTZ Research DTZ Beijing Office Index are based to 1Q00 as 100

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Beijing Residential Market According to National Development and Reform Commission, growth of Beijing residential price reached the peak in 4Q07. In March 2008, Beijing residential price grew at 13.8% yoy, compared with 15.0% in December 2007.

Beijing residential price Strong demand for luxury property in Beijing continued to drive up property price jumped 32.8% in 07 substantially by 32.8% yoy to RMB 20,982 per sqm in 2007 according to Jones Lang LaSalle. New projects launched with higher prices pushed up second-hand propert ies prices. Although property transaction in Beijing declined in 2007, luxury and high-end properties performed well in 2007 because Beijing luxury and high-end properties still trade at a discount to Shanghai.

There may be a rental rise due to the coming Olympic Games but it would be a short-term effect. Rental is expected to stay flat by end-08 because of ample supply. Because of robust economy and rising incomes, strong demand should continue drag up property price but slow growth is expected in 2008.

Figure 16: Beijing Residential Capital Value Change

116 114 112 110 108 106 104

7 7 8 07 0 07 7 0 - r- l- r- n u a J J Ma May-07 Sep-0 Nov-0 Jan-08 Ma

Source: NDRC

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Completion schedule

Project Location Interest Usage Total GFA Attributable Selling Price Cost Gross 08 NPV

(sqm) GFA (sqm) (RMB/sqm) (RMB/sqm) Margin In FY08 Guanghualu SOHO Beijing 95% Commercial 75,766 71,978 34,000 15,000 55.9% 2,339 Beijing SOHO Residences Beijing 95% Residence 66,333 63,016 45,000 30,000 33.3% 2,647 142,099 134,994 4,986 In FY09 Sanlitun SOHO Phase I Beijing 95% Mixed 200,000 190,000 32,000 14,000 56.3% 5,001 200,000 190,000 5,001 In FY10 Sanlitun SOHO Phase II Beijing 95% Mixed 265,680 252,396 35,000 14,000 60.0% 5,971 265,680 252,396 5,971 After 2010 Guanghualu SOHO II Beijing 95% Commercial 180,000 171,000 38,000 12,000 68.4% 3,512 180,000 171,000 3,512

Total 787,779 748,390 19,471

Source: Company information, FSSL

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Financial Summary

Income statement Key statistics and ratios Year end Dec 31 (RMB m) 2006 2007 2008E 2009E 2010E Year end Dec 31 2006 2007 2008E 2009E 2010E Turnover 1,740 6,954 5,561 6,400 9,299 Growth (%) COSG (819) (3,157) (3,126) (2,800) (3,720) Turnover (55) 300 (20) 15 45 Gross profit 921 3,797 2,435 3,600 5,579 Operating profit (53) 344 (36) 52 55 Other revenue 32 (7) 57 65 52 Net profit (52) 476 (13) 48 49 SGA (182) (363) (311) (352) (502) EPS N.A. 424 (31) 48 49 Operating profit 771 3,427 2,181 3,313 5,129 Margins (%) Interest expenses 16 330 370 417 440 Gross profit 53 55 44 56 60 Associated 1 0 0 0 0 Operating profit 44 49 39 52 55 Exceptional items 0 0 0 0 0 Net Profit 20 28 31 40 41 Pre-tax profit 788 3,757 2,551 3,730 5,569 Others (%) Tax (377) (1,769) (765) (1,119) (1,671) Effective tax rate 48 47 30 30 30 After-tax profit 410 1,987 1,785 2,611 3,898 Payout ratio 0 27 30 25 22 Minority interest (69) (22) (70) (80) (116) ROE 25 14 11 14 18 Net profit 342 1,966 1,716 2,531 3,782 ROA 4 8 6 8 11 Core earnings 342 1,966 1,716 2,531 3,782 Valuation Dividends 0 (523) (523) (628) (837) P/Sales (x) 9.5 2.6 4.2 3.6 2.5 Retained earnings 342 1,442 1,193 1,903 2,945 PE (x) 48.6 9.3 13.5 9.2 6.1 P/B (x) 13.0 1.6 1.5 1.3 1.1 EPS (RMB) 0.091 0.477 0.328 0.484 0.723 P/Cash flow (x) N.A. 9.2 12.5 10.7 7.6 DPS (RMB) 0.000 0.100 0.100 0.120 0.160 Dividend yield (%) 0.0 2.3 2.3 2.7 3.6

Balance sheet Cash flow statement Year end Dec 31 (RMB m) 2006 2007 2008E 2009E 2010E Year end Dec 31 (RMB m) 2006 2007 2008E 2009E 2010E Cash & deposits 1,081 13,749 15,349 16,480 18,563 Operating Profit 771 3,427 2,181 3,313 5,129 Trade debtors 434 274 350 420 500 Depreciation 19 28 52 63 76 Inventories 5,738 7,286 8,500 10,000 12,000 Change in wc (2,888) 1,056 (832) (1,370) (1,880) Other current assets 379 77 80 80 80 Taxation (148) (316) (1,014) (1,419) (1,871) Intangible assets 0 0 0 0 0 Others 1,456 (2,213) 1,470 1,581 1,582 Other LT assets 357 1,252 1,508 1,810 2,012 CF from Operation (790) 1,982 1,857 2,168 3,036 Associated 0 0 0 0 0 Fixed assets 441 820 1,000 1,200 1,500 Capex (24) (604) (232) (263) (376) Total assets 8,430 23,458 26,787 29,990 34,655 Associated investments 0 0 0 0 0 Others (18) (777) (253) (300) (200) ST debt 0 1,000 1,500 1,800 2,000 CF from Investing (42) (1,382) (485) (563) (576) Trade creditors 629 2,342 2,800 3,000 3,200 Other current liabilities 5,411 4,343 5,000 5,600 6,300 Equity raised 0 11,382 0 0 0 LT borrowings 800 1,000 1,500 1,500 1,800 Change of Debts 800 1,200 1,000 300 500 Deferred taxation 0 51 55 55 55 Dividend paid (156) (106) (523) (523) (628) Other LT liabilities 68 103 120 140 160 Others (40) (85) 0 0 0 Total liabilities 6,907 8,840 10,975 12,095 13,515 CF from Financing 604 12,392 477 (223) (128)

S'holders' funds 1,360 14,456 15,648 17,732 20,977 Change in Cash (228) 12,991 1,850 1,382 2,333 Minorities 163 163 163 163 163 FX Change 0 (324) (250) (250) (250) Total 8,430 23,458 26,786 29,990 34,655 Cash at the beginning 1,309 1,081 13,749 15,349 16,480 Cash at the end 1,081 13,749 15,349 16,480 18,563 Net gearing Net Cash Net Cash Net Cash Net Cash Net Cash Adj: OD or others 0 0 (0) (0) 0 BVPS (RMB) 0.34 2.76 2.99 3.39 4.01 Cash at BS 1,081 13,749 15,349 16,480 18,563

Source: Company information, FSSL

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