Deutsche Bank Markets Research

Rating Company Date 31 January 2018 Hold Hang Lung Results Asia Properties Hong Kong Reuters Bloomberg Exchange Ticker Price at 30 Jan 2018 (HKD) 20.10 Property 0101.HK 101 HK HSI 0101 Price target - 12mth (HKD) 18.10

ADR Ticker ISIN 52-week range (HKD) 21.65 - 17.36 HLPPY US41043M1045 HANG SENG INDEX 32,967

Worst is over in China operation, but Jason Ching, CFA Jeffrey Gao, CFA further improvement takes time; Hold Research Analyst Research Analyst (+852 ) 2203 6205 (+852 ) 2203 6256 E-commerce remains a headwind in China; maintaining Hold on valuation [email protected] [email protected] We maintain our Hold rating on Hang Lung (HLP) post the FY17 results. Core net profit exceeded our expectations due to higher property sales bookings and Stephen Cheung, CFA asset disposal, excluding which, the results were mostly in line. A key highlight in FY17 is the improvement in the China operation, where we believe the worst Research Analyst is probably over. However, with competition from e-commerce likely to (+852 ) 2203 6182 continue ahead, we believe further operational improvement could take time. [email protected]

Following a recent share price rally, Hang Lung is currently trading at a 33% discount to our revised NAV or in line with the historical average – not Foo Leung particularly attractive, in our view. We maintain Hold. Research Associate FY17 core profit -13% YoY to HK$5,530m on fewer property sales bookings (+852 ) 2203 6239 In FY17, HLP’s revenue fell 14% YoY to HK$11,199mn, dragged by a 36% YoY [email protected] decline in property development revenue to HK$3,420m due to fewer residential units booked. On the other hand, property leasing revenue rose 1% Key changes YoY to HK$7,779m (1% YoY decline in China portfolio and 2% YoY growth in TP 16.50 to 18.10 ↑ 9.7% HK). Excluding areas closed for renovation, rental revenue from the China Sales (FYE) 9,667 to 9,464 ↓ -2.1% portfolio would have registered 5% YoY growth. Meanwhile, the development property margin improved by 5 percentage points YoY to 65% and the rental Op prof 66.5 to 71.2 ↑ 7.1% margin (FYE) margin was 1% lower YoY at 73%. Meanwhile, underlying profit fell 13% YoY Net profit 4,318.7 to ↑ 7.1% to HK$5,530m. A final dividend of HK$0.58/shr was declared (flat YoY). (FYE) 4,623.8 China portfolio saw operational improvement, but varies between cities Source: Deutsche Bank

Rental revenue was up 1% in FY17, boosted by growth in the Hong Kong portfolio and Shanghai (the largest contributor in China). While overall Price/price relative performance in the China operation improved, performance of individual malls 24 was still mixed. Specifically, rental revenues at Shanghai Plaza 66 and Palace were up 8% and 9%, respectively. Nevertheless, Forum 66, 20 Center 66 and Riverside 66 reported YoY declines in rental income, despite seeing a recovery in tenant retail sales. 16

12 Target price at 40% discount to our revised NAV estimate of HK$30.1/shr; risks 2/16 8/16 2/17 8/17 We base our HK$18.1/share TP on a 40% discount to our revised NAV of Hang Lung Properties HK$30.1/share by rolling it over to end-2018. Our target discount is appropriate HANG SENG INDEX (Rebased) to reflect the current point in the market cycle, and it is in line with peers under our coverage, in our view. Our estimates include our latest prices and rent Performance (%) 1m 3m 12m assumptions. Risks: external economic factors and liquidity (see page 3). Absolute 5.2 11.7 4.7 HANG SENG INDEX 10.2 16.3 41.1

Forecasts And Ratios Source: Deutsche Bank

Year End Dec 31 2016A 2017A 2018E 2019E 2020E Sales (HKDm) 13,059.0 11,199.0 9,464.3 9,079.1 9,439.1 EBITDA (HKDm) 8,574.0 7,933.0 6,789.3 6,382.0 6,621.2 Reported NPAT (HKDm) 6,195.0 8,124.0 4,623.8 4,056.7 4,107.9 DB EPS FD (HKD) 1.41 1.23 1.03 0.90 0.91 PER (x) 11.3 15.6 19.6 22.3 22.0 DPS (net) (HKD) 0.75 0.75 0.75 0.75 0.75 Yield (net) (%) 4.7 3.9 3.7 3.7 3.7 Source: Deutsche Bank estimates, company data

______Deutsche Bank AG/Hong Kong Distributed on: 30/01/2018 22:03:54 GMT 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) 083/04/2017. 7T2se3r0Ot6kwoPa 31 January 2018

Property Hang Lung Properties

Model updated:30 January 2018 Fiscal year end 31-Dec 2016 2017 2018E 2019E 2020E

Running the numbers Financial Summary Asia DB EPS (HKD) 1.41 1.23 1.03 0.90 0.91 Reported EPS (HKD) 1.38 1.81 1.03 0.90 0.91 Hong Kong DPS (HKD) 0.75 0.75 0.75 0.75 0.75 BVPS (HKD) 28.1 30.3 30.6 30.7 30.9 Property Weighted average shares (m) 4,497 4,498 4,498 4,498 4,498 Hang Lung Properties Average market cap (HKDm) 71,793 86,310 90,401 90,401 90,401 Enterprise value (HKDm) 78,879 93,770 104,048 110,836 111,468 Reuters: 0101.HK Bloomberg: 101 HK Valuation Metrics P/E (DB) (x) 11.3 15.6 19.6 22.3 22.0 Hold P/E (Reported) (x) 11.6 10.6 19.6 22.3 22.0 Price (30 Jan 18) HKD 20.10 P/BV (x) 0.58 0.63 0.66 0.65 0.65

Target Price HKD 18.10 FCF Yield (%) 5.0 13.4 nm nm 3.8 Dividend Yield (%) 4.7 3.9 3.7 3.7 3.7 52 Week range HKD 17.36 - 21.65 EV/Sales (x) 6.0 8.4 11.0 12.2 11.8 Market Cap (m) HKDm 90,401 EV/EBITDA (x) 9.2 11.8 15.3 17.4 16.8 EV/EBIT (x) 9.3 11.9 15.4 17.5 17.0 USDm 11,564 Income Statement (HKDm) Company Profile Sales revenue 13,059 11,199 9,464 9,079 9,439 Hang Lung Properties Limited, through its subsidiaries, Gross profit 10,279 9,084 7,767 7,323 7,599 invests in, develops and manages properties. The EBITDA 8,574 7,933 6,789 6,382 6,621 company also manages parking lots. Depreciation 54 54 54 54 54 Amortisation 0 0 0 0 0 EBIT 8,520 7,879 6,735 6,328 6,567 Net interest income(expense) -317 -654 -553 -777 -896 Associates/affiliates 62 78 78 78 78 Exceptionals/extraordinaries 0 0 0 0 0 Other pre-tax income/(expense) -286 2,599 0 0 0 Profit before tax 7,979 9,902 6,261 5,629 5,749 Price Performance Income tax expense 1,372 1,352 1,033 929 949 Minorities 412 426 604 644 692 24 Other post-tax income/(expense) 0 0 0 0 0 Net profit 6,195 8,124 4,624 4,057 4,108 20 DB adjustments (including dilution) 146 -2,594 0 0 0 DB Net profit 6,341 5,530 4,624 4,057 4,108 16

Cash Flow (HKDm) 12 Feb 16May 16Aug 16Nov 16Feb 17May 17Aug 17Nov 17 Cash flow from operations 6,287 11,585 4,969 4,774 4,768 Net Capex -2,666 0 -7,179 -7,545 -1,334 Hang Lung Properties Free cash flow 3,621 11,585 -2,210 -2,771 3,435 HANG SENG INDEX (Rebased) Equity raised/(bought back) 0 0 0 0 0 Margin Trends Dividends paid -3,702 -3,373 -3,735 -3,759 -3,789 Net inc/(dec) in borrowings -5,051 -2,241 624 4,905 3,291 72 Other investing/financing cash flows -1,743 0 0 0 0 71 Net cash flow -6,875 5,971 -5,321 -1,626 2,937 69 Change in working capital -729 2,989 207 445 344

68 Balance Sheet (HKDm) 66 Cash and other liquid assets 24,325 22,106 16,785 15,159 18,095 65 Tangible fixed assets 143,030 156,256 163,979 171,843 173,563 16 17 18E 19E 20E Goodwill/intangible assets 0 0 0 0 0 EBITDA Margin EBIT Margin Associates/investments 1,251 1,362 1,362 1,362 1,362

Other assets 6,301 3,862 2,731 2,225 1,926 Growth & Profitability Total assets 174,907 183,586 184,856 190,589 194,946 Interest bearing debt 27,082 24,841 25,465 30,370 33,661 5 7 Other liabilities 15,680 16,500 15,654 15,541 15,596 0 6 Total liabilities 42,762 41,341 41,119 45,911 49,257 5 -5 4 Shareholders' equity 126,565 136,158 137,409 138,092 138,827 Minorities 5,580 6,087 6,329 6,586 6,863 -10 3 2 Total shareholders' equity 132,145 142,245 143,737 144,678 145,690 -15 1 Net debt 2,757 2,735 8,681 15,211 15,565 -20 0 16 17 18E 19E 20E Key Company Metrics Sales growth (%) nm -14.2 -15.5 -4.1 4.0 Sales growth (LHS) ROE (RHS)

DB EPS growth (%) na -12.8 -16.4 -12.3 1.3 Solvency EBITDA Margin (%) 65.7 70.8 71.7 70.3 70.1 EBIT Margin (%) 65.2 70.4 71.2 69.7 69.6 12 30 Payout ratio (%) 54.4 41.5 73.0 83.2 82.1 10 25 ROE (%) 4.8 6.2 3.4 2.9 3.0 8 20 Capex/sales (%) 20.5 0.0 78.1 83.1 14.1 6 15 Capex/depreciation (x) 49.6 0.0 136.9 139.7 24.7 4 10 Net debt/equity (%) 2.1 1.9 6.0 10.5 10.7 2 5 Net interest cover (x) 26.9 12.0 12.2 8.1 7.3

0 0 Source: Company data, Deutsche Bank estimates 16 17 18E 19E 20E

Net debt/equity (LHS) Net interest cover (RHS)

Jason Ching, CFA +852 2203 6205 [email protected]

Page 2 Deutsche Bank AG/Hong Kong

31 January 2018

Property Hang Lung Properties

Investment thesis

Outlook

We maintain our Hold rating on Hang Lung. In our view, while operations in China improved in FY17, challenges from intensifying competition from e- commerce in China are likely to continue ahead, implying that further operational improvement could take time. Moreover, Hang Lung will likely suffer rental loss at Grand Gateway 66 due to renovation in the next 18 months (scheduled for completion in mid-2019) for which we see few catalysts. Following the recent share price rally, Hang Lung is currently trading close to its fair value – not particularly attractive, in our view.

Valuation

Our estimated NAV for HLP is calculated through a sum-of-the-parts valuation. For development properties, we apply a DCF to estimate the value of the projects by taking the estimated cash inflows from property sales minus the outstanding costs, including any outstanding land costs, construction costs, and related income taxes and LAT for each of the China development projects. For the investment properties, we use the income capitalisation approach, taking the estimated rental revenues of the investment properties and dividing this figure by the estimated cap rates. Our estimated rents and cap rates differ between the various types of properties and their locations.

Our target price of HK$18.1/share is based on a 40% discount to our latest NAV of HK$30.1/share by rolling it over to end-2018. Our target discount is appropriate to reflect the current point in the market cycle, and it is in line with peers under our coverage, in our view.

Risks

Macro risks - Government property-tightening measures might be stricter than expected.

- Unexpected economic fluctuations in the Chinese economy.

Company-specific risks (downside) - Competition from other commercial properties in mainland China.

- Potential delays in completion of new properties in China.

- Execution in new cities in mainland China not fully proven.

Company-specific risks (upside) - A prolonged low interest rate environment.

- Disposal of key assets at low cap rates.

Deutsche Bank AG/Hong Kong Page 3

31 January 2018

Property Hang Lung Properties

FY17 results generally in line with expectation

FY17 core profit -13% YoY, to HK$5,530m

In FY17, HLP’s revenue fell 14% YoY to HK$11,199mn, dragged by a 36% YoY decline in property development revenue to HK$3,420m due to fewer residential units booked. On the other hand, property leasing revenue rose 1% YoY to HK$7,779m (1% YoY decline in China portfolio and 2% YoY growth in HK). Excluding areas closed for renovation, rental revenue from the China portfolio would have registered 5% YoY growth. Meanwhile, the development property margin improved by 5 percentage points YoY to 65% and the rental margin was 1% lower YoY at 73%. Meanwhile, underlying profit fell 13% YoY to HK$5,530m. A final dividend of HK$0.58/share was declared (flat YoY).

Figure 1: Income statement (HK$m) For Year Ended Dec 31 2016 2017 YoY Comments Revenue 13,059.0 11,199.0 (14%) Property Development 5,322.0 3,420.0 (36%) - Due to fewer unit sales, contributed by 226 units of The Long Beach, a house at 23-29 Blue Pool Road and the last duplex of The HarbourSide Property Investment 7,737.0 7,779.0 1% - Rental revenue benefited from stronger HK portfolio and Shanghai Plaza 66. The HK portfolio was boosted by the office and residential portfolios (both +5% YoY), but the retail portfolio (flat YoY) was adversely affected by the renovation of Kingston and Peak Galleria. In China, Shanghai malls indicated improvement (uptick in tenant sales) while other projects were still mostly mixed in performance. Operating Profit 8,520.0 7,879.0 (8%) Property Development 3,209.0 2,238.0 (30%) Property Investment 5,710.0 5,672.0 (1%) Unallocated operating costs (399.0) (31.0) (92%) - Driven by other income from HK$464m disposal of 257 car parking spaces at The Long Beach Net Finance Income/(Costs) (317.0) (654.0) 106% - Due to smaller amount of interest capitalisation Revaluation gain/loss (286.0) 2,599.0 n/a - Revaluation gain of HK$2,855m in HK; HK$256m loss in China Share of profit from JV/ associates 62.0 78.0 26% Profit before Tax 7,979.0 9,902.0 24% Income Tax (1,452.0) (1,304.0) (10%) Deferred Income Tax 80.0 (48.0) (160%) Profit after Tax 6,607.0 8,550.0 29% Minorities (412.0) (426.0) 3% Net Profit 6,195.0 8,124.0 31% EPS 1.38 1.81 31% Core Net Profit 6,341.0 5,530.0 (13%) - Due to fewer property sales booking contribution Core EPS 1.41 1.23 (13%) DPS 0.75 0.75 0% - Total dividend to be paid accounted for ~106% of FY17 rental income Interim DPS 0.17 0.17 0% Final DPS 0.58 0.58 0% - Final dividend kept unchanged Core payout ratio 0.53 0.61 Source: Company, Deutsche Bank

Page 4 Deutsche Bank AG/Hong Kong

31 January 2018

Property Hang Lung Properties

China operation saw improvement in FY17

Rental revenue was up 1% in FY17, boosted by growth in the Hong Kong portfolio and Shanghai Plaza 66 (the largest contributor in China). While overall performance in the China operation improved (following tenant mix enhancement and a recovery in the luxury retail segment), performance of individual malls was still mixed. Specifically, rental revenues at Shanghai Plaza 66 and Shenyang Palace were up 8% and 9%, respectively. Nevertheless, Forum 66, Center 66 and Riverside 66 reported YoY declines in rental income, despite seeing a recovery in tenant retail sales.

Figure 2: A mixed performance across Hong Kong, Shanghai and ex-Shanghai China investment properties end-FY17 end-FY16 end-FY17 end-FY16 Local FY17 revenue FY17 revenue FY16 revenue retail retail office office Currency (LC) in LC YoY in LC YoY in LC occupancy occupancy occupancy occupancy Hong Kong Hong Kong rental properties HKD 3,821 2% 5% 96% 96% 95% 91% Shanghai Shanghai Plaza 66 RMB 1,409 8% (3%) 96% 93% 89% 95% Shanghai Grand Gateway 66 RMB 883 (9%) 1% 77% 96% N.A. N.A. Ex-Shanghai China Shenyang Palace 66 RMB 155 9% 4% 90% 93% N.A. N.A. Shenyang Forum 66 RMB 213 (7%) 1% 83% 84% 80% 58% Jinan Parc 66 RMB 271 3% (3%) 94% 91% N.A. N.A. Wuxi Center 66 RMB 219 (2%) (5%) 87% 80% 87% 65% Tianjin Riverside 66 RMB 181 (5%) (1%) 89% 82% N.A. N.A. Dalian Olympia 66 RMB 99 13% N.A. 71% 66% N.A. N.A. Source: Company data, Deutsche Bank

Figure 3: Brief remarks on major investment properties Remarks made by HLP Hong Kong Hong Kong rental properties Satisfactory stable growth considering an already high rental. Both offices and residential posted 5% revenue growth. Retail portfolio was flat YoY, yet retail sales would show 8% increase on a comparable basis when excluding areas affected by renovation work at Kingston and The Peak Galleria. Rental margin slipped to 84% (vs 85% in FY16). Shanghai Shanghai Plaza 66 Rental revenue of the Shanghai Plaza 66 mall rose 22% YoY, on the re-opening of the renovated basement and higher tenant sales (+26% YoY). Meanwhile, office rental income decreased by 8% YoY, due to tenant relocation and some lease expiries towards FY17 year-end, which management expected to be short-term. Shanghai Grand Gateway 66 The asset upgrading programme at Grand Gateway 66 caused disruptions and 9% decline in rental revenue of the mall. If excluding the affected areas, rental revenue would advance 7%. The mall will re-open some of the areas from mid-2018 to minimise the impact (i.e. occupancy down by 19 points to 77% at end-FY17). Ex-Shanghai China Shenyang Palace 66 Rental revenue was up 9%. Retail sales grew 8% YoY on an improved tenant mix. Shenyang Forum 66 Rental income at the mall decreased by 25%, hit by a tenant optimisation exercise. As an early sign of improvement, tenant retail sales reported a 1% YoY increase. For office, rental income grew 24% as tenants moved in (occupancy rose 22 points to 80%). Notably, six floors representing 14% of occupancy will not be ready for leasing until mid-2018. Jinan Parc 66 Improvement is noticeable, with 12% increase in retail sales. Wuxi Center 66 Mall’s performance rebounded after a tenant mix upgrade, despite the current temporary closure of 9% of the leasable area owing to the construction of the second office tower above the mall. Retail sales was up 16% YoY while occupancy was up 7 points to 87%. Tianjin Riverside 66 Rental income was down 5% YoY due to tenant reshuffling; but the occupancy rate was up by 7 points to 89% and retail sales also rose 8% YoY. Dalian Olympia 66 Occupancy rate reached 71% as of end-FY17. Retail sales trended up stably. Source: Company data, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 5

31 January 2018

Property Hang Lung Properties

25 residential units pending sale in Hong Kong

HLP reported a YoY decline in property sales from its Hong Kong projects, as sales slowed 64% HoH in 2H17, after good sales in 1H17. HLP still has 25 inventory units, which mainly comprise luxurious residences at 23-39 Blue Pool Road, as at the end of 31 December 2017. Together, they have a book cost of HK$1,612m. By assuming a 65% margin (in line with the margin achieved in FY17), they could potentially fetch HK$4.6bn sales for the company.

Figure 4: Hong Kong residential development inventory Units sold in 1H17 Units sold in 2H17 Remaining inventory Long Beach 197 29 10 Blue Pool Road 0 1 15 HarbourSide 1 0 0 Total 198 30 25 Source: Company data, Deutsche Bank

Amoycan Industrial Centre is pending for redevelopment With respect to the Amoycan Industrial Centre, management expressed that an application for compulsory sale has been submitted to the Lands Tribunal after the company obtained an 84.85% ownership stake in the property. Moreover, management indicated that there is no plan for further asset disposal in the Hong Kong IP portfolio.

Page 6 Deutsche Bank AG/Hong Kong

31 January 2018

Property Hang Lung Properties

Financial analysis

Raising earnings estimates by 7-13% for FY18-19E

We are raising our earnings estimates for FY18-19E on account of the slightly higher rent achieved in FY17 than our original forecast. Consequently, we revise our core net earnings estimates by 7-13% for FY18-19E. Meanwhile, we introduce FY2020E earnings at HK$4,108m, 1.3% higher from FY2019E.

Figure 5: HLP – summary of our earnings and NAV revisions 2018E 2019E 2020E (HK$m) New Old Change New Old Change New Old Change Revenue 9,464 9,667 -2.1% 9,079 8,788 3.3% 9,439 n/a n/a Operating profit 6,735 6,426 4.8% 6,328 5,774 9.6% 6,567 n/a n/a PBT 6,261 5,935 5.5% 5,629 5,060 11.3% 5,749 n/a n/a Net profit 4,624 4,319 7.1% 4,057 3,598 12.7% 4,108 n/a n/a Core profit 4,624 4,319 7.1% 4,057 3,598 12.7% 4,108 n/a n/a EPS 1.03 0.96 7.1% 0.90 0.80 12.7% 0.91 n/a n/a Core EPS 1.03 0.96 7.1% 0.90 0.80 12.7% 0.91 n/a n/a NAV 135,434 123,355 9.8% NAV per share 30.1 27.4 9.8% Source: Deutsche Bank estimates

Figure 6: HLP – income statement (HK$m) For year ended Dec 31 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Property Development 1,274 2,500 9,814 1,197 5,322 3,420 1,573 832 832 Property Investment 6,098 6,638 7,216 7,751 7,737 7,779 7,891 8,247 8,607 Total Revenue 7,372 9,138 17,030 8,948 13,059 11,199 9,464 9,079 9,439 Property Development 846 1,511 7,419 844 3,209 2,238 1,083 573 573 Property Management ------Property Investment 4,896 5,326 5,589 5,704 5,710 5,672 5,684 5,788 6,029 Others ------Unallocated operating costs (626) (606) (646) (670) (399) (31) (31) (33) (34) EBIT 5,116 6,231 12,362 5,878 8,520 7,879 6,735 6,328 6,567 Net financing cost 273 395 253 78 (317) (654) (553) (777) (896) Share results of associates 105 96 75 75 62 78 78 78 78 Exceptional item 4,675 2,482 1,705 631 (286) 2,599 - - - Pre-tax profit 10,169 9,204 14,395 6,662 7,979 9,902 6,261 5,629 5,749 Income tax (973) (1,132) (2,146) (1,126) (1,452) (1,304) (1,033) (929) (949) Minority interests (525) (545) (449) (453) (412) (426) (604) (644) (692) Net profit 8,395 7,212 11,704 5,092 6,195 8,124 4,624 4,057 4,108 Core Net Profit 6,178 5,050 10,022 4,387 6,341 5,530 4,624 4,057 4,108 Core EPS 1.38 1.13 2.24 0.98 1.41 1.23 1.03 0.90 0.91 Source: Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 7

31 January 2018

Property Hang Lung Properties

Figure 7: HLP – balance sheet (HK$m) For year ended 31-Dec 2012 2013 2014 2015 2016 2017 2018E 2019E 2020E Cash and equivalents 36,025 34,321 39,946 31,289 24,325 18,401 16,785 15,159 18,095 Receivables 1,270 2,865 1,916 1,173 3,939 2,036 1,609 1,362 1,321 Inventories and PUD 6,109 5,695 4,046 3,830 2,352 1,612 1,122 863 604 Other current assets 452 - - - - 214 - - - Total current assets 43,856 42,881 45,908 36,292 30,616 22,263 19,515 17,384 20,021 Investment properties 98,223 107,587 120,137 129,425 125,421 134,444 141,089 147,855 149,335 Fixed assets and land use rights 24,732 30,767 25,911 17,045 17,609 21,812 22,890 23,988 24,228 Interests in subsidiaries and associate 1,041 1,030 1,205 1,241 1,249 1,277 1,277 1,277 1,277 Other non-current assets 12 15 18 15 12 3,790 85 85 85 Total non-current assets 124,008 139,399 147,271 147,726 144,291 161,323 165,341 173,205 174,925 Total assets 167,864 182,280 193,179 184,018 174,907 183,586 184,856 190,589 194,946 Payables 4,811 5,977 7,906 6,806 6,327 6,673 5,963 5,901 5,947 Short term debt 1,113 1,657 5,657 4,693 568 2,112 2,264 2,832 1,878 Other current liabilities 392 633 1,581 501 932 504 368 316 326 Total current liabilities 6,316 8,267 15,144 12,000 7,827 9,289 8,595 9,049 8,150 Long term borrowings 28,623 33,322 29,441 28,078 26,514 22,708 23,180 27,517 31,762 Other non-current liabilities 8,947 9,524 9,591 9,048 8,421 9,344 9,344 9,344 9,344 Total non-current liabilities 37,570 42,846 39,032 37,126 34,935 32,052 32,524 36,861 41,106 Total liabilities 43,886 51,113 54,176 49,126 42,762 41,341 41,119 45,911 49,257 Minority interests 6,050 6,633 6,676 5,903 5,580 6,087 6,329 6,586 6,863 Total net asset 117,928 124,534 132,327 128,989 126,565 136,158 137,409 138,092 138,827 Capital and retained earnings 109,626 113,621 132,327 128,989 126,565 136,158 137,409 138,092 138,827 Other reserves 8,302 10,913 ------Shareholders' funds 117,928 124,534 132,327 128,989 126,565 136,158 137,409 138,092 138,827 Source: Company data, Deutsche Bank estimates

Page 8 Deutsche Bank AG/Hong Kong

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Property Hang Lung Properties

Valuation

Our NAV estimate for HLP is HK$30.1/share

Our estimated NAV for HLP is calculated through a sum-of-the-parts valuation. For the development properties, we apply a DCF to estimate the value of the development projects of the company by taking the estimated cash inflows from property sales minus the outstanding costs, including any outstanding land costs, construction costs, and related income taxes and LAT for each of the China development projects. We take into account only the existing landbank, and we do not assume any terminal value in the DCF analysis.

For the investment properties in HK and China, we use the income capitalisation approach, taking the estimated rental revenues of the investment properties and dividing this figure by the estimated cap rates. Our estimated rents and cap rates differ between the various types of properties and their locations. Our estimated NAV is HK$30.1/share.

Figure 8: NAV breakdown (end-FY18) HK$mn HK$/Share % of NAV Property Development 5,119 1.1 4%

Property Investment Hong Kong Retail 47,484 10.6 35% Hong Kong Office 19,293 4.3 14% Hong Kong Residential 9,649 2.1 7% Hong Kong Others 2,903 0.6 2% China Retail 43,271 9.6 32% China Office 13,945 3.1 10% China Residential 845 0.2 1% China Others (4,361) (1.0) -3% Total Property Investment 133,029 29.6 98%

Gross Asset Value 138,148 30.7 102% Net Cash/(Debt) (2,714) (0.6) -2% NAV 135,434 30.1 100% Source: Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 9

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Property Hang Lung Properties

Target price at 40% discount to our revised NAV estimate of HK$30.1/shr; risks We base our HK$18.1/share TP on a 40% discount to our revised NAV of HK$30.1/share by rolling it over to end-2018. Our target discount is appropriate to reflect the current point in the market cycle, and it is in line with peers under our coverage, in our view.

Figure 9: HLP – discount to NAV

60% Discount to NAV -1SD Average +1SD 40%

20%

0%

-20%

-40%

-60%

-80%

Jan-10 Jan-18 Jan-94 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-12 Jan-14 Jan-16 Jan-92 Source: Bloomberg Finance LP, Deutsche Bank

Figure 10: HLP – PE Figure 11: HLP – PB 60 PE -1SD Average +1SD 2.5 PB -1SD Average +1SD

50 2.0

40 1.5 30 1.0 20

0.5 10

0 0.0

Jan-94 Jan-92 Jan-96 Jan-98 Jan-00 Jan-02 Jan-04 Jan-06 Jan-08 Jan-10 Jan-12 Jan-14 Jan-16 Jan-18

Jan-98 Jan-08 Jan-14 Jan-94 Jan-96 Jan-00 Jan-02 Jan-04 Jan-06 Jan-10 Jan-12 Jan-16 Jan-18 Jan-92 Source: Bloomberg Finance LP, Deutsche Bank Source: Bloomberg Finance LP, Deutsche Bank

Page 10 Deutsche Bank AG/Hong Kong

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Property Hang Lung Properties

Risks

Macro and company-specific risks

Downside 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. If the government’s property market tightening measures are stricter than expected or if the impact of the measures already introduced are stronger than expected, we could see weaker-than-expected sales and price performance for the property businesses of Chinese property companies, including HLP.

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 − affecting Chinese developers’ property sales. In addition, 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 business of China property companies such as HLP.

Competition from other commercial properties in mainland China While HLP has a strong track record of operating commercial properties in mainland China and its commercial properties are of high quality and in prime locations, there are still 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 HLP in China.

Potential delays in completion of new properties in China HLP is planning to complete at least one new commercial property project in China each year from now until 2018. The completion of these projects could be affected by unexpected changes in contractors, labour, weather and other technical conditions, and potential delays would likely affect the timing of the contributions of the income streams from these properties.

Execution in new cities in mainland China not fully proven While HLP has a strong track record of operating in the Shanghai and HK commercial property markets, its operational capabilities in the 10 new cities have not yet been fully established. Weaker-than-expected operating performances in these cities might result in downside risk to our estimated earnings and NAV.

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Upside risks A prolonged low interest rate environment There has been a strong correlation between interest rates and cap rates; if the ample liquidity situation continues for a longer-than-expected period, current historical low cap rates could be maintained for longer periods, resulting in higher asset values.

Disposal of key assets at low cap rates If HLP is able to sell any of its key assets at a low cap rate, this could result in a meaningful boost to NAV above our current projection.

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Appendix 1

Important Disclosures

*Other information available upon request

Disclosure checklist Company Ticker Recent price* Disclosure Hang Lung Properties 0101.HK 20.10 (HKD) 30 Jan 18 14 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. 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. Important Disclosures Required by U.S. Regulators Disclosures marked with an asterisk may also be required by at least one jurisdiction in addition to the United States. See Important Disclosures Required by Non-US Regulators and Explanatory Notes.

14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year.

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=0101.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. Jason Ching

Historical recommendations and target price: Hang Lung Properties (0101.HK) (as of 1/30/2018)

25.00 Previous Recommendations

Strong Buy Buy 2 20.00 1 Market Perform Underperform Not Rated Suspended Rating 15.00 Current Recommendations

Buy 10.00 Hold Security PriceSecurity Sell Not Rated Suspended Rating 5.00 *New Recommendation Structure as of September 9,2002

**Analyst is no longer at Deutsche 0.00 Bank

Feb 16 May 16 Aug 16 Nov 16 Feb 17 May 17 Aug 17 Nov 17 Date

1. 13/09/2016: Downgrade to Hold, Target Price Change HKD16.60 2. 26/01/2017: Hold, Target Price Change HKD16.50 Jason Ching Jason Ching

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Equity rating key Equity rating dispersion and banking relationships Buy: Based on a current 12- month view of total 600 share-holder return (TSR = percentage change in 56 % share price from current price to projected target price 500 plus pro-jected dividend yield ) , we recommend that 400 investors buy the stock. 300 33 % 200 Sell: Based on a current 12-month view of total share- 19 % 10 % 18 % holder return, we recommend that investors sell the 100 16 % stock 0 Buy Hold Sell Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not Companies Covered Cos. w/ Banking Relationship recommend either a Buy or Sell. Asia-Pacific Universe Newly issued research recommendations and target

prices supersede previously published research.

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Additional Information

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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 liquidation of positions), and settlement issues related to local clearing houses are also important risk factors. 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. 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. Funding in a currency that differs from the currency in which coupons are denominated carries FX risk. Options on swaps (swaptions) the risks typical to options in addition to the risks related to rates movements.

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German Banking Law and is subject to supervision by the European Central Bank and by BaFin, Germany’s Federal Financial Supervisory Authority.

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David Folkerts-Landau Group Chief Economist and Global Head of Research

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