Property

Credit profiles to improve on lower land acquisitions and solid sales

Contents Summary

Summary ...... 1 Overall policy stance on property industry remains unchanged: we expect the Chinese governments will continue its tight control policies on Property sales ...... 2 property industry in 2019 to avoid unwanted overheating in the industry. In Land acquisition ...... 4 our view, the governments will continue to clamp down the shadow banking financing in the industry and encourage the credit growth through more Property funding ...... 6 regulated financing channels. On the other hand, with property price under Working capital efficiency ...... 7 control and inventory came off from its peak, a further severe tightening on the industry is unlikely, in our opinion. Industry consolidation ...... 8 Residential property sales momentum likely to continue but at a slightly Profitability and Cash Flow ...... 9 softer pace: residential property sales value was better than the market Leverage ...... 10 expected in the first nine months of 2018, with property sales value rising 16% year over year, according to National Bureau of Statistics (NBS). We Sampled Property Issuers ...... 11 expect to see residential property sales value to grow around 10-15% in the Glossary ...... 13 fourth quarter of 2018, and continue to grow at around 10% in 2019, with 3- 4% growth in sales volume and 5-6% growth in average selling price (ASP). Land acquisitions to slow down further and market sentiment unlikely to rebound: we expect the land acquisition activities to continue slow down noticeably in 2019, with the land sale value to grow at around low teen level over the next 12 months. With the poor market sentiment that were damped by the uncertain outlook, property developers have become more prudent in land bank replenishment.

Property funding will continue to grow at its current pace: we estimate the property funding growth for Chinese property developers to remain at 9% in 2019, driven by the solid contracted sales. The decrease in trust loans will Contacts be offset by higher bank loans, and bonds will remain as a supplementary source of funding in 2019, in our view.

Name Winnie Guo Working capital efficiency has improved and is expected to continue Title Director improving: we believe the overall working capital efficiency has improved in Direct +852 3615 8344 2018 for the China property sector due to faster property sales which has Email [email protected] resulted in a lower inventory. We expect the working capital efficiency to

continue improving, thanks to robust property sales and slower land Name Christine Zhang acquisitions. However, we expect property inventory to increase slightly in Title Analyst 2019 as the property floor-square new start to catch up the property floor- Direct +852 3615 8276 square sold. Email [email protected] Leverage to decline slightly but liquidity to remain tight in 2019: the sampled property companies that we analyzed have reported better profitability and higher leverage in the first half of 2018. We expect the leverage to increase in the second half of 2018 and decline slightly in 2019, thanks to slowing land acquisitions and robust property sales. Property companies’ liquidity condition, measured by cashflow adequacy ratio, has improved slightly in the first half of 2018 as many companies have already extended their short-term debt. However, we expect the liquidity for the sector to remain tight, with high refinancing requirement from bonds and syndicate loans in 2019.

30 October 2018 Page | 1 RE02020100001

Property China

Residential property sales are expected to remain robust in 2019, driven by positive growth of both volume and price

We expect China’s residential property sales value to grow around 10-15% year over year in the fourth quarter of 2018 and continue its growth rate of 10% in 2019, following the robust growth observed in the first nine months of this year in which residential property sales values have grown 16%. Even though the macro deleveraging will continue to be a key focus in China over the next 12 months, we believe the People’s Bank of China (PBoC) will remain accommodative on its monetary policies which will provide sufficient credit growth to the economy.

In our opinion, money supply and loan growth are the primary factors that have driven China’s property sales in the recent years (exhibit 1), in addition to other secondary factors such as economic cycles, industry dynamics, and regulatory changes. Over the longer run, China’s property industry is supported by the overall economic growth and increasing urbanization; but it tends to be more impacted by the liquidity condition in the economy over the shorter term.

Exhibit 1: Total Loan Balance Growth and Property Sales Growth Exhibit 2: Property Development and Mortgage Loan Mortgage Loan As % of Total (RHS) 100% 17% Development Loan As % of Total (RHS) 70% Porperty Development Loan YoY (LHS) 30% 80% Mortgage Loan YoY (LHS) 16% 60% 25% 60% 50% 15% 20% 40% 40%

30% 15% 20% 14% 20% 0% 10% 10% 13%

5%

Jan12 Jan13 Jan14 Jan15 Jan16 Jan17 Jan18

Sep13 Sep14 Sep15 Sep16 Sep17 Sep18

-20% Sep12

May13 May14 May15 May16 May17 May18 May12 0%

-40% Property Sales YTD YoY% (LHS) 12% -10% 0%

Jul11

Oct09 Apr13 Oct16

Jun07 Jan08 Jun14 Jan15

Mar 09 Feb12 Mar 16

Dec10 Nov13 Dec17

Aug08 Sep12 Aug15 May17 Total Loan Balance YoY% (RHS) May10 Source: PBOC, National Bureau of Statistics, Pengyuan International Source: PBOC, National Bureau of Statistics, Pengyuan International

China’s M2 growth has been trending down over the past few years and stood at around 8.3% at the end of September 2018. Total domestic loan balance was about (RMB) 133 trillion, up 13.2% year over year, and new yuan loan balance was RMB13 trillion, up 17.8% year over year at the end of September 2018. Of which, property related loans grew much faster to RMB37.5 trillion, up 20% year over year, and accounted for 28% and 58% of the total loan and new yuan loan balance respectively (exhibit 2). Among the property related loans, mortgage loans are the biggest component and stood at RMB24.9 trillion, up 18% year over year. Meanwhile, property development loan balance jumped by 24% year over year. Out of which, the private housing loan growth accelerating to 19% from a decline of 7% and social housing loan growth slowing to 33% from 48%, at the end September 2018 from March 2017. In addition, the growth of total social financing (TSF) balance, which includes off-balance-sheet forms of financing, slowed to 11% in September 2018 from 14% in June 2017, as a result of governments’ effort to clamp down shadow lending.

30 October 2018 Page | 2 RE02020100001

Property China

Exhibit 3: Property Sales Volume Growth and ASP Growth Exhibit 4: Property Sales Volume by Cities 40 Cities 1st Tier Sales Volume YoY% 120% 80% 40 Cities 2nd Tier Sales Volume YoY% 100% 40 Cities 3rd Tier Sales Volume YoY% 80% 60% 60% 40% 40% 20% 20% 0%

-20% 0%

Oct06 Oct08 Oct10 Oct12 Oct14 Oct16

Jun07 Jun09 Jun11 Jun13 Jun15 Jun17

Feb08 Feb10 Feb12 Feb14 Feb16 Feb18

-40% Feb06

Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Dec13 Dec14 Dec15 Dec16 Dec17

Sep14 Sep15 Sep16 Sep17 -60% -20% Sep13 -80% -40% -100% Monthly Residential Property FS Sold YoY% Monthly Residential Property ASP YoY% -60% Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

To be more specific, residential property sales volume has grown 3% and nationwide ASP has grown 10% in the first nine months this year according to NBS, as shown in the exhibit 3. We expect the nationwide residential property sales volume to grow at 3-4% in 2019, of which sale volume growth will recover in tier-1 cities due to faster project launching by property developers to raise cash, and slowdown in tier-2 and tier-3 cities due to less monetized resettlement transactions and residents’ weakening purchase power as a result of high property prices. Historically, the sales volume growth has been very volatile across all tiers of cities (exhibit 4).

Furthermore, we estimate the nationwide residential property ASP to increase 5-6% in 2019 despite the price control measures imposed by Chinese governments. Data from NBS’ major seventy-cities property survey also show, in September 2018, the number of cities that report a positive year-on-year housing price change increased to 96% of the surveyed sample, from 84% at the beginning of the year (exhibit 5). However, such property price increases are mostly observed among tier-2 and tier-3 cities, which have seen 7% and 9% increases in property prices respectively, and the increases were driven by provincial governments’ supports on first-time buyers and upgraders by relaxing some purchase restrictions. On the other hand, the tightening measures on the property market has led to a significant price slowdown in 2017 in tier-1 cities with no meaningful growth in 2018, according to the seventy-cities survey (exhibit 6).

Exhibit 5: Proportion of 70 Cities Price Year over Year Change Exhibit 6: Property Sales ASP by Cities 70 Cities ASP YoY% 100% 40% 70 Cities 1st Tier City ASP YoY% 70 Cities 2nd Tier City ASP YoY% 90% 35% 70 cities 3rd Tier City ASP 80% 30% 70% 25% 60% 50% 20%

40% 15% 30% 10% 20% 10% 5%

0% 0%

-5%

Oct13 Oct14 Oct15 Oct16 Oct17

Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Oct13 Oct14 Oct15 Oct16 Oct17

Feb13 Feb14 Feb15 Feb16 Feb17 Feb18 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Feb13 Feb14 Feb15 Feb16 Feb17 Feb18 Increase Unchange Decrease -10%

Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

30 October 2018 Page | 3 RE02020100001

Property China

Land acquisition activities continue to slow down and market sentiment unlikely to rebound in the near future

We expect the overall land acquisition activities to continue slow down noticeably in 2019, with the land sale value growth to be around low teen level over the next 12 months. NBS data have shown a pattern that land sale value usually lags the funding for property investment and property sales value by six to twelve months in China’s property market (exhibit 7). Land sale value growth has been trending down since the end of 2017 with a small rebound in the second quarter of 2018, because the tight funding environment and uncertain industry outlook have dampened the land acquisition sentiment, despite the property developers’ impulsion to restock when inventories fall and sales stay strong.

Exhibit 7: Growth of Property Sales Value and Property Funding Lead Growth of Land Sale Value 160% 200%

140% Nov 2009 Jun 2010 120% 150% 100% Nov 2013 Nov 2009 Feb 2013 100% 80% Mar 2016 60% Nov 2016 50% 40% Apr 2013 May 2016 20% 0% 0% -20% -50%

-40%

Jun07 Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Mar 07 Mar 08 Mar 09 Mar 10 Mar 11 Mar 12 Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18

Sep07 Dec07 Sep08 Dec08 Sep09 Dec09 Sep10 Dec10 Sep11 Dec11 Sep12 Dec12 Sep13 Dec13 Sep14 Dec14 Sep15 Dec15 Sep16 Dec16 Sep17 Dec17 -60% -100% Land Sale 3MMA YoY (LHS) Property Funding 3MMA YoY (LHS) Property sales YoY (RHS)

Source: National Bureau of Statistics, Pengyuan International

When stretching to a longer period of time, the monthly land sale value growth is a fairly volatile measure and has decelerated to 19% year over year in September 2018 from its peak of 85% in April 2017. The deceleration was mainly driven by the declining growth of land price, which decelerated to 2% growth year over year in September 2018 from 44% in March 2018. On the other hand, land sale volume growth has accelerated to 16% increase year over year in September 2018 from 7.8% decline in April 2018 (exhibit 8).

The land sale volume has seen much greater and volatile growth in tier-3 cities than in tier-1 and tier-2 cities over the last two years (exhibit 9). However, the land sale volume growth has cooled down substantially so far this year in 2018 in tier-3 cities, whilst land sale volume growth continues to stay in the negative area in 2018 for tier-1 cities and small positive growth for tier- 2 cities in recent months, according to the forty-cities property survey done by NBS.

Exhibit 8: Land Sale Volume vs. ASP Exhibit 9: Land Sale Volume by Cities

100% 40 Cities Land Sale Volume 6MMA YoY: 1st Tier 180% 40 Cities Land Sale Volume 6MMA YoY: 2nd Tier 80% 40 Cities Land Sale Volume 6MMA YoY: 3rd Tier

60% 130%

40% 80% 20%

0% 30%

-20%

Jul09 Jul16

Oct07 Apr11 Oct14 Apr18

Jun12 Jan13

Mar 07 Mar 14

Feb10 Feb17

Dec08 Sep10 Nov11 Aug13 Dec15 Sep17

May08 May15 -40%

-20%

Feb14 Feb15 Feb16 Feb17 Feb18

Nov13 Nov14 Nov15 Nov16 Nov17

Aug13 Aug14 Aug15 Aug16 Aug17 Aug18

May15 May16 May17 May18 -60% May14 Land Sale Volume 3MMA YoY Land Sale ASP 3MMA YoY -70%

Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

In recent years, the land sale price among different tiers of cities have not shown strong correlations, and tend to move in accordance with the local supply and demand dynamics and government policies. In 2018, land sale price growth sharply contracted in tier-1 cities while the highest absolute land sale price growth decline occurred in tier-3 cities in the first nine months of the year. On the other hand, the land auction premium over the base price, an indicator to measure market

30 October 2018 Page | 4 RE02020100001

Property China

sentiments and hotness, have shown strong correlations among all different tiers of cities, which means market optimism or pessimism do infect each other across the country (exhibit 10 & 11). The average land auction premium over the base prices in 100 major Chinese cities has fallen to the historical low, especially for the tier-1 cities which are seeing the lowest land market sentiment over the past ten years.

In addition, we think the lower land sale value was because of the poor market sentiment that were dampened by the uncertain outlook, rather than a lower land supply, and property developers have become more prudent in land bank replenishment.

Exhibit 10: Land Sale ASP by Cities Exhibit 11: 100 Cities Land Price % Premium to Auction Base Price

200% 40 Cities YTD Land ASP YoY: 1st Tier 300% Tier-1 (LHS) Tier-2 (RHS) Tier-3 (RHS) 140% 40 Cities YTD Land ASP YoY: 2nd Tier 40 Cities YTD Land ASP YoY: 3rd Tier 250% 120% 150% 100% 200% 100% 80% 150% 50% 60% 100% 40% 0%

50% 20%

Oct15 Oct16 Oct17

Apr16 Apr17 Apr18

Jun15 Jun16 Jun17 Jun18

Feb16 Feb17 Feb18

Dec15 Dec16 Dec17

Aug16 Aug17 Aug18 -50% Aug15

0% 0%

Jul11 Jul18

Oct09 Apr13 Oct16

Jun14 Jan15

-100% Jan08

Mar 09 Mar 16

Feb12

Aug08 Dec10 Sep12 Nov13 Aug15 Dec17 May17 May10 Source: National Bureau of Statistics, Pengyuan International Source: Wind, Pengyuan International

As shown in exhibit 12, the gap of land supply over sales has picked up since December 2017, according to the 100 cities data compiled by Wind. In addition, the failed land auctions across the country have increased to a five-year high.

Exhibit 12: Land Supply and Land Sale Gap has expanded Exhibit 13: Growth of Land Purchase vs Growth of Property FAI ml sqm 100 Cities 12MMA Residential Land Supply (LHS) ml sqm 120% Land Purchase 3MMA YoY (LHS) 45% 100 Cities 12MMA Residential Land Sale (LHS) Property FAI 3MMA YoY (RHS) 120 14 40% Supply - Sale (RHS) 100% 35% 100 12 80% 30% 10 80 60% 25% 8 60 20% 40% 6 15% 40 4 20% 10%

5% 20 2 0%

0% Jul16

0 0 -20% Jul09

Oct07 Apr11 Oct14 Apr18

Jun12 Jan13

Mar 07 Feb10 Mar 14 Feb17

Dec08 Sep10 Nov11 Aug13 Dec15 Sep17 May15

May08 -5%

Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Jun09 -40% -10%

Dec09 Dec10 Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 Dec17 Dec08 Source: Wind, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

China’s property fixed asset investment (FAI) consists of two major components: land purchase value, the cash paid for the land sale within the current year, that usually accounts for 30% of property FAI; and construction expenditure, the money paid to actually build the property units, that often makes up 60% of property FAI. The change of land purchase value typically lags the change of land sale value by 6-12 months and construction expenditure usually comes 18-24 months after the land purchase is completed.

In September 2018, property FAI growth increased to 9% year over year from 7% in December 2017, and land purchase value growth reached to 41%, the highest level in the last six years (exhibit 13). Even though land purchase value is not the biggest contributor to the property FAI, its fluctuation is more or less in line with that of property FAI. Therefore, we expect construction activities to pick up in 2019 following the upbeat in land purchase in 2017-2018. Indeed, floor space under construction has picked up since 4Q17, and is expected to continue its recent uptrend in the next 12-18 months. However, since project mergers and acquisitions (M&A) start to account for higher percentage of land purchase in the industry, we think the land purchase’s

30 October 2018 Page | 5 RE02020100001

Property China

impact to construction expenditure will incrementally be lowered, due to the fact that M&A projects tend to be brownfield and require less capital expenditure in construction phase. Property funding growth to remain at current pace driven by solid contracted sales

We estimate the property funding growth for China’s property developers will remain at 9% in 2019, the similar level of 2018. The major components for the property funding in China include bank loans, prepayments from contracted sales, self-raised alternative finance, trust funds, bonds, and cash, etc. The total property funding reached to RMB12 trillion for the first nine months of 2018, up 8% from the same period of 2017. Despite that we expect the new trust loans invested in property have declined around 40% year over year in the first nine months of 2018, the new bank loans have increased 78% year over year for the same period, showing that the banks have brought back loans onto their balance sheets whilst getting out of the shadow banking lending. In addition, the prepayments from contracted sales and self-raised fund have increased 16% and 11% respectively in the first nine months of the year.

As shown in exhibit 14, prepayments from contracted sales have been the single largest funding source for China’s property developers to finance their operations in recent years, followed by interest-bearing debts and alternative financing which includes equity financing. Therefore, any changes on China’s property pre-sale policy will cause liquidity crisis for a large number of smaller property developers, in our view.

Within the category of interest-bearing debts, trust funds and onshore bank loans make up the vast majority of funding sources as shown in exhibit 15. So far China’s property developers’ reliance on bond market funding, both onshore and offshore, has been volatile depending on the regulators’ risk views on the property industry. Onshore bond issuance was at its highest in between July 2015 and September 2016 when the onshore regulatory environment was relatively loose for property developers. We think bonds will remain to be a supplementary source of funding under current regulatory environment.

Exhibit 14: Property Funding Exhibit 15: Interest Bearing Debt Breakdown RMB bn RMB bn Trust Fund Onshore Bank Loan 100% 4,500 1,400 Onshore Bond Offshore Bond 90% Offshore Syndicate Loan 80% 1,200 70% 4,000 60% 1,000 50% 3,500 40% 800 30% 600 20% 3,000 10% 400 0%

-10% 2,500 200

20152Q 20153Q 20154Q 20161Q 20162Q 20163Q 20164Q 20171Q 20172Q 20173Q 20174Q 20181Q 20182Q 20183Q 20151Q - Others Alternative Finance

Cash Contracted Sales -200

20151Q 20152Q 20153Q 20154Q 20161Q 20162Q 20163Q 20164Q 20171Q 20172Q 20173Q 20174Q 20181Q 20182Q 20183Q Interest Bearing Debt Total Property Funding (RHS) Note: Trust fund for 20183Q is estimated. Source: National Bureau of Statistics, PBOC, CTA, Pengyuan International Source: National Bureau of Statistics, PBOC, CTA, Pengyuan International

In the first nine months of 2018, the bond net financing has decreased 28% and increased 5% year over year, in the onshore and offshore markets, respectively, with the maturities outpacing the issuance (exhibit 16). Bond issuance has increased by 46% and 2% year over year respectively, in onshore and offshore market, in the first nine months of 2018, whilst maturities increased 206% and declined 4% year over year respectively for the same period. In turn, the total net financing from bond issuance has decreased 14% or RMB52bn for the first nine months of 2018. On the other hand, the net financing of offshore syndicate loans has increased 109% or RMB45bn for the same period.

30 October 2018 Page | 6 RE02020100001

Property China

Exhibit 16: Property Bond Financing RMB bn Onshore Bond Issuance 150 Offshore Bond Issuance Onshore Bond Repayment 100 Offshore Bond Repayment Total Bond Net Financing 50

0

-50

-100

Jul13 Jul14 Jul15 Jul16 Jul17 Jul18 Jul19 Jul20

Jan13 Jan14 Jan15 Jan16 Jan17 Jan18 Jan19 Jan20

Mar 13 Mar 14 Mar 15 Mar 16 Mar 17 Mar 18 Mar 19 Mar 20

Nov13 Nov14 Nov15 Nov16 Nov17 Nov18 Nov19 Nov20

Sep13 Sep14 Sep15 Sep16 Sep17 Sep18 Sep19 Sep20

May13 May14 May15 May16 May17 May18 May19 May20

Note: As of Sep 2018 Source: Wind, Bloomberg, Pengyuan International Working capital efficiency has improved and is expected to continue improving

In our view, the working capital efficiency for the Chinese property developers has improved in 2018 driven by faster property sales which has resulted in a lower inventory. Land purchase and contracted sales are the major working capital outflow and inflow for Chinese property developers, and the reasons for high working capital requirement in the China property industry.

We expect property inventories to continue its downward trend in the rest of 2018 and to increase slightly in 2019 but still remain at a relatively low level, with the new house starts catching up the property sales. Since the beginning of 2016, the governments have increased its effort to reduce excess inventories in the property markets, which in turn has shrunk China’s property inventories substantially. Nationwide completed but unsold residential property inventories were recorded at 260 million square meters in September 2018, off from the peak of 466 million square meters in February 2016 and back to the same level of early 2013 (exhibit 17).

According to data compiled by Wind, inventory to sales has decreased the most in the tier-1 cities to 8 months in September 2018 from its last peak of 12 months in April 2018, while tier-2 cities’ inventory to sales decreased slightly to 11 months in September 2018 from 12 months (exhibit 18).

Exhibit 17: Completed Inventory Exhibit 18: Inventory to Sales Has Come Off ml Sqm Residential Property Completed Inventory (LHS) Month Ten Cities Inventory to Sales x Ten Cities Inventory to Sales-1st Tier To 12MMA Monthly Sales (RHS) 25 500 5.0 Ten Cities Inventory to Sales-2nd Tier 23 450 4.5 21 4.0 400 19 3.5 17 350 3.0 300 2.5 15 13 250 2.0 1.5 11 200 1.0 9 150 0.5 7

100 0.0 5

Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Apr18

Dec11 Aug12 Dec12 Aug13 Dec13 Aug14 Dec14 Aug15 Dec15 Aug16 Dec16 Aug17 Dec17 Aug18

Apr12 Apr13 Apr14 Apr15 Apr16 Apr17 Apr18

Dec11 Dec12 Dec13 Dec14 Dec15 Dec16 Dec17

Aug13 Aug14 Aug15 Aug16 Aug17 Aug18 Aug12 Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

The destocking over the last few years was mainly due to the fact that property sales have outpaced the new starts, where new starts usually lag sales by six months in China (exhibit 19). The growth of property sales has slowed since early 2017, but the new start volume continues to trend up from the recent bottom in November 2015. We expect the new start volume growth to continue to accelerate in the rest of 2018 before slowing down in 2019 (exhibit 20).

30 October 2018 Page | 7 RE02020100001

Property China

Exhibit 19: New Start Volume Growth Lagging Sales Growth by 6 Months Exhibit 20: Floor Square Sold Outpaced Floor Square New Start

70% ml sqm Oct 2010 1,800 60% 1,600 50% 1,400 Feb 2010 40% 1,200

30% 1,000 Mar 2017 800 20% Sep 2013 600 10% Nov 2013 400 0% 200

-10% 0

Jul09 Jul16

Oct07 Apr11 Oct14 Apr18

Jun12 Jan13

Mar 07 Feb10 Mar 14 Feb17

Dec08 Sep10 Nov11 Aug13 Dec15 Sep17 May15

-20% May08

Jul08 Jul15

Oct06 Apr10 Oct13 Apr17

Jun11 Jan12 Jun18

Mar 06 Feb09 Mar 13 Feb16

Dec07 Sep09 Nov10 Aug12 Dec14 Sep16 Nov17 May14 -30% FS Start 3MMA YoY: Residential May07 FS Start -12M Trailing FS Sold -12M Trailing FS Sold 3MMA YoY: Residential

Source: National Bureau of Statistics, Pengyuan International Source: National Bureau of Statistics, Pengyuan International

On the land purchase side, we expect the land purchase value which is the land premium paid in cash to continue decline in the full year of 2019, following the lower land acquisition activities as a result of developers’ intention to be less expansive in the next twelve months. Chinese property developers started to be aggressive in acquiring lands since early 2017 as revealed by the percentage of land purchase to sales prepayment (exhibit 21).

Exhibit 21: Land Purchase as Percentage of Prepayments from Contracted Sales 100% 90% 80% 70% 60% 50% 40% 30% 20%

10%

Oct06 Oct07 Oct08 Oct09 Oct10 Oct11 Oct12 Oct13 Oct14 Oct15 Oct16 Oct17

Jun06 Jun07 Jun08 Jun09 Jun10 Jun11 Jun12 Jun13 Jun14 Jun15 Jun16 Jun17 Jun18

Feb06 Feb07 Feb08 Feb09 Feb10 Feb11 Feb12 Feb13 Feb14 Feb15 Feb16 Feb17 Feb18 Land Purchase as Percentage of Prepayments from Contracted Sales

Source: National Bureau of Statistics, Pengyuan International Industry consolidation is expected to continue in the next few years

China property developer industry is fragmented and products are homogenous with residential property transactions contributing the majority of the total property sales. The sector’s industry concentration has increased in the recent years which is a support for the leading industry players, especially the large established players. The larger players are more competitive in getting resources including land procurement and fund raising. We estimate the top 30 developers has contributed about 45% of the land transactions in the market in 2017 (exhibit 22).

The tight credit environment has created a favourable backdrop for developers with strong financials and funding access, to expand market share and benefit from lower land cost. Looking ahead, we expect market consolidation to accelerate in the next few years and the top 10 developers’ market shares in contracted sales may expand to 40-45% by 2020, from 24% in 2017 (exhibit 23).

30 October 2018 Page | 8 RE02020100001

Property China

Exhibit 22: Top players contribution to the land acquisition Exhibit 23: Top players market share (by contracted sales)

50% 60%

45% 50% 40%

35% 40% 30%

25% 30% 20%

15% 20%

10% 10% 5%

0% 0% 2010 2011 2012 2013 2014 2015 2016 2017 2018F 2010 2011 2012 2013 2014 2015 2016 2017 2018F Top 10 Top 30 Top 10 Top 30

Source: Wind, Pengyuan International Source: Wind, Pengyuan International

Profitability has improved and is expected to continue improving, operating cash outflow expanded but is expected to narrow in 2019

We analyzed 50 Chinese property developers’ financials, majority of which are offshore issuers. The total contracted sales from our sample account for 45% of the nationwide property contracted sales in 2017.

We expect the trend of improving profitability and revenue to continue in 2019, with many property issuers locking up ~50% of 2019‘s revenue in the first half of 2018.Thanks to the solid property sales over the last two years, Chinese property developers have seen significant revenue growth with improved margins. In 2017, the 50 property developers we analyzed have reported a revenue growth of 8.4%, 24.0%, 19.4%, and EBITDA growth of 4.4%, 20.2%, 46.2% respectively, from the year 2015 to year 2017. Meanwhile, the industry profitability has also improved with EBITDA margin increased to 21.9% in 2017 from 17.6% in 2016, and return on invested capital (ROIC) improved to 9.4% in 2017 from 7.8% in 2016 (exhibit 24).

Exhibit 24: ROIC and EBITDA Margin Exhibit 25: Operating Cash Flow and M&A adj. Operating Cash Flow RMB bn 25% 11% 0

10% -100 20% -200 9% -300 15% -400 8% -500 10% -600 7% -700 5% -800 6% -900

0% 5% -1,000 2013 2014 2015 2016 2017 2013 2014 2015 2016 2017

EBITDA margin (LHS) ROIC (RHS) OCF OCF (M&A adjusted)

Source: Pengyuan International Source: Pengyuan International

Despite a growth in revenue and EBITDA, operating cash outflow expanded in 2017 with higher working capital outflow caused by more land acquisitions. M&A activities have increased in the recent years which have not been reflected by the cash flows from operations. Total operating cash outflow after M&A adjustments for our sampled fifty issuers was RMB918 billion in 2017, substantially down from RMB316 billion in 2016 (exhibit 25). We expect both the operating cash outflow and M&A expenditures to be narrowed in 2019 on the back of improved working capital efficiency and lower land acquisition activities.

30 October 2018 Page | 9 RE02020100001

Property China

Leverage has gone up and liquidity condition to remain tight

With a better profitability, EBITDA interest coverage improved to 2.86x in 2017 from 2.65x in 2015, and we expect it to further improve to 2.90x in 2018. On the other hand, the leverage ratios, such as net debt to adjusted inventory and gross debt to total capital, have increased slightly in 2017 and are estimated to further increase in 2018, and then start to decline slightly in 2019 as a result of slower land acquisitions (exhibit 26).

Exhibit 26: Leverage has Increased Exhibit 27: Average Borrowing Costs x Contracted Sales / Gross Debt (LHS) 9% Adjusted Interest Expense / Total Debt EBTIDA Coverage (LHS) 4 Net Debt / Adj. Inventory (RHS) 70% Gross Debt / Total Capitalization (RHS) 8% 60%

3 7% 50%

40% 6% 2 30% 5%

20% 1 4%

10% 3% 2013 2014 2015 2016 2017 0 0% 2013 2014 2015 2016 2017 Source: Pengyuan International Source: Pengyuan International

Driven by a higher leverage and tight fund raising and loan issuance, property developers’ average borrowing costs have increased year-to-date, reversing a declining trend from 2015-2017. In our view, a slightly higher financing cost on new loans would not significantly raise the overall blended cost, which we expect to increase slightly to ~6.5% in 2018 and ~7% in 2019, but still remain below 2015 level (exhibit 27).

Liquidity measured by cashflow adequacy ratio has declined in 2017, driven by higher short-term debt and active M&A (exhibit 28), and then improved slightly in the first half of 2018 with some short-term debts being managed to roll over. Total short- term debt as a percentage of all the interest-bearing debt increased to 31% in 2017 from 26% in 2016, but has declined slightly to 30% in the first half of 2018.

Exhibit 28: Weakening Liquidity (Cash Flow Adequacy Ratio) Exhibit 29: Onshore Bond Maturity Profile

x 100%

3.5 90% 80% 3.0 70% 2.5 60% 2.0 50% 40% 1.5 30% 1.0 20% 0.5 10%

0.0 0%

2013 2014 2015 2016 2017

2014 2015 2016 2017

1H14 1H15 1H16 1H17 Cash Flow Adequacy Ratio < 1 Year 1-3 Years 3-5 Years > 5 Years YTD2018

Source: Pengyuan International Source: Wind, Pengyuan International

We project that the liquidity for the sector to remain tight with high refinancing requirements from bonds and syndicate loans. Bond maturity profile for the whole sector has been shortened. Tenors of under one year has increased to 16% in 2018 from 4% in 2016 in the onshore bond market (exhibit 29). Such changes are more obvious within the property sector compared to the other sectors, suggesting the sector's difficulty rolling over their debt for a longer duration with investors avoiding the

30 October 2018 Page | 10 RE02020100001

Property China

exposure to longer term risk. Despite that the peak of maturities for 2018 has passed, bond refinancing pressure remains high at the moment, in our opinion. Financials of the Sampled Property Issuers

Exhibit 30: Profitability – Three-year average of 2015 to 2017 EBITDA Margin(LHS) ROIC(RHS) 30% 20%

16% 20% 12%

8% 10% 4%

0% 0%

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

Vanke Tahoe

Redco CMSK

Yango

Jingrui

Guorui

COGO

Yuexiu

Wanda

Jinmao

Shimao

Longfor Aoyuan Yuzhou

Yanlord Jiayuan

Xinyuan Risesun

CRLand

Gemdale

Roadking Ronshine

Fantansia

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

CentralChina

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden SinoOceanland XinhuZhongbao Source: Pengyuan International

Exhibit 31: Leverage (Contracted Sales/ Gross Debt and Net Debt/ Adjusted Inventory) – Three-year average of 2015 to 2017 x Contracted Sales / Gross Debt(LHS) Net Debt / Adj. Inventory(RHS) 2.0 100% 1.8 1.6 80% 1.4 1.2 60% 1.0 0.8 40% 0.6 0.4 20% 0.2

0.0 0%

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

Vanke Sunac Tahoe

Redco CMSK

Yango

Jingrui

Guorui

COGO

Yuexiu

Wanda

Jinmao

Shimao

Longfor Aoyuan Yuzhou

Yanlord Jiayuan

Xinyuan Risesun

CRLand

Roadking Ronshine

Fantansia

*Gemdale

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

CentralChina

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden SinoOceanland XinhuZhongbao Source: Pengyuan International *Gemdale is excluded for Net Debt / Adj. Inventory analysis due to negative Adj. inventory; Wanda’s contracted sales is not available.

Exhibit 32: Leverage (Gross Debt/ Total Capitalization and EBITDA Coverage) – Three-year average of 2015 to 2017 Gross Debt / Total Capitalization(LHS) EBITDA Coverage(RHS) x 80% 7 6 60% 5 4 40% 3 20% 2 1

0% 0

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

Vanke Sunac Tahoe

Redco CMSK

Yango

Jingrui

Guorui

COGO

Yuexiu

Wanda

Jinmao

Longfor Aoyuan Shimao Yuzhou

Yanlord Jiayuan

Xinyuan Risesun

CRLand

Gemdale

Roadking Ronshine

Fantansia

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

CentralChina

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden SinoOceanland XinhuZhongbao Source: Pengyuan International

30 October 2018 Page | 11 RE02020100001

Property China

Exhibit 33: Cash Flow Adequacy Ratio – Three-year average of 2015 to 2017

x *12.83 *8.55 8 Cash Flow Adequacy Ratio 6 4 2 0

-2

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

Vanke Sunac Tahoe

Redco CMSK

Yango

Jingrui

Guorui

COGO

Yuexiu

Wanda

Jinmao

Shimao

Longfor Aoyuan Yuzhou

Yanlord Jiayuan

Risesun

Xinyuan

CRLand

Gemdale

Roadking Ronshine

Fantansia

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

CentralChina

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden

SinoOceanland XinhuZhongbao

Source: Pengyuan International

Exhibit 34: Debt Structure – Three-year average of 2015 to 2017

60% Short-term Debt / Total Debt 50% 40% 30% 20% 10%

0%

CIFI

Poly

R&F

Agile

COLI Jinke

KWG

Kaisa

CFLD

Logan

Vanke Sunac Tahoe

Redco CMSK

Yango

Jingrui

Guorui

COGO

Yuexiu

Wanda

Jinmao

Longfor Aoyuan Shimao Yuzhou

Yanlord Jiayuan

Xinyuan Risesun

CRLand

Gemdale

Roadking Ronshine

Fantansia

Greenland

Powerlong

Greentown

China SCE

Evergrande

FutureLand

ModernLand

CentralChina

Sunshine 100

GoldenWheel

BeijingCapital

TimesProperty

Country Garden SinoOceanland XinhuZhongbao Source: Pengyuan International

30 October 2018 Page | 12 RE02020100001

Property China

Glossary

Net Debt to Adjusted Inventory: Net debt to Adjusted Inventory measures the company’s debt against its property related assets, which are mostly land bank. Property inventory, which consists of unsold property or land, can be used as collateral to borrow and is also a reflection of the homebuilders and property developers’ future cash flow generation capability.

Adjusted Inventory: Adjusted inventory is all the land related resources that for future development minus liabilities associated. It is the historical value of the company’s land bank after netting prepayments collected from the clients. Adjusted inventory includes: 1) Project under construction. 2) Investment property at the historical value, 3) Completed properties held for sale 4) Equity value of property related joint ventures and associates. 5) Prepayments from the clients are deducted from the land inventory to come at the final adjusted inventory.

We do not include land use right in our adjustments but may give credit to it, depending on the company’s definition and accounting rule. We might include other property or land related assets that fit our definition of inventory, depending on the company’s definition.

Contracted Sales: Contracted sales is the total contracted value of properties sold in the certain period. Since contracted sales are not audited, we might adjust the contracted sales that provided by the company based on our judgement on the data quality. Attributable contracted sales are contracted sales that attributable to shareholders, which proportionable consolidates the contracted sales from the joint ventures.

Cash Flow adequacy ratio: Cash flow adequacy ratio is designed to measure the company’s refinancing risk of its short- term debts and how the short-term cash inflows to cover its mandatory short-term cash outflows, and it is defined as the sum of available cash and inflows including liquid assets on hand, funds from operations (FFO) and working capital inflows (outflows), etc., divided by the sum of company’s short-term cash outflows including short-term debt payment, cash interest and mandatory capital expenditure, etc.

List of Sampled Companies: Ticker Company Company Name (Full Name) 2007 HK Country Garden Country Garden Holdings Co Ltd 000002 CH Vanke China Vanke Co., Ltd 1966 HK China SCE China SCE Group Holdings Limited 3883 HK Aoyuan China Aoyuan Property Group Limited 1813 HK KWG KWG Property Holdings Limited 1238 HK Powerlong Powerlong Real Estate Holding Ltd 1232 HK Golden Wheel Golden Wheel Tiandi Holdings Company Limited 1107 HK Modern Land Modern Land (China) Co Ltd 1918 HK Sunac Sunac China Holdings Limited 600208 CH Xinhu Zhongbao Xinhu Zhongbao Co Ltd 000732 CH Tahoe Tahoe Group Co Ltd 3383 HK Agile Agile Group Holdings Ltd 1233 HK Times Property Times Property Holdings Limited 2608 HK Sunshine 100 Sunshine 100 China Holdings Ltd 0832 HK Central China Central China Real Estate Limited 2868 HK Capital Beijing Capital Land Ltd 3380 HK Logan Logan Property Holdings Company Limited 2777 HK R&F R&F Properties Co., Ltd 1109 HK CR Land Limited 3377 HK Sino Oceanland Sino-Ocean Group Holding Limited 2329 HK Guorui Guorui Properties Limited Z25 SGX Yanlord Yanlord Land Group Limited 1777 HK Fantansia Group Company Limited 1862 HK Jingrui Jingrui Holdings Ltd 3301 HK Ronshine Ronshine China Holdings Ltd 000671 CH Yango Yango Group Co Ltd 600606 CH Greenland Greenland Holdings Co., Ltd 1030 HK Future Land Future Land Development Holdings Ltd 0813 HK Shimao Holdings Ltd 0884 HK CIFI CIFI Holdings Group Co Ltd

30 October 2018 Page | 13 RE02020100001

Property China

3900 HK Greentown Holdings Ltd 1622 HK Redco Redco Properties Group Ltd 3333 HK Evergrande China 1628 HK Yuzhou Yuzhou Properties Company Limited 0688 HK COLI China Overseas Land & Investment Ltd 0081 HK COGO China Overseas Grand Oceans Group Ltd 0817 HK Jinmao Holdings Group Limited 0960 HK Longfor Longfor Properties Co Ltd 0123 HK Yuexiu Company Limited XIN US Xinyuan Co., Ltd 600048 CH Poly Group Co., Ltd 600340 CH CFLD China Fortune Land Development Co., Ltd 600383 CH Gemdale Gemdale Group 000656 CH Jinke Jinke Property Group Co., Ltd 1098 HK Roadking Road King Infrastructure Limited 2768 HK Jiayuan Jiayuan International Group Ltd 1638 HK Kaisa Kaisa Group Holdings Ltd 002146 CH Risesun RiseSun Real Estate Development Co Ltd 3699 HK Wanda Dalian Wanda Commercial Management Group Co., Ltd 001979 CH CMSK China Merchants Shekou Industrial Zone Holdings Co.,Ltd

30 October 2018 Page | 14 RE02020100001

Property China

DISCLAIMER

Pengyuan Credit Rating (Hong Kong) Company Ltd (“Pengyuan International”, “Pengyuan”, “the Company”, “we”, “us”, “our”) publishes credit ratings and reports based on the established methodologies and in compliance with the rating process. For more information on policies, procedures, and methodologies, please refer to the Company’s website www.pyrating.com. The Company reserves the right to amend, change, remove, publish any information on its website without prior notice and at its sole discretion.

All credit ratings and reports are subject to disclaimers and certain limitations. CREDIT RATINGS ARE NOT FINANCIAL OR INVESTMENT ADVICE AND MUST NOT BE CONSIDERED AS A RECOMMENDATION TO BUY, SELL OR HOLD ANY SECURITIES AND DO NOT ADDRESS/REFLECT MARKET VALUE OF ANY SECURITIES. USERS OF CREDIT RATINGS ARE EXPECTED TO BE TRAINED FOR INDEPENDENT ASSESSMENT OF INVESTMENT AND BUSINESS DECISIONS.

CREDIT RATINGS ADDRESS ONLY CREDIT RISK. THE COMPANY DEFINES THE CREDIT RISK AS THE RISK THAT THE RATED ENTITY MAY NOT MEET ITS CONTRACTUAL AND/OR FINANCIAL OBLIGATIONS AS THEY BECOME DUE. CREDIT RATINGS MUST NOT BE CONSIDERED AS FACTS OF A SPECIFIC DEFAULT PROBABILITY OR AS A PREDICTIVE MEASURE OF A DEFAULT PROBABILITY. Credit ratings constitute the Company’s forward-looking opinion of the credit rating committee and include predictions about future events which by definition cannot be validated as facts.

For the purpose of rating process the Company obtains sufficient quality factual information from sources believed by the Company to be reliable and accurate. The Company does not perform an audit and undertakes no duty of due diligence or third-party verification of any information it uses during the rating process. The issuer and its advisors are ultimately responsible for the accuracy of the information provided for the rating process.

Users of the Company’s credit ratings should refer to the rating symbols and definitions published on the Company’s website. Credit ratings with the same rating symbol may not fully reflect all small differences in the degrees of risk, because credit ratings are relative measures of the credit risk.

NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS OR COMPLETENESS OF ANY INFORMATION GIVEN OR MADE BY THE COMPANY IN ANY FORM OR MANNER. In no event shall the Company, its directors, shareholders, employees, representatives be liable to any party for any damages, expenses, fees, or losses in connection with any use of the information published by the Company.

The Company reserves the right to take any rating action for any reasons the Company deems sufficient at any time and in its sole discretion. The publication and maintenance of credit ratings are subject to availability of sufficient information.

The Company may receive compensation for its credit ratings, normally from issuers, underwriters or obligors. The information about the Company’s fee schedule can be provided upon the request.

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

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

Copyright © 2018 by Pengyuan Credit Rating (Hong Kong) Company Ltd. All rights reserved.

30 October 2018 Page | 15 RE02020100001