Deutsche Bank Markets Research
Rating Company Date 20 May 2015 Buy Joy City Property Initiation of Coverage Asia Hong Kong Reuters Bloomberg Exchange Ticker Price at 19 May 2015 (HKD) 2.08 Property 0207.HK 0207 HK HKG 0207 Price target - 12mth (HKD) 4.50 Property 52-week range (HKD) 2.09 - 1.33
HANG SENG INDEX 27,591
Strong recurrent income, upsides Tony Tsang Jason Ching, CFA from SOE reform; initiating with Buy Research Analyst Research Analyst (+852) 2203 6256 (+852) 2203 6205 A fast-growing state-owned landlord; TP HK$4.50; implied upside 116% [email protected] [email protected] Joy City is a 66.8%-owned property flagship of COFCO. Our positive call on Joy City is based on its quality recurrent income base, strong state-owned background (well below-peer interest cost), strong balance sheet, strong Price/price relative organic growth (we expect core net profit growth of 39-66% p.a. in 2015-17 on 5.0 strong revenue growth with improving margins), and strong additional NAV 4.0 and earnings upsides from expected further asset injections from COFCO. 3.0
High-quality IP portfolio providing solid recurrent income with solid growth 2.0 In contrast to most listed Chinese developers (which focus on property sales), 1.0 Joy City focuses primarily on prime-location investment properties that 5/13 11/13 5/14 11/14 generate recurrent income, which in our view should command higher Joy City Property valuation multiples. We see the following unique characteristics: 1) recurrent HANG SENG INDEX (Rebased) income makes up a high % of Joy City’s total revenue; 2) the IPs of Joy City Performance (%) 1m 3m 12m are all located in Tier-1 and major Tier-2 cities, where consumption power is relatively strong, consumers are more mature and oversupply of new Absolute 33.3 41.5 9.5 properties is less serious; and 3) it has a clear IP focus and positioning – Joy HANG SENG INDEX -0.2 11.1 21.5
City Shopping Malls makes up the bulk of Joy City’s IP portfolio (ex hotels). Source: Deutsche Bank
SOE reform: strong upsides from potential further asset injections from COFCO Given the central government's advocacy of more SOE reforms and the big scale and diverse businesses of COFCO, we see significant NAV and earnings- accretive restructuring potential within COFCO, which should benefit Joy City via further asset injections. According to COFCO, in the next five years Joy City will maintain its strategy of focusing on Tier-1 cities and expanding into Yangtze River Delta, Bohai Rim and other key areas; it will continue to develop Joy Cities in Chengdu, Tianjin Liuwei Road, Beijing Andingmen, Shenzhen and other cities, with a total of 30 Joy City urban complexes. In our view, this implies more asset injections and we expect Tianjin Luiwei Road and Shenzhen Joy City to be the next candidates. Also, we see good potential for Joy City to realize its NAV and recycle capital by spinning off its hotel portfolio. Attractive valuations at 68% NAV discount and 0.9x P/B Our TP of HK$4.50 is based on a 30% discount to our est. NAV of HK$6.43. Our target discount is higher than that for other big state-owned developers like COLI, CR Land and Poly (given the relatively new listing status of Joy City when compared to these big SOE names), but at a premium to other privately owned peers, which we believe is appropriate given Joy City’s state-owned background and stronger financial position and financing capabilities. We adopt NAV as our primary valuation metric, in line with peers under coverage. Key risks: competition in retail market, unexpected policy/economic volatilities. Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 6,809.1 5,712.8 5,883.0 8,693.7 9,488.5 DB EPS FD (CNY) 0.19 0.08 0.10 0.13 0.20 PER (x) 13.8 18.1 16.2 13.1 8.4 Yield (net) (%) 0.0 0.7 0.6 0.9 1.5 Source: Deutsche Bank estimates, company data
______Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015.
20 May 2015
Property Joy City Property
Model updated:19 May 2015 Fiscal year end 31-Dec 2013 2014 2015E 2016E 2017E
Running the numbers Financial Summary Asia DB EPS (CNY) 0.19 0.08 0.10 0.13 0.20 Reported EPS (CNY) 0.51 0.17 0.11 0.13 0.20 Hong Kong DPS (CNY) 0.00 0.01 0.01 0.02 0.03 BVPS (CNY) 4.4 2.1 1.8 1.9 2.1 Property Weighted average shares (m) 6,083 9,947 12,650 14,231 14,231 Joy City Property Average market cap (CNYm) 15,591 14,256 15,793 15,793 15,793 Enterprise value (CNYm) 24,011 34,498 32,625 26,410 20,396 Reuters: 0207.HK Bloomberg: 0207 HK Valuation Metrics P/E (DB) (x) 13.8 18.1 16.2 13.1 8.4 Buy P/E (Reported) (x) 5.0 8.3 15.6 12.8 8.3 Price (19 May 15) HKD 2.08 P/BV (x) 0.35 0.57 0.91 0.86 0.79
Target Price HKD 4.50 FCF Yield (%) nm nm nm 25.5 20.6 Dividend Yield (%) 0.0 0.7 0.6 0.9 1.5 52 Week range HKD 1.33 - 2.09 EV/Sales (x) 3.5 6.0 5.5 3.0 2.1 Market Cap (m) HKDm 19,734 EV/EBITDA (x) 8.7 14.8 12.5 6.8 4.8 EV/EBIT (x) 9.5 17.1 14.4 7.5 5.3 USDm 2,546 Income Statement (CNYm) Company Profile Sales revenue 6,809 5,713 5,883 8,694 9,488 COFCO Land Holdings Ltd, is engaged in the development, Gross profit 3,465 3,032 3,274 4,534 4,839 operation, sale, leasing and management of mixed-use EBITDA 2,772 2,332 2,605 3,899 4,241 complexes and commercial properties such as shopping Depreciation 256 310 341 375 412 malls, hotels, offices, serviced apartments and resort and Amortisation 0 0 0 0 0 tourist properties. EBIT 2,517 2,022 2,264 3,525 3,829 Net interest income(expense) -835 -854 -789 -507 -434 Associates/affiliates 4 -10 860 369 1,434 Exceptionals/extraordinaries 3,914 2,027 0 0 0 Other pre-tax income/(expense) 0 0 0 0 0 Profit before tax 5,599 3,186 2,335 3,386 4,830 Price Performance Income tax expense 2,055 1,239 941 1,488 1,912 Minorities 425 229 45 47 52 5.0 Other post-tax income/(expense) 0 0 0 0 0 Net profit 3,118 1,719 1,349 1,851 2,866 4.0
DB adjustments (including dilution) -1,986 -931 -45 -45 -45 3.0 DB Net profit 1,131 788 1,304 1,806 2,820 2.0 Cash Flow (CNYm) 1.0 Cash flow from operations 1,141 -895 298 6,252 5,156 May 13Aug 13Nov 13Feb 14May 14Aug 14Nov 14Feb 15 Net Capex -1,954 -2,268 -2,678 -205 -273 Joy City Property Free cash flow -812 -3,163 -2,380 6,047 4,883 HANG SENG INDEX (Rebased) Equity raised/(bought back) 3,016 0 5,090 0 0 Margin Trends Dividends paid -206 -168 -142 -213 -356 Net inc/(dec) in borrowings 420 6,419 -900 -1,100 -600 46 Other investing/financing cash flows 2,851 -6,041 27 60 105 44 Net cash flow 5,268 -2,953 1,695 4,794 4,032 42 Change in working capital -867 -1,986 -822 3,493 2,742 40 38 Balance Sheet (CNYm) 36 Cash and other liquid assets 9,042 6,456 8,151 12,944 16,976 34 Tangible fixed assets 42,509 46,662 49,000 48,830 48,692 13 14 15E 16E 17E Goodwill/intangible assets 961 1,057 1,057 1,057 1,057 EBITDA Margin EBIT Margin Associates/investments 157 137 997 1,366 2,800
Other assets 9,103 10,769 10,716 8,914 6,240 Growth & Profitability Total assets 61,772 65,081 69,920 73,111 75,765 Interest bearing debt 13,665 23,365 22,465 21,365 20,765 60 14 Other liabilities 18,564 18,530 17,972 20,624 21,361 12 Total liabilities 32,229 41,895 40,437 41,989 42,126 40 10 Shareholders' equity 25,589 19,717 25,968 27,560 30,025 8 20 Minorities 3,954 3,469 3,515 3,562 3,614 6 Total shareholders' equity 29,543 23,186 29,483 31,122 33,639 0 4 2 Net debt 4,622 16,909 14,314 8,420 3,789 -20 0 13 14 15E 16E 17E Key Company Metrics Sales growth (%) nm -16.1 3.0 47.8 9.1 Sales growth (LHS) ROE (RHS) DB EPS growth (%) na -57.4 30.1 23.1 56.2
Solvency EBITDA Margin (%) 40.7 40.8 44.3 44.9 44.7 EBIT Margin (%) 37.0 35.4 38.5 40.5 40.4 80 10 Payout ratio (%) 0.0 5.8 9.4 11.5 12.4 ROE (%) 12.2 7.6 5.9 6.9 10.0 8 60 Capex/sales (%) 32.2 42.5 45.5 2.4 2.9 6 Capex/depreciation (x) 8.6 7.8 7.9 0.5 0.7 40 4 Net debt/equity (%) 15.6 72.9 48.6 27.1 11.3 20 2 Net interest cover (x) 3.0 2.4 2.9 6.9 8.8
0 0 Source: Company data, Deutsche Bank estimates
13 14 15E 16E 17E
Net debt/equity (LHS) Net interest cover (RHS)
Tony Tsang +852 2203 6256 [email protected]
Page 2 Deutsche Bank AG/Hong Kong
20 May 2015
Property Joy City Property
Investment thesis
Outlook
We initiate coverage of Joy City Property (Joy City) with a Buy rating and a target price of HK$4.50. Our positive call on Joy City is based on its strong state-owned background, solid financial position, and expected solid core net profit growth of 39-66% p.a. (core EPS growth of 23-56% p.a.) in 2015-17 – driven by solid growth in gross rental income, hotel income and development earnings with stable gross margins and improving net margins (on the back of falling financing costs given the backing of COFCO Group). Despite these advantages, Joy City now trades at a 68% NAV discount and 0.9x 2015E P/B, hence we see current valuations as attractive. We expect Joy City to also benefit from the extensive SOE reform advocated by the central government and the positive impacts of the restructuring at the parent COFCO Group.
Valuation
We base our target price of HK$4.50 on a 30% discount to our estimated NAV of HK$6.43/share. We calculate our estimated NAV for Joy City Property (Joy City) by using a sum-of-the-parts methodology. Our target discount is higher than that for other big state-owned developers like COLI, CR Land and Poly, given their bigger operating scale, but at a premium to other privately owned peers, which we believe is appropriate given Joy City’s state-owned background and stronger financial position and financing capabilities. We adopt NAV as our primary valuation metric, in line with peers under coverage.
Risks
The key risks to our target price being achieved include:
1) Government tightening measures – during times when the government tightens its fiscal and monetary policies, especially via administrative measures, there could be extreme fluctuations in residential transaction volumes, housing prices, land prices and financing available to developers and homebuyers. This could result in marked declines in sales volume and property prices, which could adversely affect developers’ cash flows.
2) Unexpected fluctuations in the Chinese economy – consistent softening in the Chinese economy would likely ultimately result in weaker housing demand, hence affecting developers’ sales performance. On the other hand, any overly strong growth in the Chinese economy could raise concerns about overheating and might lead to the introduction of further tightening measures.
3) Competition from other commercial properties in mainland China – While COFCO Group and Joy City have a strong track record of operating commercial properties in mainland China and their commercial properties are of high quality and in prime locations, there still exist competitive threats from other existing commercial property players in the Chinese property market, and from potential new entrants into the market in the future.
Deutsche Bank AG/Hong Kong Page 3
20 May 2015
Property Joy City Property
Table Of Contents
Strong recurrent income; upsides from SOE reform ...... 5 Initiating with Buy, target price HK$4.50 ...... 5 High-quality IP portfolio providing solid recurrent income with growth ...... 6 A key beneficiary of SOE reform – restructuring at COFCO group should allow for faster growth for Joy City ...... 11 Strong financial positions with lower-than-industry-average borrowing cost .. 14 Brighter retail property market outlook in China ...... 16 Joy City should benefit from brighter retail market outlook in China ...... 16 Company profile ...... 19 A state-owned landlord of prime commercial properties and hotels ...... 19 Competitive strengths of Joy City ...... 20 Prime-location, high-quality property portfolio ...... 23 Joy City has a portfolio of prime-location, high quality commercial, residential and hotels in China ...... 23 Financial analysis ...... 26 We expect strong earnings growth for 2015-17 ...... 26 Valuation ...... 29 Our estimated NAV for Joy City is HK$6.43/share ...... 29 Investment risks ...... 32 Macro risks ...... 32 Company-specific risks ...... 32
Page 4 Deutsche Bank AG/Hong Kong
20 May 2015
Property Joy City Property
Strong recurrent income; upsides from SOE reform
Initiating with Buy, target price HK$4.50
Joy City Property (Joy City) is 66.83% owned by COFCO Corporation (COFCO), one of the largest state-owned conglomerates in China, specializing in agricultural products, the food industry, real estate and hotel, and other businesses like e-commerce, packaging and garments. Currently, Joy City is the HK-listed commercial properties flagship of COFCO.
We initiate coverage of Joy City with a Buy rating and a target price of HK$4.50. Our positive call on Joy City is based on the following:
1) Its strong state-owned background and solid financial position with low financing costs.
2) Expected solid core net profit growth of 39-66% p.a. (core EPS growth of 23-56% p.a.) in 2015-17 – driven by solid growth in gross rental income, hotel income and development earnings with stable gross margins and improving net margins (on the back of falling financing costs given the backing of COFCO Group).
3) We expect Joy City to also benefit from the extensive SOE reform advocated by the central government and the positive impacts of the restructuring at the parent COFCO Group.
Despite these advantages, Joy City now trades at a 68% NAV discount and 0.9x P/B, hence we see current valuations as attractive. Looking ahead, we see the following positive catalysts for the stock:
1) Near term: further asset injection from the parent, COFCO Group, which should help enhance Joy City’s NAV, expand its recurrent income base, and support stronger earnings growth.
2) Near term: a recovery in the residential market should facilitate stronger property sales for Joy City, contributing additional earnings to its solid and growing recurrent income base.
3) Medium term: Joy City should benefit from the more positive outlook for China retail and prime-location retail properties on the back of a) the latest consumption tax reform announced by the central government, which we believe should lead to a broad-based reduction or removal of luxury goods taxes in China; b) the significant wealth impact of strong A-share and H-share stock markets in the past nine months, which should support stronger domestic consumption; and c) a stronger expected economic environment in 2016/17.
4) Medium term: with the central government advocating more SOE reform, we see good opportunities for Joy City to realize value from its prime-location, all 5-star hotel portfolio in mainland China.
Deutsche Bank AG/Hong Kong Page 5
20 May 2015
Property Joy City Property
Figure 1: Joy City Property – Peer valuation table (as of 18 May 2015) Company Ticker Share Mkt cap NAV P/E P/B price (USD mn) discount FY14 FY15E FY16E FY14 FY15E FY16E Joy City 0207 HK 2.08 3,819 -67.7% 10.0 15.2 12.6 0.8 0.9 0.9
A-Share SOE CSCEC 601668 CH 9.68 46,786 -28.5% 12.9 11.0 8.8 2.1 1.8 1.6 China Vanke - A 000002 CH 14.16 25,508 -25.0% 10.0 9.1 8.0 1.8 1.5 1.4 Poly - A 600048 CH 12.88 22,274 35.4% 11.4 10.5 9.0 2.2 1.9 1.6 China Merchants Prop 000024 CH 31.96 10,649 36.3% 15.7 13.9 11.5 2.7 2.3 2.0 Average A-share 4.5% 12.5 11.1 9.3 2.2 1.9 1.6 H-share SOE COLI 688 HK 29.00 36,888 -24.5% 8.6 9.0 7.7 1.8 1.4 1.2 CR Land 1109 HK 24.9 20,978 -37.0% 12.3 10.4 9.6 1.5 1.3 1.2 Franshion 817 HK 3.07 3,592 -45.2% 9.2 7.9 6.5 0.7 0.7 0.6 Poly HK 119 HK 4.53 2,140 -43.9% 8.6 13.7 11.2 0.5 0.5 0.5 Greenland HK 337 HK 7.68 2,265 NA 154.8 18.9 12.6 1.3 2.4 2.0 Average H-Share SOE -37.6% 38.7 12.0 9.5 1.2 1.3 1.1 Commercial property names CR Land 1109 HK 24.9 20,978 -37.0% 12.3 10.4 9.6 1.5 1.3 1.2 Wanda 3699 HK 68.75 40,151 -26.0% 18.1 12.3 10.4 1.4 1.3 1.2 Lujiazhui 600663 CH 50.29 12,875 NA 58.5 56.3 47.9 8.2 6.6 5.9 Financial Street 000402 CH 12.85 6,182 40.1% 13.2 11.2 10.3 1.6 1.4 1.3 Hui Xian REIT 87001 HK 3.5 3,020 -26.0% 15.9 15.4 14.8 0.7 0.7 0.7 Franshion 0817 HK 3.07 3,592 -45.2% 9.2 7.9 6.5 0.7 0.7 0.6 SOHO China 0410 HK 5.56 3,729 -47.6% 10.5 26.0 24.3 0.6 0.6 0.6 Average Commercial property names -23.6% 19.7 19.9 17.7 2.1 1.8 1.6 Source: Company, Deutsche Bank estimates, Bloomberg Finance LP
High-quality IP portfolio providing solid recurrent income with growth
Currently, in the HK stock market, the majority of China property companies are developers that focus primarily on the development and sale of properties (residential or commercial); there are very few large-scale listed companies that focus more on prime investment properties (IP) that generate recurrent rental income. In contrast to most listed Chinese developers, Joy City focuses mainly on IP in China.
As the listed commercial properties flagship of COFCO, with a high-quality IP portfolio that generates solid, growing recurrent income, Joy City should command a scarcity valuation premium (such as higher P/Es) versus the listed Chinese developers, in our view. In particular, we see the following unique characteristics for Joy City:
1) Recurrent income makes up a high percentage of Joy City’s total revenue. As a reference, in 2013 and 2014 recurrent income from IP made up 45% and 61% of its total revenue, respectively. These are much higher than the percentages of other Chinese developers that focus on commercial properties – 13% and 13% respectively for Wanda, 6% and 6% for CR Land, 16% and 12% for Franshion, and only 2% and 7% for SOHO China.
Page 6 Deutsche Bank AG/Hong Kong
20 May 2015
Property Joy City Property
Figure 2: Joy City – Recurrent income as a % of total revenue, vs. other key commercial properties players
70% 61% 2013 60% 2014 50% 45%
40%
30%
20% 16% 13% 13% 12% 10% 6% 6% 7% 2% 0% Joy City Wanda CR Land Franshion SOHO China
Source: Company, Deutsche Bank
Figure 3: Joy City – Recurrent Income as a % of Total Figure 4: Joy City – Recurrent Income as a % of Total Revenue, 2014 Revenue, 2013 Primary Land Primary Land 2014 Development, 2013 Development, 4% 2%
Recurrent Property Sales, Income, 45% Recurrent 35% Income, 61% Property Sales, 53%
Source: Company, Deutsche Bank Source: Company, Deutsche Bank
2) The IPs of Joy City are located principally in Tier-1 and other major Tier-2 cities where consumption power is relatively stronger, consumers are more mature and oversupply of new properties is less serious. On our analysis, Tier-1 cities currently make up 74% of the IP value of Joy City while Tier-2 cities make up 26% of its IP value. These ratios are meaningfully higher than those for the other key Chinese developers that also focus on the commercial property markets. As a reference, for CR Land, Tier-1 cities make up 12% of our est. IP value, while Tier-2 and Tier-3/4 cities make up 83% and 5% respectively. For Wanda, Tier-1 cities make up 14% of our est. IP value, and Tier-2 and Tier-3/4 cities make up 45% and 41% respectively. For Franshion, Tier- 1 cities make up 71% of our est. IP value, while Tier-2 and Tier-3/4 cities make up 11% and 18% respectively.
Deutsche Bank AG/Hong Kong Page 7
20 May 2015
Property Joy City Property
Figure 5: Joy City – IP Value breakdown by city-tiers
100%
90% 83%
80% 74% 71% 70%
60%
50% 45% 41% 40%
30% 26%
20% 18% 14% 12% 11% 10% 5% 0% 0% Joy City CR Land Wanda Franshion
Tier-1 Cities Tier-2 Cities Tier-3/4 Cities
Source: Company, Deutsche Bank
3) A clear IP focus and positioning – Joy City Shopping Malls making up the bulk of Joy’s City IP portfolio (ex hotels). Currently, the flagship Joy City Shopping Malls (like Beijing Xidan Joy City, Beijing Chaoyang Joy City, Shenyang Joy City, Tianjin Joy City, Hangzhou Joy City, Chengdu Joy City) make up about 69% of the estimated value of the IP portfolio (excluding hotels) of Joy City.
As a reference, the Joy City brand and concept came from Mr. Frank Ning Gao Ning, the current Chairman of COFCO Group. Before joining COFCO Group in 2005, Mr. Ning was at China Resources Holdings, and had been Vice Chairman of China Resources Holdings (CR Holdings), Chairman of China Resources Beijing Land. During his tenure at CR Holdings, Mr. Ning was a key person behind the development of MIXc shopping malls (now a key shopping mall brand of CR Land) for CR Holdings.
As another reference, Joy City Shopping Malls are all located in city- center locations, and all have a differentiated market positioning – targeting middle-class customers aged 18-35 as the main customer base, featured by juvenility, fashion, style and taste – and hence they are different from commonplace shopping malls that solely rely on the high-end market. According to the management, since the end of 2007 when the first Joy City Shopping Mall opened up, annual traffic has been growing steadily, and has reached over 100mn visits by the end of 2014.
Page 8 Deutsche Bank AG/Hong Kong
20 May 2015
Property Joy City Property
Figure 6: Joy City – IP value breakdown by type IP Value divided by Type
Serviced Apartments, 13%
Office, 18%
Joy Cities, 69%
Source: Company, Deutsche Bank
Figure 7: Joy City – High-quality commercial IPs 2014 2013 Project Type Rental Income Effective Monthly Occupancy Retail Sales Rental Income Effective Monthly Occupancy (RMBmn) Average Rent (RMBpsm) Value (RMBmn) (RMBmn) Average Rent (RMBpsm) Xidan Joy City Retail 600 991 95% 3,601 542 864 98% Xidan Joy City Office 45 290 95% - 37 243 94% Chaoyang Joy City Retail 417 313 98% 2,517 341 252 99% Tianiang Joy City Retail 252 260 99% 2,001 198 213 95% Shanghai Joy City Retail 87 263 98% 431 86 261 98% Shenyang Joy City Retail 129 110 86% 880 100 102 67% Yantai Joy City Retail 33 73 96% 242 - - 0% Beijing COFCO Plaza Retail 55 120 83% - 61 124 89% Beijing COFCO Plaza Office 167 260 88% - 139 232 82% Fraser Suites Top S.A. 118 1,914 90% - 114 1,863 91% Glory Top Glory Tower Office 68 373 91% - 68 347 96% Source: Company, Deutsche Bank
High focus on Tier-1 cities among the listed China property companies On our analysis, Joy City is among the top-five developers with the highest landbank exposure in Tier-1 cities by GFA. By eliminating the two regional developers with high Tier-1 city exposures, namely KWG and Yuexiu, Joy City is indeed among the top-two national property developer with the highest landbank exposure in Tier-1 cites.
Deutsche Bank AG/Hong Kong Page 9
20 May 2015
Property Joy City Property
Figure 8: Joy City – Well-diversified landbank with a focus on key and mature Tier-1/2 cities
% of Total GFA Suzhou, 1% Nanchang, 1%
Chengdu, 15% Beijing, 22%
Sanya, 16% Shanghai, 13%
Shenyang, Yantai, 5% Tianjin, 13% Hong Kong, 1% 13%
Source: Company, Deutsche Bank
Figure 9: China Prop – Landbank breakdown by city tier (by GFA) for major property companies Total landbank by city tier (by GFA) Company RIC Attributable Landbank (sqm) Tier-1 Tier-2 Tier-3/4 Others KWG 1813 HK 10,100,000 58% 35% 7% 0% Sino-Ocean 3377 HK 18,337,000 41% 54% 5% 0% Yuexiu 123 HK 14,310,000 38% 42% 20% 1% Joy City 0207.HK 4,609,422 36% 64% 0% 0% R&F 2777 HK 40,800,000 35% 38% 11% 16% Agile 3383 HK 40,350,000 22% 32% 45% 1% Gemdale 600383.SS 17,000,000 22% 67% 11% 0% CIFI 884 HK 7,100,000 21% 70% 9% 0% CMPD 000024 CH 17,225,300 15% 64% 22% 0% Kaisa 1638 HK 23,600,000 14% 26% 60% 0% Sunac^ 1918 HK 12,802,358 13% 61% 27% 0% Franshion 817 HK 23,618,456 12% 86% 2% 0% Poly A 600048 CH 124,580,000 11% 65% 25% 0% China Vanke 200002 CH 39,860,000 10% 72% 18% 0% Shimao 813 HK 36,153,271 9% 73% 18% 0% COLI 688 HK 34,958,050 9% 88% 3% 1% C. Garden 2007 HK 75,680,000 9% 49% 41% 1% CR Land 1109 HK 34,654,939 7% 66% 27% 0% LongFor 960 HK 35,582,286 6% 91% 3% 0% Evergrande 3333 HK 150,753,146 5% 40% 55% 0% Greentown 3900 HK 25,126,000 5% 49% 46% 0% COGO 81 HK 11,907,700 1% 0% 99% 0% CC Land 1224 HK 10,200,000 0% 100% 0% 0% CCRE 832 HK 16,920,000 0% 24% 76% 0% Source: Company, Deutsche Bank Note: ^Assuming that Sunac can successfully acquire Kaisa
Page 10 Deutsche Bank AG/Hong Kong
20 May 2015
Property Joy City Property
Higher-than-average margins – Joy City has been achieving a good balance between asset turnover and profitability Consistent with its unique market positioning, timely land purchases and focus on Tier-1 and key Tier-2 cities, Joy City has achieved gross margins of 54% in 2013 and 59% in 2014 – better than the industry average, reflecting its strong execution ability. While Joy City has a strong track record on investment properties, it has also achieved higher-than-industry-average gross margins of 50% in 2013 and 54% in 2014. Together with its lower-than-average borrowing costs, this should allow Joy City to achieve higher core net profit margin relative to other China property companies.
Figure 10: Joy City – Higher-than-industry gross margins
90% 79% 80% 76%
70% 59% 60% 54% 54% 50% 50% 41% 41% 40%
30%
20%
10%
0% Investment Properties Development Properties Hotel Operations Overall
2013 2014
Source: Company, Deutsche Bank
A key beneficiary of SOE reform – restructuring at COFCO group should allow for faster growth for Joy City
Given the government's advocacy of more SOE reforms (like grouping different businesses and assets under a state-owned conglomerate into different yet clearly delineated listed vehicles) and the current big scale and diverse business activities of the COFCO, we still see significant NAV and earnings- accretive restructuring potential within COFCO, which also means potential NAV and earnings enhancements for Joy City.
Deutsche Bank AG/Hong Kong Page 11
20 May 2015
Property Joy City Property
Figure 11: COFCO Corp (Ultimate parent of Joy City) – Organization Structure
COFCO Corp
COFCO Agri- COFCO COFCO Trading COFCO Anhui Trading & Engineering Logistics Technology
COFCO Meat COFCO Hainan China Tuhsu China Foods (0506.HK)
JOYCITY PPT Fin. Services womai.com China Agri (0207.HK) Dept (0606.HK)
Huafu Group Nidrea COFCO JiLin Mengniu Dairy (2319.HK)
COFCO Tunhe COFCO Packing COFCO Noble Agri (600737.SS) Hldgs (0906.HK) Biochemical (000930.SZ)
Source: Company, Deutsche Bank
In our view, the potential restructuring activities inside COFCO could benefit Joy City in the form of:
1) Further asset injections from COFCO into Joy City. According to the management of Joy City, a key strategy of the company is to develop Joy City at a steady pace, with 1-2 new Joy City Shopping Malls expected each year, and more new openings in the coming years. In addition, according to the parent, COFCO, in the next five years, Joy City will still follow its strategy of focusing on China’s first-tier cities and expanding to the Yangtze River Economic Zone, Bohai Economic Zone and other economic zones to continue developing Chengdu Joy City, Yantai Joy City, Tianjin Liuwei Road Joy City, Beijing Andingmen Joy City, Shenzhen Joy City and other projects totaling 30 Joy City urban complex projects.
As a reference, on our analysis, there are still a number of commercial and property projects currently sitting in COFCO that could be injected into Joy City, which, if realized, would help grow Joy City’s recurrent income base and enhance its NAV. Examples would include the Tianjin Luiwei Road Joy City and Shenzhen Joy City, which, based on their construction status now, would very likely be the candidates for next round of asset injection from COFCO into Joy City.
Page 12 Deutsche Bank AG/Hong Kong
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Property Joy City Property
Figure 12: COFCO Corp – Examples of property projects that are now still in COFCO Corp Project name City Site area Planned GFA Commercial GFA Remarks Commercial Projects Tianjin Liuwei Road Tianjin 129,000 1,050,000 110,000 A-1 office buildings, five-star hotels, hotel-style Joy City apartments, urban mansions and high-end clubs. Shenzhen Joy City Shenzhen 138,000 1,290,000 220,000 Shopping mall, residential, serviced apartments, offices, five-star hotel 267,000 2,340,000 330,000 Residential Projects 御岭湾 Chengdu NA Over 800 units of villas NA Villas 颐和南园 Nanjing NA 355 ksqm NA Villas 翡翠别墅 Shanghai NA NA NA Villas 沈阳隆玺壹号 Shenyang NA NA NA High rise 苏州本岸 Suzhou NA 155 ksqm NA Low rise and villas 天津中粮大道 Tianjin NA 1.05 msqm NA Complex 长沙北纬 28° Changha NA 300 ksqm NA villas 苏州本源 Suzhou NA NA NA Villas 朝北大悦公寓 Beijing NA 699 ksqm NA Serviced apartment 沈阳大悦公寓 Shenyang NA 530 ksqm NA Serviced apartment 天津南开大悦公寓 Tianjin NA 46 ksqm NA Serviced apartment 北京祥云国际 Beijing NA 320 ksqm NA Residential 北京假日风景 Beijing NA NA NA Residential 成都香榭丽都 Chengdu NA 64 ksqm NA Residential 杭州湘湖人家 Hangzhou NA 420 ksqm NA Residential 杭州云涛名苑 Hangzhou NA 120 ksqm NA Residential 南京彩云居 Nanjing NA 103 ksqm NA Residential 深圳中粮鸿云 Shenzhen NA 97 ksqm NA Residential 中粮锦云 Shenzhen NA NA NA Residential 北京长阳半岛 Beijing NA 1.15 msqm NA Residential 广州东银广场 Guangzhou NA 30 ksqm NA Residential 广州金域蓝湾 Guangzhou NA NA NA Residential 深圳中粮澜山 Shenzhen NA NA NA Residential Source: Company, Deutsche Bank
2) Potential spin-off of its prime hotel portfolio. In our view, given the scale, prime location and high quality of its hotels, we see good opportunities for Joy City spin off its hotel assets to unlock value from its hotel portfolio and recycle capital for a faster build-up of its IP portfolio.
Figure 13: Joy City – Hotel portfolio 2014 2013 Hotel Average ARR (RMB) Rev PAR (RMB) Average ARR (RMB) Rev PAR (RMB) occupancy rate occupancy rate St. Regis Sanya Yanlong Bay Resort 69% 2,345 1,625 66% 2,356 1,549 MGM Grand Sanya 71% 1,407 1,118 60% 1,475 989 Cactus Resort Sanya by Gloria 68% 500 333 70% 526 365 Xidan Joy City Hotel 74% 640 473 76% 670 506 Waldorf Astoria Beijing 31% 2,000 622 W Beijing - Chang'an 51% 1,554 797 Source: Deutsche Bank
Deutsche Bank AG/Hong Kong Page 13
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Property Joy City Property
Strong financial positions with lower-than-industry-average borrowing cost
Joy City has consistently maintained a very healthy balance sheet, with net gearing of only 18-56% in 2012-2014. At end-2014, Joy City had a net gearing of 56% - lower than the industry average. In addition, Joy City’s average borrowing cost was only about 6.05% in 2014, also well below the average borrowing cost of the listed Chinese developers. More importantly, this 6.05% represented only an average borrowing cost of Joy City (i.e. an average of the costs of all the outstanding debts, raised at different times in the past), and this does not fully reflect the latest borrowing cost of Joy City, which is now a state-owned property company.
We believe there is still plenty of scope for Joy City’s average funding costs to decline by leveraging on COFCO’s state-owned background. As a reference, in Nov 2014, Joy City issued US$800mn 5-year guaranteed note at a coupon of only 3.625%.
In our view, in the commercial properties market where upfront capital requirement is substantial, the strong financial positions and low borrowing costs of Joy City are one of its key competitive advantages against other players, and should allow Joy City to grow its rental income portfolio at a faster pace than other property companies.
Figure 14: Joy City – Financing cost analysis
1,220 7.00%
1,200 6.80% 1,180 6.60% 1,160 6.40% 1,140 6.34% 6.20% 1,120 6.05% 6.00% 1,100 1,080 5.80% 1,109 1,197 1,060 5.60% 2013 2014
Interest expenses (RMBmn) Average interest rate
Source: Company, Deutsche Bank
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Figure 15: China Property – Average borrowing costs of key listed developers Name Ticker Currency 2010 2011 2012 2013 2014 COLI 0688.HK HKD 3.5% 3.4% 3.7% 3.7% 4.3% COGO 0081.HK HKD 5.7% 5.6% 4.8% 4.2% 4.4% CR Land 1109.HK HKD 3.1% 3.6% 3.8% 3.8% 4.5% Yuexiu 0123.HK RMB 5.2% 5.4% 7.0% 5.6% 5.1% CMPD 000024.SZ RMB 4.5% 4.3% 6.0% 5.2% 5.1% Franshion 0817.HK HKD 5.4% 5.9% 5.9% 5.6% 5.4% Joy City 0207.HK RMB NA NA 6.1% 6.3% 6.1% Longfor 0960.HK RMB 6.3% 6.4% 6.7% 6.6% 6.4% Poly Real Estate 600048.SS RMB 6.3% 8.0% 8.5% 7.0% 6.5% Sino-Ocean 3377.HK RMB 5.8% 6.7% 7.7% 7.3% 7.1% Shimao 0813.HK RMB 6.1% 7.9% 7.7% 7.4% 7.4% Central China 0832.HK RMB 8.3% 9.7% 10.8% 8.9% 7.5% Greentown 3900.HK RMB 9.0% 10.7% 8.9% 8.7% 7.9% Agile 3383.HK RMB 7.9% 8.3% 10.2% 7.9% 7.9% Country Garden 2007.HK RMB 7.8% 10.0% 9.4% 8.5% 8.2% R&F 2777.HK RMB 6.2% 6.5% 8.1% 8.2% 8.2% KWG 1813.HK RMB 6.7% 8.9% 10.8% 8.8% 8.3% Sunac 1918.HK RMB 7.4% 8.5% 10.2% 10.0% 9.1% China Vanke 200002.SZ RMB 7.6% 8.6% 9.5% 9.6% 9.4% Evergrande 3333.HK RMB 9.3% 8.8% 10.1% 9.5% 9.7% Kaisa 1638.HK RMB 7.2% 11.9% 10.2% 8.1% NA Average 6.5% 7.5% 7.9% 7.2% 6.9% Source: Company, Deutsche Bank
Figure 16: Average borrowing cost: Joy City vs. peer
9.0% 9.0%
7.9% 8.0% 8.0% 7.5% 7.4% 7.2% 6.9% 6.9% 7.0% 7.0% 6.5% 6.3% 6.1% 6.1% 6.0% 5.5% 6.0%
5.0% 4.5% 5.0%
4.0% 4.0%
3.0% 3.0% 2010 2011 2012 2013 2014 2015E 2016E
Average of key listed developers Joy City
Source: Company, Deutsche Bank
Deutsche Bank AG/Hong Kong Page 15
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Property Joy City Property
Brighter retail property market outlook in China
Joy City should benefit from brighter retail market outlook in China
Recently, some market participants commented that the government would further relax on the residential market to boost FAI for the country. While we expect more policy easing on the property market, we believe that under the “New Normal” advocated by the central government, solely boosting the residential market to boost GDP growth is now an “old-school” policy tool, and we expect government policy boosts on multiple areas – including domestic consumption. In particular, we are turning more positive on outlook of prime- location, retail properties in China on the back of:
1) Latest consumption tax reform announced by the central government, which in our view, would also lead to a broad-based reduction or removal of luxury good taxes in China. These should help channel higher-end consumption by mainland Chinese back into China (instead of letting them buy luxury items overseas) and increase attractiveness of prime-location malls versus online parallel imports providers;
2) Significant wealth impact of strong A-share and H-share stock markets in the past nine months, which should support stronger domestic consumption. In addition, the strong stock market should also boost demand for Grade-A office spaces in the Tier-1 cities like Shanghai and Shenzhen; and
3) Stronger expected economic environment in 2016/17. In our view, the strong A-share and H-share stock markets should also allow the domestic Chinese enterprises (state-owned and private enterprises) to recapitalize (via activities like share placements or rights issues). After such recapitalization exercises, those enterprises would have more capital for investments, hence boosting FAI (e.g. through new arrangements like PPP) and GDP growth going forward.
With these, while rental growth for 2015 for retail malls is unlikely given that the announced consumption tax reform takes time to implement, we expect more supportive retail market for 2016 and 2017, and growth should return. This should benefit the prime-location commercial properties landlords like Joy City.
Consumption tax reform announced by State Council In the Standing Committee meeting of the State Council last Tuesday (April 28, 2015), Premier Li Keqiang announced plans to improve the current policies related to the import and export of consumer goods in order to provide more options for mainland consumers and to promote domestic consumption. The key highlights of the consumption tax policy reform are:
1) To establish trial locations on reducing import tariffs for foreign consumer products having high domestic demand before the end of June 2015 and to gradually expand the range of consumer products eligible for the reduction of tariffs;
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2) To integrate the tax system reform to enhance the consumption tax policy on consumer staples such as clothing and cosmetics, through adjustments in taxable areas and tax rates;
3) To increase and resume operations of duty-free shops and to reasonably increase duty-free products and purchase quotas on duty-free items, for the convenience of Chinese consumers purchasing imported products domestically;
4) To further push forward the custom clearance and tax refund processes for overseas consumers in order to strictly implement self-declaration on inbound items for taxation;
5) To speed up the enhancement of brand images of domestic products in order to support the development of physical shops to realize online-to-offline interaction; to regulate the discipline of the market and to tackle counterfeit and low-quality products strictly; to allow quality products to eliminate the poor ones.
As reported by the local media (like Hexun, Oriental Daily, JRJ), the consumption tax for clothing and cosmetics products is to be cut in the near term. Looking ahead, we expect the reduction or removal of consumption tax to be expanded to other categories within the next 12 months, which should provide a meaningful boost to the domestic consumption, revive retail sales and rental demand for prime-location retail properties, and support better rental growth.
Deutsche Bank AG/Hong Kong Page 17
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Property Joy City Property
Figure 17: China consumption tax rates on various items (before the latest announced consumption tax reform) Item Tax rate I. Cigarettes 1. Rolled cigarettes i. Grade-A Cigarette 45% plus RMB0.003 per piece ii. Grade-B Cigarette 30% plus RMB0.003 per piece 2. Cigar 25% 3. Cut tobacco 30500% II. Wine and alcohol 1. Grain spirit 205 plus RMB0.5 / 500 gram (or 500 ml) 2. Yellow wine RMB240 / ton 3. Beer i. Grade-A Beer RMB250 / ton ii. Grade-B Beer RMB220 / ton 4. Other wines 10% 5. Alcohol 5% III. Cosmetics 30% IV. Valuable jewelry and gem and jade 1. Gold and silver jewelry 5% 2. Other gems and jade 10% V. Firecrackers and fireworks 15% VI. Gasoline 1. Gasoline i. Leaded fuel RMB0.28 / L ii. Unleaded fuel RMB0.20 / L 2. Diesel RMB0.10 / L 3. Jet fuel RMB0.10 / L 4. Naphtha RMB0.20 / L 5. Solvent gasoline RMB0.20 / L 6. Lubricant RMB0.20 / L 7. Fuel RMB0.10 / L VII. Vehicle tires 3% VIII. Motorcycles 1. The total cylinder capacity does not exceed 250 ml 3% 2. The total cylinder capacity exceed 250 ml 10% IX. Cars 1. Passenger car i. The total cylinder capacity does not exceed 1.0L 1% ii. The total cylinder capacity from 1.0L to 1.5L 3% iii. The total cylinder capacity from 1.5L to 2.0L 5% iv. The total cylinder capacity from 2.0L to 2.5L 9% v. The total cylinder capacity from 2.5L to 3.0L 12% vi. The total cylinder capacity from 3.0L to 4.0L 25% vii. The total cylinder capacity exceed 4.0L 40% 2. Medium sized commercial cars 5% X. Golf and golf equipment 10% XI. Luxury watches 20% XII. Yacht 10% XIII. Disposable wooden chopsticks 5% XIV. Solid wood floor 5% Source: China State Administration of Taxation
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Property Joy City Property
Company profile
A state-owned landlord of prime commercial properties and hotels
Joy City Property is owned and managed by its parent company, COFCO Corporation. As the overseas listed platform of COFCO Corporation, it is primarily engaged in the development, operation, sales, lease and management of mixed-use complexes portfolio under the flagship brand “Joy City (大悅城)". Joy City Property own a total of 18 commercial property projects, including eight mixed-use complex projects, four commercial property projects, four hotel projects, one integrated tourist project. Joy City Property will focus on the development and management of the mixed-use complexes under the flagship brand of “Joy City”.
Besides, there are several hotel brands in the group such as Waldorf Astoria, W Hotel and MGM or under the “Gloria” brand. Going forward, Joy City Property will continue to focus on the development of large scale mixed-use complex projects. Besides, Joy City Property will leverage on the established brands of “COFCO” and “Joy City” to developing new projects in commercial centers within the surrounding regions of the centres of first-tier cities in the PRC where Joy City Property already has an existing property portfolio, and also selectively expanding into prime locations in second-tier cities in the PRC.
According to the management, Joy City will maintain a balanced portfolio of properties for sale, investment and operation. The balanced property portfolio would enable Joy City Property to generate revenues from sales of properties whilst maintaining recurring rental income and hotel revenues and capturing the long-term capital appreciation potential of its properties for investment and operation.
Figure 18: COFCO/Joy City – key development milestones on commercial properties Year Key milestone 1996 Completion of construction of Beijing COFCO Plaza 2001 Completion of construction of Shanghai COFCO Tower 2007 Opening of Beijing Xidan Joy City 2009 Opening of shopping center of Shenyang Joy City 2010 Completion of construction of Beijing Chaoyang Joy City 2011 Completion of construction of Southern part of Ph1 of Shanghai Joy City 2012 Completion of construction of shopping center of Tianjin Joy City, Beginning construction of Yantai Joy City, Completion of Shenyang Joy City 2013 Beginning of construction of Northern part of Phase 1 of Shanghai Joy City 2014 Opening of Yantai Joy City, Beginning of construction of Beijing Andigmen Project 2015 Acquisition of Hangzhou Joy City Project Source: Company, Deutsche Bank
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Property Joy City Property
Competitive strengths of Joy City
According to the company, its competitive strengths include:
The flagship brand of "Joy City" The "Joy City" brand consists of shopping mall being the core component and also with offices and hotels, making them the focal points of their surrounding urban areas.
The holding of properties in prime locations with enormous growth potential Most of the properties in the portfolio of Joy City Property are located in prime locations with high value and investment potential.
A strong brand and reputation The commercial developments of Joy City Property are in prime areas and in large scale and combined with the strong brand and reputation of “Joy City” brand.
Acquisition of premium land Apart from acquiring land parcels through the general procedure of competitive bidding, Joy City Property also participates in primary development of land parcels or redevelopment of mature sites.
Leverage on the relationship with COFCO Corporation Joy City Property is the overseas listed platform of COFCO Corporation focusing on the development, operation, sale, leasing and management of mixed-use complexes and commercial properties.
Balanced portfolio of property development for sale and investment Joy City Property has a balanced portfolio of properties for sale and investment. Investment properties provide steady cash inflows, lower its risk of over reliance on revenue from properties sales and diversify the source of income.
Senior management and operational teams with extensive experience Joy City Property benefits from the wide experience of the senior management in overseeing and managing mixed-use complexes and commercial properties.
Business strategy Joy City Property intends to enhance its position as a mixed-use complex platform in the PRC by implementing the following business strategies:
1) Leverage on "Joy City" mixed-use complexes to create value on a continuous basis;
2) Continue to acquire land in prime locations in first-and-second-tier cities;
3) Continue to implement a disciplined financial strategy and hold a balanced portfolio of properties for sale and investment;
4) Capitalize on strong fund raising capability to support the continuous development of Joy City Property; and
5) Attract, retain and motivate talented personnel through systematic training programmes and competitive remuneration packages.
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Figure 19: Joy City – Management profile Name Title Profile Zhou Zheng Chairman Chairman of the Board, Executive Director and chairman of the Nomination Committee of the Company. He is also a director of certain subsidiaries of the Company. Mr. Zhou is the chairman of COFCO Property (Group) Co.,Ltd. ( "COFCO Property ") (stock code: 000031), a company listed on the Shenzhen Stock Exchange, and a vice president of COFCO Corporation. He was the general manager of COFCO Property from June 2008 to January 2011. Han Shi Executive Director Executive Director of the Company. Mr. Han is also a director of certain subsidiaries of the Company. Mr. Han joined COFCO Corporation in August 1990 and has more than 20 years of management experience in project management, project investment and general management. Since 2007, Mr. Han has been responsible for overseeing the commercial real estate business of the COFCO Corporation and its subsidiaries, and the establishment and development of the "Joy City (大悅城)" brand. Shi Zhuowei Non-Executive Director Non-Executive Director of the Company. Mr. Shi joined COFCO Corporation in July 1993 and was the chairman of Cofco Land Limited from July 2011 to May 2013. He has extensive management experience in project management, project investment, human resources development and general management. Ma Jianping Non-Executive Director Non-Executive Director and the member of the Remuneration Committee. Mr. Ma joined COFCO Corporation in August 1986. He has been a vice president of COFCO Corporation since May 2010 and has been the director of the strategy department of COFCO Corporation since January 2006. Ma Wangjun Non-Executive Director Non-Executive Director of the Company and a member of the Audit Committee. Mr. Ma joined COFCO Corporation in August 1988 and is currently the chief accountant of COFCO Corporation. He is a qualified senior accountant in the PRC and has extensive experience in corporate finance and asset management. Jiang Hua Non-Executive Director Non-Executive Director of the Company. Ms. Jiang joined COFCO Corporation in September 2004 and was a director of COFCO Corporation during the period from September 2004 to December 2012. She is a member of the Chinese Communist Party Committee of COFCO Corporation. Lau Hon Chuen, Independent Non-executive Independent Non-executive Director of the Company, the chairman of each of the Audit Ambrose Director Committee and the Remuneration Committee, and a member of the Nomination Committee. Lam Kin Ming, Independent Non-executive Independent Non-executive Director of the Company and a member of each of the Audit Lawrence Director Committee, Remuneration Committee and Nomination Committee. Mr Lam is the senior vice president of the Enterprise Solutions Commercial Group of HKT Trust and HKT Limited (stock code: 06823), a company listed on the Main Board of The Hong Kong Stock Exchange and a member of the PCCW group. Wu Kwok Cheung Independent Non-executive Independent Non-executive Director of the Company and a member of each of the Audit Director Committee, Remuneration Committee and Nomination Committee. Mr. Wu served as a member of the Governance Committee of United Christian Hospital from April 2004 to March 2013. He has over 30 years of experience in management and administration. Source: Company, Deutsche Bank
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Property Joy City Property
Figure 20: Joy City Property – Organization Structure
COFCO Corp 100%
Joy City Property
Joy Sincere (HK)
Shenyang Sino Melody Gloria
Beijing COFCO Beijing COFCO Shanghai Hongtaijiye
Beijing Kunting Asset
Source: Company, Deutsche Bank
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Prime-location, high-quality property portfolio
Joy City has a portfolio of prime-location, high quality commercial, residential and hotels in China
Figure 21: Joy City – Investment properties Name of project Address City Total Site GFA (sqm) Intended Condition Completion / Rentable Effective Area Uses Expected GFA interest (sqm) completion Xidan Joy City A 131 Xidan N St, Xicheng, Beijing 14,541 185,654 Complex Operating 2008 66,267 100% Beijing Shenyang Joy Xiaodong Rd, Dadong District, Shenyang 50,719 555,146 Complex Operating 2011 121,643 100% City Shenyang, Liaoning Chaoyang Joy 101 Chaoyang N Rd, Beijing 58,958 405,570 Complex Operating 2010 112,538 90% City Chaoyang, Beijing Shanghai Joy 166 Tibet N Rd, Zhabei District, Shanghai 85,975 449,849 Complex Operating 2011 (South tower 94,721 100% City Shanghai of Phase I) 2015 (South tower of Phase II) Tianjin Joy City 2-6 Nanmen Outer St, Nankai Tianjin 77,450 531,369 Complex Operating 2012 83,965 100% District, Tianjin Yantai Joy City 150 Beima Lu, Zhifu District, Yantai 40,762 219,964 Complex Operating 2014 78,267 51% Yantai, Shandong Chengdu Joy Joy Rd, Gaobei Village, Chengdu 66,536 314,560 Complex Under 2015 95,200 100% City Cuqiao, Wuhou District, construction Chengdu, Sichuan Beijing COFCO 8 Jianguomen Inner St, Beijing 22,555 118,632 Office & Operating 1996 107,743 100% Plaza Chaoyang District, Beijing retail Yuechuan Plaza Hedong Rd, Hedong District, Sanya 698 2,445 Office Self use 1993 2,445 51% Sanya, Hainan Hong Kong Top 262 Gloucester Rd, Causeway Hong Kong 1,155 20,003 Office & Operating 1993 15,738 100% Glory Tower bay, Hong Kong SAR retail 11th Floor of 19 Des Voeux Rd C, Hong Hong Kong NA NA Office Operating 1981 1,309 100% Hong Kong Kong SAR World-Wide House Fraser Suites Top 600 Yincheng Middle Rd, Shanghai 24,316 49,212 Apartment Operating 2010 48,465 100% Gory Shanghai Lujiazui Finance and Trade District, Pudong New District Yalong Bay Yalong Bay National Tourism Sanya 396,709 26,197 Commercia Under 2015 NA 51% Mountain Ocean and Resort District, Jiyang l construction Park Town, Sanya, Hainan TOTAL 840,374 2,878,601 828,301 Source: Company, Deutsche Bank
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Figure 22: Joy City – Property development Name of Address City Total Site GFA (sqm) Intended Condition Completion / Operation Effective Sold Unsold project Area Uses Expected Type interest GFA GFA (sqm) (sqm) completion (sqm) Ocean One 600 Yincheng Middle Shanghai 24,316 48,403 Residential Completed 2010 For sale 100% 43,078 5,325 Rd, Lujiazui Finance and Trade District, Pudong New District, Shanghai The Yalong Bay National Sanya 123,926 27,146 Villa-styled Completed 2011 For sale 41% 22,688 4,458 Signature Tourism and Resort apartment District, Jiyang Town, Sanya, Hainan Chengdu 2 Joy Rd, Gaobei Chengdu 88,832 326,530 Residential Completed 2014 For sale 30% 190,403 120,680 Shine City Village, Cuqiao, and Wuhou District, Commercia Chengdu, Sichuan l Brilliant Villa Yalong Bay National Sanya 224,384 116,596 Residential Under 2015 For sale 41% – 78,712 Tourism and Resort construction District, Jiyang Town, Sanya, Hainan Tianjin Joy Junction of Nanmen Tianjin 32,630 151,520 Residential Under 2012 For sale 100% 99,248 14,086 City Wai Main Street and construction Mansion Nanma Road, Tianjin Joy Street of Joy Rd, Gaobei Chengdu 8,500 25,500 Commercia Under 2012 For sale 100% – 24,803 Chengdu Village, Cuqiao, l construction Joy City Wuhou District, Chengdu, Sichuan Office Junction of Nanmen Tianjin 44,820 82,322 Commercia Under 2015 For sale 100% – 61,254 buildings in Wai Main Street and l construction Tianjin Nanma Road, Tianjin Office Joy Rd, Gaobei Chengdu NA 10,770 Commercia Under 2015 For sale 100% – 10,000 buildings in Village, Cuqiao, l construction Chengdu Wuhou District, Chengdu, Sichuan Andingmen 208 Anwai Avenue, Beijing 13,030 102,390 Commercia Under 2017 For sale 30% – 102,390 Project Dongcheng District, l construction Beijing Shanghai 166 Tibet N. Rd, Shanghai 76,556 385,927 Residential, Under 2018 For sale 100% – 278,470 Joy City Zhabei District, commercial construction Phases 2 Shanghai and apartment TOTAL 636,994 1,277,104 355,417 700,178 Source: Company, Deutsche Bank
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Figure 23: Joy City – Hotel portfolio Name of project Address City Total GFA Condition Completion / Operatio No. of guestrooms Effective Site Area (sqm) Expected n type interest (sqm) completion The St. Regis Yalong Bay National Tourism Sanya 204,032 90,869 Operating 2011 Held Guest room 373 51% Sanya Yalong Bay and Resort District (Gangcheng Villa 28 Resort Rd) Jiyang Town, Sanya, Hainan Total 401 MGM Grand Yalong Bay National Tourism Sanya 106,667 108,332 Operating 2011 Held Guest room 669 100% Sanya and Resort District (Binhai Rd) Villa 6 Jiyang Town, Sanya, Hainan Total 675 Cactus Resort Yalong Bay National Tourism Sanya 90,012 38,500 Operating 1998 Held Guest room 563 51% Sanya By Gloria and Resort District (Longtan Rd) Jiyang Town, Sanya, Hainan Waldorf Astoria 5 Jinyu Hutong, Dongcheng, Beijing 6,149 44,180 Operating 2013 Held Guest room 171 51% Beijing Beijing, Courtyard house 2 Total 173 W Beijing- 2 Jianguomenan Avenue, Beijing 6,746 62,805 Operating 2014 Held Guest room 353 100% Chang’an Chaoyang, Beijing, Gloria Grand Hotel 39 Yanjiang North Rd, Donghu Nanchang 4,050 37,329 Operating 1998 Held Guest room 327 100% Nanchang District, Nanchang, Jiangxi Gloria Plaza Hotel 535 Ganjing East Rd, Pingjiang Suzhou 8,001 26,255 Operating 1997 Held Guest room 288 100% Suzhou District, Suzhou, Jiangsu Xidan Joy City B 131 Xidan N. St, Xicheng, Beijing NA 32,885 Operating 2008 Held Guest room 300 100% Hotel Beijing TOTAL 425,657 441,155 3,080 Source: Company, Deutsche Bank
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Property Joy City Property
Financial analysis
We expect strong earnings growth for 2015-17
We expect solid growth in the gross rental income of Joy City as new investment properties get open. At the same time, revenue from property sales should also see steady growth on the back of new projects. In addition, as Joy City continues to use diversified financing channels to optimize its capital structure and pursue effective cost control, its profitability (e.g. gross margin and net margin) should also improve.
Figure 24: Joy City – Income Statement (RMBmn) Year Ended Dec 31 2012 2013 2014 2015E 2016E 2017E Gross rental income from investment properties 358 1,694 2,009 2,414 2,590 3,158 Sales of properties held for sale 3,166 3,650 2,021 1,625 4,084 4,179 Service income from primary land development 63 117 221 243 267 294 Property management and related services 125 292 288 317 349 384 Other property related service income 86 172 164 172 180 189 Hotel Operations - Hotel room revenue 413 603 699 769 846 888 Hotel Operations - Other ancillary service 222 281 312 343 377 396 Others ------Total Revenue 4,433 6,809 5,713 5,883 8,694 9,488 Property investment 202 Property and land development 1,862 1,739 1,173 1,163 2,266 2,188 Hotel operations (156) (74) (93) (80) (50) (30) Property management and related services 61 118 117 129 142 156 Unallocated corporate income and other gains 155 153 33 33 33 33 Unallocated corporate expenses and other losses (13) (439) (381) (381) (381) (381) EBIT 2,112 2,517 2,022 2,264 3,525 3,829 Net interest income/expense (144) (835) (854) (789) (507) (434) Share of results of associated cos. (18) 4 (10) 860 369 1,434 Exceptional item 679 3,914 2,027 - - - Pre-tax profit 2,629 5,599 3,186 2,335 3,386 4,830 Income Tax (324) (542) (376) (369) (754) (849) LAT (323) (565) (228) (572) (733) (1,063) Deferred Tax (315) (949) (635) - - - Minority interests (748) (425) (229) (45) (47) (52) Reported net profit 919 3,118 1,673 1,304 1,806 2,820 Core net profit 725 1,131 788 1,304 1,806 2,820 Core EPS 0.13 0.19 0.08 0.10 0.13 0.20 DPS - - 0.01 0.01 0.02 0.03 Source: Company, Deutsche Bank
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Figure 25: Joy City – Balance Sheet (RMBmn) As at Dec 31 2012 2013 2,014 2015E 2016E 2017E Investment properties 32,745 37,117 40,699 43,378 43,583 43,856 Property, plant and equipment 4,826 5,392 5,963 5,622 5,248 4,836 Leasehold land and land use rights 1,197 768 854 854 854 854 Intangible assets 9 8 19 19 19 19 Interest in associates 92 99 89 949 1,318 2,752 Available-for-sale investments 2 2 2 2 2 2 Goodwill 184 184 184 184 184 184 Others 1,137 465 116 116 116 116 Non-current Assets 40,191 44,036 47,926 51,123 51,322 52,618 Inventories 29 27 30 26 65 67 Property held for sale 2,267 1,373 534 488 378 239 Property under development fo sale 4,454 6,326 9,308 9,273 7,177 4,537 Accounts receivable 233 164 125 118 174 190 Deposits, prepayments and other receivables 852 659 609 647 956 1,044 Others 2,784 176 183 183 183 183 Cash 3,743 9,012 6,368 8,063 12,856 16,888 Current Assets 14,363 17,736 17,156 18,797 21,789 23,147 Total Assets 54,554 61,772 65,081 69,920 73,111 75,765 Accounts payable 2,064 1,789 1,132 1,118 1,652 1,803 Other payables and accrulals 1,191 1,530 876 332 679 764 Deposits received in respect of pre-sale of 4,619 4,372 6,450 6,006 6,253 6,238 properties Others 10,030 5,882 6,673 6,673 6,673 6,673 Bank borrowings 3,428 2,842 5,574 5,674 5,574 5,474 Income tax and LAT payables 1,191 1,530 876 332 679 764 Derivative financial instruments - 0 - - - - Current liabilities 21,216 15,722 17,961 17,503 20,055 20,691 Rental deposits received 224 218 287 287 287 287 Loans from ultimate holding company 108 - - - - - Loans from a fellow subsidiary 475 524 456 456 456 456 Bank borrowings 8,264 10,823 9,161 8,161 7,161 6,661 Deferred tax liabilities 4,065 4,942 5,401 5,401 5,401 5,401 Guaranteed notes - - 4,862 4,862 4,862 4,862 Derivative financial instruments 1 - - - - - Deferred income - 1 - - - - Non-current Liabilities 13,137 16,507 20,167 19,167 18,167 17,667 Total Liabilities 34,353 32,229 38,128 36,669 38,221 38,358 Minority Interests 3,265 3,954 3,469 3,515 3,562 3,614 Total Net Assets 16,937 25,589 23,484 29,736 31,328 33,793 Equity attributable to owners of the company 16,937 25,589 19,717 25,968 27,560 30,025 Perpetual capital instruments - - 3,768 3,768 3,768 3,768 Total Equity 16,937 25,589 23,484 29,736 31,328 33,793 Source: Company, Deutsche Bank
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Figure 26: Joy City – Cash flow statement (RMBmn) Year Ended Dec 31 2012 2013 2014 2015E 2016E 2017E Profit before tax 2,629 5,599 3,186 2,335 3,386 4,830 Non-cash adjustments (459) (2,905) (898) 270 513 (589) Working capital changes (182) (867) (1,986) (822) 3,493 2,742 PRC taxes paid (346) (386) (470) (913) (407) (764) LAT paid (116) (299) (727) (572) (733) (1,063) Net cash (used in)/generated from operating 1,526 1,141 (895) 298 6,252 5,156 activities Net cashflow generated from investing activities (373) 1,390 (2,343) (2,606) (100) (123) Net cash generated from financing activities 142 2,744 276 4,003 (1,359) (1,001) Net Change in Cash and Cash equivalents 1,296 5,275 (2,962) 1,695 4,794 4,032 Beginning Cash 1,596 3,743 9,012 6,059 7,753 12,547 FX change (0) (7) 9 - - - Ending cash 2,891 9,012 6,059 7,753 12,547 16,579 Net Gearing 45% 18% 56% 35% 15% 0% Source: Company, Deutsche Bank
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Valuation
Our estimated NAV for Joy City is HK$6.43/share
We base our target price of HK$4.50 on a 30% discount to our estimated NAV of HK$6.43/share. We calculate our estimated NAV for Joy City Property (Joy City) by using a sum-of-the-parts methodology. We apply a DCF to estimate the value of the company’s development projects by taking the estimated cash inflows from property sales minus the outstanding costs, including any outstanding land costs, construction costs, related income taxes and the LAT for each of the development projects.
With respect to the investment properties’ valuation, we use the income capitalization approach, taking the estimated rental revenues of the investment properties divided by the estimated capitalization (cap) rates.
For different types of properties in different locations, our estimated rents and cap rates differ. In arriving at the NAV for the company, we take the aggregate estimated value for the previously mentioned business segments and then add the company’s net cash position or subtract its net debt position.
Figure 27: Joy City – Estimated NAV HK$m HK$/Share % of NAV % of GAV Property Development Residential 13,234 0.93 14.5% 12.4% Office 990 0.07 1.1% 0.9% Retail 438 0.03 0.5% 0.4% 14,663 1.03 16.0% 13.7% Property Investment Residential 4,678 0.33 5.1% 4.4% Office 9,407 0.66 10.3% 8.8% Retail 53,940 3.79 59.0% 50.5% Hotel 25,224 1.77 27.6% 23.6% 93,249 6.55 101.9% 87.3% Other assets 2 0.00 0.0% 0.0% Outstanding Taxes (1,099) (0.08) -1.2% -1.0% payable Gross Asset Value 106,814 7.51 116.7% 100.0% Net debt (10,585) (0.74) -11.6% -9.9% Perpetual loan (4,728) (0.33) -5.2% -4.4% NAV 91,502 6.43 100.0% 85.7% Source: Deutsche Bank
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Figure 28: China property – valuation table DB Trade Report Mkt 12M 19 Target Implied Est. NAV EPS PE(x) Cap Daily May T/O Company Ticker Rating Ccy Ccy USDm USDm Price Price Upside NAV Disc 14 15E 16E 14 15E 16E Covered CSCEC 601668 CH Buy CNY CNY 46,786 578.80 9.68 12.18 26% 13.5 -28% 0.75 0.88 1.10 12.9 11.0 8.8 Wanda 3699 HK Buy HKD CNY 40,151 37.49 68.75 65.00 -5% 92.9 -26% 3.04 4.47 5.29 18.1 12.3 10.4 COLI 688 HK Buy HKD HKD 36,888 78.22 29.00 34.56 19% 38.4 -24% 3.39 3.23 3.77 8.6 9.0 7.7 China Vanke - A 000002 CH Buy CNY CNY 25,508 357.77 14.16 16.00 13% 18.9 -25% 1.42 1.56 1.77 10.0 9.1 8.0 China Vanke - H 2202 HK Buy HKD CNY 25,508 28.31 19.62 19.80 1% 23.3 -16% 1.42 1.56 1.77 11.1 10.1 8.9 Poly - A 600048 CH Buy CNY CNY 22,274 357.61 12.88 7.61 -41% 9.5 35% 1.13 1.22 1.44 11.4 10.5 9.0 CR Land 1109 HK Buy HKD HKD 20,978 42.15 24.90 31.64 27% 39.6 -37% 2.02 2.40 2.60 12.3 10.4 9.6 Evergrande 3333 HK Sell HKD CNY 12,572 29.08 6.59 2.44 -63% 4.9 35% 0.06 0.33 0.37 88.1 15.8 14.1 Country Garden 2007 HK Sell HKD CNY 11,597 20.85 3.98 2.60 -35% 4.3 -8% 0.48 0.56 0.62 6.6 5.7 5.1 China Merchants 000024 CH Buy CNY CNY 10,644 153.42 31.96 16.42 -49% 23.5 36% 2.04 2.30 2.78 15.7 13.9 11.5 Prop Gemdale 600383 CH Sell CNY CNY 10,283 84.02 14.21 7.50 -47% 11.5 23% 0.78 0.86 0.90 18.3 16.5 15.7 Longfor 960 HK Buy HKD CNY 9,999 6.20 13.32 17.50 31% 21.9 -39% 1.25 1.35 1.49 8.5 7.9 7.2 GLP GLP SP Buy SGD USD 9,890 24.02 2.72 3.20 18% 2.4 11% 0.05 0.05 0.06 39.6 43.3 33.8 Shimao 813 HK Sell HKD CNY 7,938 26.36 17.72 13.16 -26% 21.9 -19% 2.29 2.46 2.76 6.2 5.8 5.1 CSCI 3311 HK Buy HKD HKD 7,381 12.03 14.26 16.80 18% 16.8 -15% 0.88 1.09 1.37 16.3 13.0 10.4 Sino-Ocean 3377 HK Buy HKD CNY 5,618 4.67 5.79 7.70 33% 11.0 -47% 0.49 0.58 0.68 9.5 8.0 6.8 Sunac 1918 HK Hold HKD CNY 4,383 17.22 10.00 7.35 -27% 13.3 -25% 1.13 1.70 1.68 7.1 4.7 4.8 R&F 2777 HK Hold HKD CNY 4,003 13.60 9.63 8.13 -16% 16.3 -41% 1.20 1.37 1.49 6.4 5.6 5.2 Joy City 207 HK Buy HKD CNY 3,819 1.93 2.08 4.50 116% 6.43 -68% 0.17 0.10 0.13 9.9 16.1 13.1 Franshion 817 HK Buy HKD HKD 3,592 3.38 3.07 3.92 28% 5.6 -45% 0.33 0.39 0.47 9.2 7.9 6.5 Agile 3383 HK Sell HKD CNY 3,274 10.96 6.48 3.55 -45% 11.8 -45% 1.12 0.96 0.96 4.6 5.4 5.4 Greentown 3900 HK Buy HKD CNY 3,061 9.41 10.98 13.40 22% 20.6 -47% 0.96 2.13 2.38 9.2 4.1 3.7 Yuexiu 123 HK Sell HKD CNY 2,976 7.65 1.86 1.23 -34% 2.5 -24% 0.12 0.12 0.13 12.7 12.2 11.4 KWG 1813 HK Buy HKD CNY 2,966 6.99 7.80 6.68 -14% 11.1 -30% 1.12 1.35 1.44 5.6 4.6 4.3 Yanlord YLLG SP Sell SGD CNY 1,866 1.08 1.28 0.80 -37% 1.6 -20% 0.25 0.34 0.37 23.6 17.3 16.0 CIFI 884 HK Buy HKD CNY 1,727 1.83 2.22 2.53 14% 4.6 -52% 0.34 0.46 0.61 5.2 3.8 2.9 COGO 81 HK Buy HKD HKD 1,410 2.83 4.79 7.14 49% 10.2 -53% 0.55 0.95 1.37 8.8 5.1 3.5 Kaisa 1638 HK Hold HKD CNY 1,033 4.32 1.56 1.80 15% 6.7 -77% 0.64 0.72 0.81 2.0 1.7 1.5 E-House EJ US Buy USD USD 924 15.15 6.55 12.40 89% 0.0 NA 0.43 0.54 0.62 15.2 12.2 10.6 Central China 832 HK Buy HKD CNY 748 0.35 2.38 3.45 45% 5.8 -59% 0.36 0.58 0.72 5.3 3.3 2.7 Not Rated
NWCL 917 HK NR HKD HKD 5,872 1.87 5.24 NA NA NA NA 0.45 0.42 0.43 11.6 12.5 12.2 SOHO China 410 HK NR HKD CNY 3,729 3.75 5.56 NA NA NA NA 0.42 0.17 0.18 10.5 26.0 24.3 Hui Xian REIT 87001 HK NR CNY CNY 3,020 1.91 3.50 NA NA NA NA 0.22 0.23 0.24 15.9 15.4 14.8 Shui On 272 HK NR HKD CNY 2,713 2.95 2.62 NA NA NA NA 0.08 0.04 0.13 26.2 55.2 16.4 Hopson 754 HK NR HKD HKD 2,527 1.39 8.73 NA NA NA NA 0.56 0.42 0.56 15.6 20.8 15.6 Greenland Hong 337 HK NR HKD CNY 2,265 3.62 7.68 NA NA NA NA 0.04 0.33 0.49 153.7 18.8 12.5 Kong Poly Property 119 HK NR HKD HKD 2,140 9.29 4.53 NA NA NA NA 0.53 0.33 0.41 8.6 13.7 11.2 BJ North Star 588 HK NR HKD CNY 1,581 1.58 3.64 NA NA NA NA 0.30 0.26 0.30 9.7 11.4 9.7 Glorious 845 HK NR HKD CNY 1,226 1.11 1.22 NA NA NA NA 0.14 0.10 0.04 6.8 9.8 24.4 Yuzhou 1628 HK NR HKD CNY 1,025 1.23 2.30 NA NA NA NA 0.46 0.39 0.49 4.0 4.8 3.8 Powerlong 1238 HK NR HKD CNY 1,006 0.59 1.95 NA NA NA NA 0.27 5.8 NA NA
Fantasia 1777 HK NR HKD CNY 928 1.33 1.25 NA NA NA NA 0.18 0.21 0.26 5.6 4.8 3.9 BC Land 2868 HK NR HKD CNY 869 1.73 6.60 NA NA NA NA 0.76 0.95 1.25 7.0 5.6 4.2 Aoyuan 3883 HK NR HKD CNY 758 0.55 2.11 NA NA NA NA 0.31 0.33 0.40 5.4 5.1 4.2 C C Land 1224 HK NR HKD HKD 701 0.59 2.10 NA NA NA NA 0.26 0.24 NA 8.1 8.8
Minmetals 230 HK NR HKD HKD 496 0.40 1.15 NA NA NA NA 0.20 5.8 NA NA
Far East Global 830 HK NR HKD HKD 417 0.37 1.50 NA NA NA NA 0.09 16.7 NA NA
Overall average -25% 15.8 11.8 9.7 Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR
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Figure 29: China property – valuation table (cont.) EPS growth % BVPS PB(x) DPS Dividends yield % Net gearing % Company Ticker 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E 14 15E 16E Covered CSCEC 601668 CH 10 17 25 4.6 5.3 6.2 2.1 1.8 1.6 0.2 0.2 0.2 1.8 1.9 2.3 53.2 49.1 38.9 Wanda 3699 HK 31 47 18 40.0 43.4 47.4 1.4 1.3 1.2 1.2 1.3 1.6 2.2 2.4 2.9 41.6 40.4 38.6 COLI 688 HK 46 (5) 17 16.3 20.7 23.8 1.8 1.4 1.2 0.6 0.6 0.7 1.9 2.1 2.2 35.6 18.7 3.1 China Vanke - A 000002 CH 4 10 14 8.0 9.1 10.4 1.8 1.5 1.4 0.5 0.6 0.6 3.5 3.9 4.4 42.1 34.1 18.7 China Vanke - H 2202 HK 4 10 14 8.0 9.1 10.4 2.0 1.7 1.5 0.5 0.6 0.6 3.2 3.5 3.9 42.1 34.1 18.7 Poly - A 600048 CH 13 8 17 5.7 6.7 7.9 2.2 1.9 1.6 0.2 0.3 0.3 1.9 1.9 2.0 93.9 66.7 53.5 CR Land 1109 HK 25 19 8 16.6 19.0 21.0 1.5 1.3 1.2 0.5 0.6 0.6 2.0 2.2 2.4 69.0 30.8 21.3 Evergrande 3333 HK (89) 457 12 3.6 3.8 4.1 1.5 1.4 1.3 0.5 0.1 0.1 10.1 2.4 2.6 87.3 76.0 79.5 Country Garden 2007 HK 5 16 11 3.0 3.4 3.8 1.1 0.9 0.8 0.1 0.2 0.2 4.6 5.3 5.9 67.8 61.7 60.2 China Merchants 000024 CH 25 13 21 12.0 13.9 16.1 2.7 2.3 2.0 0.4 0.5 0.6 0.4 0.5 0.5 27.3 7.4 -3.4 Prop Gemdale 600383 CH 61 10 5 7.0 7.7 8.5 2.0 1.8 1.7 0.1 0.2 0.2 0.9 1.2 1.3 58.2 56.3 51.3 Longfor 960 HK 6 8 10 8.8 9.9 11.1 1.2 1.1 1.0 0.3 0.3 0.3 2.7 2.7 3.0 53.2 42.7 32.9 GLP GLP SP (24) (8) 28 1.8 1.8 1.8 1.1 1.1 1.1 0.0 0.1 0.1 2.2 2.7 2.9 20.9 12.2 19.3 Shimao 813 HK 8 7 12 13.5 15.2 16.9 1.1 0.9 0.8 0.7 0.8 0.9 4.0 4.6 5.0 88.7 76.1 89.0 CSCI 3311 HK 26 25 25 5.0 5.7 6.8 2.9 2.5 2.1 0.3 0.3 0.3 1.8 2.0 2.2 32.5 26.7 17.6 Sino-Ocean 3377 HK 17 19 17 5.9 6.7 7.1 0.8 0.7 0.6 0.2 0.3 0.3 5.2 5.5 5.7 65.9 57.6 56.9 Sunac 1918 HK 19 51 (2) 5.1 6.6 8.1 1.6 1.2 1.0 0.2 0.2 0.2 2.5 2.7 2.9 104.7 70.5 77.2 R&F 2777 HK (34) 15 9 11.2 12.5 14.0 0.7 0.6 0.5 - - 0.4 0.0 0.0 4.5 176.5 162.9 145.2 Joy City 207 HK (64) (34) 21 2.1 1.8 1.9 0.8 0.9 0.8 0.0 0.0 0.0 0.6 0.6 0.9 56.0 35.2 14.5 Franshion 817 HK 24 16 21 4.1 4.5 4.9 0.7 0.7 0.6 0.1 0.1 0.1 3.7 4.1 4.6 51.0 30.0 5.6 Agile 3383 HK (12) (14) (1) 8.6 10.4 11.1 0.6 0.5 0.5 0.4 0.3 0.3 7.6 6.7 6.7 68.1 69.6 69.0 Greentown 3900 HK (58) 123 12 12.3 14.4 16.5 0.7 0.6 0.5 - 0.3 0.4 0.0 3.9 4.2 74.8 73.8 66.1 Yuexiu 123 HK (5) 4 7 2.3 2.4 2.5 0.6 0.6 0.6 0.1 0.1 0.1 4.1 4.6 4.8 65.6 76.0 77.1 KWG 1813 HK 40 20 7 7.0 8.1 9.3 0.9 0.8 0.7 0.3 0.3 0.3 4.0 4.2 4.3 61.8 39.4 25.1 Yanlord YLLG SP (50) 36 9 9.8 10.1 10.4 0.6 0.6 0.6 0.0 0.0 0.0 0.2 0.2 0.2 45.0 62.4 64.7 CIFI 884 HK 30 37 31 1.7 2.1 2.6 1.0 0.8 0.7 0.1 0.1 0.1 3.8 5.2 6.8 55.9 58.6 48.0 COGO 81 HK (55) 74 44 5.4 6.3 7.6 0.9 0.8 0.6 0.1 0.1 0.1 1.0 1.3 1.7 61.7 58.0 54.1 Kaisa 1638 HK 50 13 12 4.1 4.8 5.5 0.3 0.3 0.2 0.2 0.2 0.2 14.6 16.5 18.7 73.6 85.6 69.5 E-House EJ US (19) 25 15 6.5 6.7 6.9 1.0 1.0 0.9 0.2 0.2 0.2 2.3 2.3 2.3 -58.4 -55.6 -50.1 Central China 832 HK (12) 59 24 2.6 3.0 3.5 0.7 0.6 0.5 0.1 0.2 0.2 5.7 10.5 12.6 41.7 38.0 32.2 Not Rated
NWCL 917 HK 32 (7) 2 6.7 7.0 7.3 0.8 0.7 0.7 0.1 0.1 0.1 1.3 1.0 1.1 37.3 48.4 51.0 SOHO China 410 HK (41) (59) 7 7.5 7.8 7.9 0.6 0.6 0.6 0.3 0.2 0.2 5.8 5.4 5.4 16.8 31.0 34.8 Hui Xian REIT 87001 HK 5 3 4 5.3 5.1 5.1 0.7 0.7 0.7 0.2 0.3 0.3 7.1 7.9 8.1 1.2 7.7 7.9 Shui On 272 HK (4) (53) 237 5.4 5.3 5.5 0.4 0.4 0.4 0.0 0.0 0.1 2.0 2.1 2.6 82.9 97.3 94.9 Hopson 754 HK (53) (25) 33 25.3 25.9 NA 0.3 0.3 - - - 0.0 0.0 0.0 NA NA NA
Greenland Hong 337 HK (82) 718 51 2.1 2.6 3.1 2.9 2.4 2.0 0.0 0.0 0.0 0.6 0.6 0.6 NA 76.1 -171.0 Kong Poly Property 119 HK (28) (37) 22 8.8 8.9 9.2 0.5 0.5 0.5 0.2 0.1 0.1 3.9 2.1 2.4 106.3 104.5 89.6 BJ North Star 588 HK 7 (15) 18 3.5 3.7 NA 0.8 0.8 0.1 0.1 NA 2.1 2.1 NA NA NA
Glorious 845 HK 7 (30) (60) 2.5 2.0 2.1 0.4 0.5 0.5 - - 0.0 0.0 NA 117.9 136.8 141.8
Yuzhou 1628 HK 42 (15) 27 2.4 2.8 3.2 0.8 0.7 0.6 0.1 0.1 0.2 6.2 7.4 8.9 79.8 78.2 1.7 Powerlong 1238 HK 1 NA NA NA NA NA 0.1 0.1 0.1 3.3 4.4 4.6 NA NA NA
Fantasia 1777 HK (14) 17 22 1.7 2.2 2.4 0.6 0.5 0.4 0.0 0.1 0.1 3.7 5.1 6.1 91.0 101.5 102.2 BC Land 2868 HK 31 24 32 5.7 6.4 NA 0.9 0.8 0.2 0.3 0.3 4.4 5.2 5.9 NA 234.1 248.4
Aoyuan 3883 HK 121 6 21 2.9 3.2 3.5 0.6 0.5 0.5 0.1 0.1 0.1 3.6 5.9 7.1 77.2 88.1 72.3 C C Land 1224 HK NA NA (8) 5.7 6.0 6.3 0.4 0.3 0.3 0.1 0.1 0.1 4.8 3.6 3.6 NA 26.7 NA Minmetals 230 HK (11) NA NA NA NA NA NA NA NA NA NA NA
Far East Global 830 HK 80 NA NA 0.6 2.5 NA NA NA NA NA -3.9 NA NA
Overall average 2 37 20 12. 1.0 0.9 3.3 3.6 4.2 59.1 60.1 48.0
Source: Deutsche Bank estimates, Company data, Bloomberg Finance LP Consensus estimates for companies NR
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Investment risks
Macro risks
Government property tightening measures might be stricter than expected The China property market is dependent not only on economic conditions and the demand-and-supply balance, but also on government policies. At times when the government is tightening its fiscal and monetary policies, especially via administrative measures, there could be volatile moves in housing transaction volumes, housing prices, land prices, and financing available to developers and homebuyers. Recently, there have been signs that the tightening measures by the government have been reaccelerated, with potential new measures that would result in sales volume and property price decline in the physical property market, which could put pressure on cash flows for developers. With this in mind, if the government’s property market tightening measures are stricter than expected, we could see weaker-than- expected sales and a weaker price performance for the property businesses of Joy City.
Unexpected economic fluctuations in the Chinese economy In our view, any weaker-than-expected performance in the Chinese economy would likely result in weaker housing demand, hence affecting Chinese developers’ property sales. On the other hand, any overly strong growth in the Chinese economy could raise concerns about overheating and attract tightening measures. Therefore, any unexpected fluctuations in the Chinese economy would likely affect demand and supply in the China property market and the businesses of Joy City.
Company-specific risks
Competition from other commercial properties in mainland China While the COFCO Group and Joy City have a strong track record of operating commercial properties in mainland China and its commercial properties are of high quality and in prime locations, there still exist competitive threats from other existing commercial property players in the Chinese property market, and from potential new entrants into the market in the future. Any stronger-than- expected competition from other players might result in lower-than expected rentals and occupancies for the commercial properties of Joy City in China.
Potential delays in future asset injection from parent (COFCO) We see strong organic growth from Joy City’s existing property portfolio and new acquisition growth from potential further asset injection from the parent, COFCO. Our positive view on Joy City is based on its strong organic growth and new acquisition injection growth, and hence any potential delay in future asset injection from COFCO would affect our positive view on the company.
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Appendix 1
Important Disclosures
Additional information available upon request
Disclosure checklist Company Ticker Recent price* Disclosure Joy City Property 0207.HK 2.08 (HKD) 19 May 15 NA *Prices are current as of the end of the previous trading session unless otherwise indicated and are sourced from local exchanges via Reuters, Bloomberg and other vendors . Other information is sourced from Deutsche Bank, subject companies, and other sources. For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/DisclosureDirectory.eqsr.
For disclosures pertaining to recommendations or estimates made on securities other than the primary subject of this research, please see the most recently published company report or visit our global disclosure look-up page on our website at http://gm.db.com/ger/disclosure/Disclosure.eqsr?ricCode=0207.HK
Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst(s) about the subject issuer and the securities of the issuer. In addition, the undersigned lead analyst(s) has not and will not receive any compensation for providing a specific recommendation or view in this report. Tony Tsang
Historical recommendations and target price: Joy City Property (0207.HK) (as of 5/19/2015)
4.50 Previous Recommendations
4.00 Strong Buy Buy 3.50 Market Perform Underperform Not Rated 3.00 Suspended Rating
2.50 Current Recommendations
2.00 Buy
Hold SecurityPrice 1.50 Sell Not Rated Suspended Rating 1.00 *New Recommendation Structure as of September 9,2002 0.50
0.00 May 13 Aug 13 Nov 13 Feb 14 May 14 Aug 14 Nov 14 Feb 15 Date
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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 450 share-holder return (TSR = percentage change in 400 52 % share price from current price to projected target price 350 39 % plus pro-jected dividend yield ) , we recommend that 300 250 investors buy the stock. 200 Sell: Based on a current 12-month view of total share- 150 23 % 9 % holder return, we recommend that investors sell the 100 21 % 50 17 % stock 0 Hold: We take a neutral view on the stock 12-months Buy Hold Sell out and, based on this time horizon, do not recommend either a Buy or Sell. Companies Covered Cos. w/ Banking Relationship Notes: Asia-Pacific Universe 1. Newly issued research recommendations and target prices always supersede previously published research. 2. Ratings definitions prior to 27 January, 2007 were: Buy: Expected total return (including dividends) of 10% or more over a 12-month period Hold: Expected total return (including dividends) between -10% and 10% over a 12- month period Sell: Expected total return (including dividends)
of -10% or worse over a 12-month period
Regulatory Disclosures 1.Important Additional Conflict Disclosures Aside from within this report, important conflict disclosures can also be found at https://gm.db.com/equities under the "Disclosures Lookup" and "Legal" tabs. Investors are strongly encouraged to review this information before investing. 2.Short-Term Trade Ideas Deutsche Bank equity research analysts sometimes have shorter-term trade ideas (known as SOLAR ideas) that are consistent or inconsistent with Deutsche Bank's existing longer term ratings. These trade ideas can be found at the SOLAR link at http://gm.db.com.
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Additional Information
The information and opinions in this report were prepared by Deutsche Bank AG or one of its affiliates (collectively "Deutsche Bank"). Though the information herein is believed to be reliable and has been obtained from public sources believed to be reliable, Deutsche Bank makes no representation as to its accuracy or completeness.
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Macroeconomic fluctuations often account for most of the risks associated with exposures to instruments that promise to pay fixed or variable interest rates. For an investor who is long fixed rate instruments (thus receiving these cash flows), increases in interest rates naturally lift the discount factors applied to the expected cash flows and thus cause a loss. The longer the maturity of a certain cash flow and the higher the move in the discount factor, the higher will be the loss. Upside surprises in inflation, fiscal funding needs, and FX depreciation rates are among the most common adverse macroeconomic shocks to receivers. But counterparty exposure, issuer creditworthiness, client segmentation, regulation (including changes in assets holding limits for different types of investors), changes in tax policies, currency convertibility (which may constrain currency conversion, repatriation of profits and/or the liquidation of positions), and settlement issues related to local clearing houses are also important risk factors to be considered. The sensitivity of fixed income instruments to macroeconomic shocks may be mitigated by indexing the contracted cash flows to inflation, to FX depreciation, or to specified interest rates – these are common in emerging markets. It is important to note that the index fixings may -- by construction -- lag or mis-measure the actual move in the underlying variables they are intended to track. The choice of the proper fixing (or metric) is particularly important in swaps markets, where floating coupon rates (i.e., coupons indexed to a typically short-dated interest rate reference index) are exchanged for fixed coupons. It is also important to acknowledge that funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Naturally, options on swaps (swaptions) also bear the risks typical to options in addition to the risks related to rates movements.
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to or inspired by the contents of this publication. The risk of loss in futures trading and options, foreign or domestic, can be substantial. As a result of the high degree of leverage obtainable in futures and options trading, losses may be incurred that are greater than the amount of funds initially deposited. Trading in options involves risk and is not suitable for all investors. Prior to buying or selling an option investors must review the "Characteristics and Risks of Standardized Options”, at http://www.optionsclearing.com/about/publications/character-risks.jsp. If you are unable to access the website please contact your Deutsche Bank representative for a copy of this important document.
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and/or services, customers should carefully read the relevant disclosures, prospectuses and other documentation. "Moody's", "Standard & Poor's", and "Fitch" mentioned in this report are not registered credit rating agencies in Japan unless Japan or "Nippon" is specifically designated in the name of the entity. Reports on Japanese listed companies not written by analysts of DSI are written by Deutsche Bank Group's analysts with the coverage companies specified by DSI. Some of the foreign securities stated on this report are not disclosed according to the Financial Instruments and Exchange Law of Japan.
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