Deutsche Bank Research

Asia Industry Date China 16 October 2020

China Property Property Initiation of Coverage

Re-rating potential for developers with balanced growth Lucia Kwong, CFA With credit strength replacing scale as a key competitive advantage, we see Research Analyst opportunities +852-2203 6256 The China property sector, dominated by the world's largest homebuilders by annual home sales, is heading in a new direction. The property sector has derated since early 2018 in response to concerns about the industry. We believe current valuations ignore the steadier nature of today's property market, with less cyclicality and more balanced supply/demand dynamics. We are cautiously optimistic on the sector at a time when credit strength is replacing scale as the key competitive advantage. We expect companies with strong or improving credit profiles to be re-rated, outperforming those with stretched balance sheets despite ultra-high growth, and the valuation gap to widen further from here.

Simplistic business models being phased out; three areas of diversification China property developers have faced a reshaped policy landscape since local governments began to regulate selling prices on primary home launches from 2017 onwards. Together with keen competition in public land tender markets, this suggests that development margins are capped and risk further compression. The formerly foolproof manufacturing model of go-for-scale through accelerated presale cycles (shortening the required time from land acquisitions to presale launches) and geographical expansion is being challenged.

Homebuilding is still the bread-and-butter of China property developers, but we believe that a higher level of sophistication is now needed to sustain margins and growth. Enhancements could come from: 1) business diversification, where management capabilities and expertise in development, operation and management are crucial (not to mention the cheap financing costs in the case of asset-heavy portfolio build-out); 2) diversified funding access; and 3) diverse means of land replenishment, including M&A, urban renewal, integrated development projects, etc. We also believe that companies with the ability to turn some of their real estate services into open platforms to serve third-party customers can create value and eventually outshine their peers.

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 Distributed on: 16/10/2020 05:49:05 GMT 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) 064/04/2020. DURING THE PERIOD NOVEMBER 2018 to MARCH 2020 DISCLOSURES MAY HAVE DISPLAYED INCOMPLETE INFORMATION, PLEASE SEE APPENDIX 1 FOR FURTHER DETAILS.

7T2se3r0Ot6kwoPa 16 October 2020 Property China Property

Diversified land access could become crucial in margin preservation With increasing competition in public tender markets squeezing development margins, finding alternative means of landbanking could be crucial. We believe developers with early entry and know-how in urban renewal, city operation projects, and TOD developments possess another competitive advantage. In particular, urban renewal projects are getting more government support than in previous years and could reenter the spotlight in the near future, in our view. We expect companies with such channels to better preserve margins and stand out from peers in the long run.

Credit-driven business model needs overhaul Another challenge for developers is the across-the-board increase in leverage over the past three years to support landbanking, which finally roused government concerns and led to the discussion of potential curbs on gross debt growth going forward ("The Three Red Lines"). Developers that opt for high leverage to fuel development sales growth will have to bear not only a higher interest burden but also higher financing costs when credit quality deteriorates. A high cost of financing puts pressure on development margins and profitability, offsetting the benefits of scaling up. As such, even without potential financial curbs by the central government, the credit-driven expansion model appears to be reaching its limits.

Valuations and recommendations Our key call is to pick medium-term outperformers that have an edge in either land or funding access and/or are expected to see improvements in credit quality. The sector trades at 6.7x/5.8x FY20/21E P/E, and we expect sector returns to be skewed to the upside in the near term given valuations and favorable seasonality. We initiate coverage on five China property developers: China Resources Land (1109.HK), Shimao Group Holdings (0813.HK), China Aoyuan Group (3883.HK), Agile Group Holdings (3383.HK), China SCE Group Holdings (1966.HK). Within our coverage, our pecking order is Shimao > Agile > CRLand > China Aoyuan > China SCE, taking into account the likely timing of share price catalysts, valuation, stock liquidity and market cap. Risks: macroeconomic weakness, Rmb fluctuations, unexpected resurgence of the pandemic, drastic mortgage tightening. See company sections for company specific valuation and risks.

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Table Of Contents

Investment thesis...... 4 With or without The Three Lines, China developers' traditional bu...... 4 Stock initiations...... 5

China homebuilding industry: Diversification neede...... 9 China property policy landscape today: heavily regulated growth ...... 9 Diversification #1: Alternative means of access to land determine ...... 12 Diversification #2: Access to various low-cost financing channels...... 14 Diversification #3: Branching out from property development...... 14

Leverage-driven growth is poised for a setback...... 16 The Three Red Lines – a warning to the industry...... 20

Sector view and strategy...... 24 Sector view – Not on a secular uptrend for everyone anymore...... 24 4Q20 sector strategy: cautiously optimistic...... 27

Property market overview – more stable...... 30 Long-term housing demand is likely to stem from upgrades for qual...... 32

Agile Group ...... 38 Investment thesis ...... 39 Outlook...... 39 Other discussion...... 40 Valuation...... 41

CR Land...... 46 Investment thesis ...... 47 Other discussion...... 48 Valuation...... 48

China Aoyuan...... 54 Investment thesis ...... 55 Outlook...... 55 Other discussion...... 56 Valuation...... 57

China SCE Group...... 62 Investment thesis ...... 63 Outlook...... 63 Other discussion...... 64 Valuation...... 65

Shimao Group ...... 71 Investment thesis ...... 72 Other discussion...... 72 Valuation...... 73

Deutsche Bank AG/Hong Kong Page 3 16 October 2020 Property China Property Investment thesis

With or without The Three Lines, China developers' traditional business models need an overhaul

The China property sector is approaching 20 years of development and has gone through rapid industry consolidation. Major players have successfully expanded their scale through accelerating housing start cycles and leveraging up, branching out from their hometowns to go nationwide and meet sustainable housing demand across China. Developers are incentivized by banks to aim for scale expansion, as banks prioritize developers ranked at the top of the league by contract sales achieved when considering lending quotas. As a result, developers that successfully manage a mega-sized portfolio do enjoy economies of scale, but the industry as a whole is more leveraged. At the same time, there is keen competition for land among branded developers in most cities, while local governments put heavy controls on housing prices. As a result, industry margins have been squeezed, as reflected in companies' earnings from 2H19 onwards.

The Three Red Lines (not formally announced) act as a warning signal from the regulatory bodies with regard to the leverage situation, and we expect more companies to have to change their strategic focus from scale expansion to the reduction of financial risks and funding costs. We have heard of more companies aiming to contain gross debt growth through capex cuts and spin-offs/disposals, which we believe could offer some comfort to investors.

In addition, we look into the industry's existing business model and conclude that diversification and modification on several fronts (land access, funding access, business diversification) are necessary for developers to excel from here.

Alternative landbanking channels, especially Urban Renewal Projects, may enter the spotlight again Among the diversification themes we mentioned, the access to urban renewal projects (mainly in Guangdong province, with GBA a focus) is a key competitive advantage in preserving development margins, in our view. In particular, local governments are promoting urban redevelopments as a solution to increase land supply and are becoming more accommodative. Developers that have cultivated the business for several years, building up renewal pipelines, may be closer to conversion of projects and crystallization of value. The entry barrier is thus high and margins way better than those for land acquired via open tenders.

Sector derating might have also been driven by changes in investor preferences Since Jan-18, the China property sector's trading forward P/E has come down from a peak of 8.5x to the recent trough of 5.2x in Aug-20, before recovering to 5.7x (rolling 12-mth forward basis). This might have priced in concerns about margin compression ahead, but we believe stock market preferences (favoring new economy sectors with high growth expectations and asset-light industries with scalability) have played a more important role.

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Strong players defying industry trends are ignored We also believe that the sector's low valuation does not reflect the steadier property market with improving policy visibility, the less cyclical market and the more balanced supply/demand dynamics vs. a decade ago. The derating backdrop might have also easily masked selective competent developers with quality management, diversified landbanking channels, decent earnings growth prospects and more diversified businesses.

Financing cost trend to determine profitability and even valuation If we look at historical valuations of the sector throughout the past decade, the average forward P/E has not varied much on a long-term horizon, but companies have gone through re-ratings /deratings mostly in line with their operating scale, and often correlated with their credit strength across the years.

So long as selling prices are capped and competition for land remains fierce, developers' future profitability could be even more correlated with their financing cost trends. Going forward, we expect the valuation gap between companies with better (and improving) credit quality and those with a weakening credit outlook to be wider than before. After all, those companies with prudent financial management often end up having better landbanking opportunities. We also believe that companies which proactively reduce leverage, even at the expense of short-term development pipeline expansion, could see share price re-ratings.

Valuation methodology We value the China property developer sector mainly based on P/E, considering that 1) homebuilding, an asset churn model, is still the major revenue contributor for most companies, and 2) companies are aiming to expand asset-light management businesses, which are better valued using P/E. The fair P/E depends on a range of factors, including companies' earnings growth outlook (PEG), which in turn depends on financial leverage, level of geographical diversification, and market share, among others.

For companies with sizable recurrent income generating assets / businesses, we set our target prices using a discount to NAV estimates. Our NAV estimates are based on sum-of-the-parts methodology: 1) development business values, which are essentially the expected future attributable net profits from the existing land resources with land certificates secured, based on projected ASP in the next four years, assuming 2-4% ASP growth p.a.; and 2) the market value of listed businesses held by companies. This is added to existing shareholder equity or development segment equity.

We believe developers' valuations are increasingly related to their credit costs, which in turn depend on their debt profile management. We believe companies' valuations should be compared relative to their credit rating brackets, rather than operating scale.

Stock initiations

We initiate sector coverage with a cautiously optimistic view but stay selective; we believe sector returns should be skewed to the upside in the near term amid current valuations and favorable seasonality. We initiate coverage on five China property developers: China Resources Land (1109.HK), Shimao Group Holdings (0813.HK), China Aoyuan Group (3883.HK), Agile Group Holdings (3383.HK), China SCE Group

Deutsche Bank AG/Hong Kong Page 5 16 October 2020 Property China Property

Holdings (1966.HK). These companies enjoy long-term re-rating potential stemming from credit quality improvements, catalysts from spin-offs/asset disposals replenishing capital, or their niches in land acquisition (cheaper funding costs, M&A expertise, urban renewal project pipeline, etc). Their strong contract sales achieved over past years and booking pipeline could also be a plus for their share price performance, in our view. Within our coverage, our pecking order is Shimao > Agile > CRLand > China Aoyuan > China SCE, taking into account near- term share price catalysts, valuation and market cap.

Figure 1: Coverage overview

Company Ticker Last price Rating TP Target Target 2Y Upside Mkt CapP/E NAV discountDvd Yield P/BV As of 10/15/2020 HK$ HK$ FY20E P/E PEG CAGR US$ MM FY20E FY21E FY22E FY20E FY21E FY20E FY21E FY20E Agile 3383 HK 10.56 BUY 13.5 5.6 0.35 16% 28% 5,337 4.34 4.02 3.25 -32% -37% 11% 11% 0.72 CRLand 1109 HK 35.9 BUY 43.5 N/A N/A N/A 21% 33,032 9.61 8.34 6.97 -12% -19% 3.9% 4.4% 1.18 China Aoyuan 3883 HK 7.62 BUY 12.9 4.5 0.25 19% 69% 2,658 2.64 2.14 1.87 -58% -65% 14% 17% 0.92 China SCE 1966 HK 3.53 BUY 5.5 7.0 0.25 28% 56% 1,923 4.41 3.70 2.66 -70% -73% 8.6% 10.3% 0.66 Shimao 813 HK 31.5 BUY 42.5 10.4 0.40 26% 35% 14,379 7.65 5.89 4.71 -50% -54% 6.1% 7.5% 1.20 5 Co avg 57,329 8.13 6.88 5.68 -45% -49% 5.7% 6.6% 1.11 Sector 320,311 6.70 5.75 5.20 N/A N/A 5.3% 6.2% 1.17 Source : Bloomberg Finance LP, Deutsche Bank estimates

Agile Group Holdings (3383 HK, TP: HK$13.5) Agile was dragged by policy headwinds in the Hainan market during 2019 and high leverage to fund capex on the environmental business. Agile is determined to contain gross debt levels and de-leverage through spin-offs, which they have discussed during 1H20 results presentations. Its contract sales performance has improved along with eventual policy relaxation in Hainan; with high-margin sales recognized in FY20, we expect a strong earnings recovery (+102% YoY) followed by a 17% CAGR in the next two years. Its low-cost advantage, the Hainan market becoming more end-user driven, high portfolio development margins and high ROE, and its presence in GBA are masked by a weakened credit profile. We thus believe it is a potential re-rating play on deleveraging.

China Resources Land (1109 HK, TP: HK$43.5) CRLand has unique, successful track records in both rental development/operation and residential development, and aims to double its rental income base in the next five years. We like the company for its strong execution capability and know-how in integrated developments, diversified land access channels, and consistently above-industry average margins. CRLand is an uncommon all-round player that could remain outstanding among peers. We see the upcoming spin-off of its property management service operations as a share price catalyst.

China Aoyuan (3883 HK, TP: HK$12.9) Aoyuan is major GBA property developer that has rapidly built its development pipeline via M&A. The company adopts a fast development cycle and achieved high sales growth during FY16-19, which should translate into high revenue growth in FY20 and after. Aoyuan is also one of the key developers with a sizable urban renewal project pipeline after several years of cultivation. We believe some of the business is close to fruition and could bring about strong value-add for the company, including a presence in better locations in key cities in GBA and better margins; this is a key re-rating driver in the medium term, in our view.

Page 6 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

China SCE (1966 HK, TP: HK$5.5) China SCE has been a high-growth property developer, successfully going through scale and geographical expansion over the past few years, and is close to deliveries and recognition of revenue from FY20 onwards. The company is moving on to ramp-up its shopping mall portfolio (15 malls to open from 4Q20 to FY22) and targets ambitious build-out of its rental apartment management portfolio. Among peers with a similar scale and credit rating, China SCE's net debt/total equity (and see-through leverage) is relatively low and the stock appears undervalued based on PEG.

Shimao Group (813 HK, TP: HK$42.5) We like Shimao for 1) its stronger-than-average margin and earnings outlook; 2) 20-30% contract sales growth in the next few years; and 3) prudent financial management with leverage well contained, plus the company's financing costs may come down further, especially as its credit profile improves further. With an increasing dividend payout, it is a yield with growth stock. We see Shimao as one of the outperformers among the big-cap property developers, with near-term catalysts from the potential spin-off of its property management services arm.

Risks: Economic shocks, resurgence of virus One of our major assumptions behind our stock ratings is that economic conditions remain largely stable, with any potential economic weakness buffered by further monetary easing. Also, we do not factor in any large-scale resurgence of COVID-19 like in Mar-20. These two macro factors, which also affect Rmb stability, could be the key risks to our calls. See company sections for company specific risks.

Figure 2: DBe vs. Consensus

Ticker Items DB estimates Concensus Variance FY20E FY21E FY22E FY20E FY21E FY22E FY20E FY21E FY22E Revenue (Rmb MM) 3383 HK 75,284 89,368 106,715 73,312 86,872 95,860 2.7% 2.9% 11.3% 1109 HK 178,809 227,442 278,964 174,033 213,374 243,968 2.7% 6.6% 14.3% 3883 HK 77,456 97,507 104,960 76,186 97,111 119,550 1.7% 0.4% -12.2% 1966 HK 29,540 34,618 39,900 30,781 38,976 48,327 -4.0% -11.2% -17.4% 813 HK 149,483 185,139 235,204 142,057 177,506 211,599 5.2% 4.3% 11.2% Gross margins 3383 HK 33% 33% 32% 32% 31% 31% 0.1% 0.9% -0.3% 1109 HK 35% 32% 32% 35% 34% 32% 2.8% 0.0% -2.8% 3883 HK 29% 29% 28% 28% 28% 28% 0.6% 0.2% 0.1% 1966 HK 26% 27% 29% 26% 26% 26% -1.0% -2.5% 2.8% 813 HK 30% 30% 30% 30% 29% 29% 0.0% 0.2% 0.0% Core net profit (Rmb MM) 3383 HK 8,200 8,855 10,973 8,309 8,983 9,866 -1.3% -1.4% 11.2% 1109 HK 23,150 26,663 31,905 24,240 28,529 31,764 -4.5% -6.5% 0.4% 3883 HK 6,767 8,375 9,552 6,192 7,979 9,577 9.3% 5.0% -0.3% 1966 HK 2,910 3,497 4,869 3,441 4,325 5,263 -15.5% -19.1% -7.5% 813 HK 12,563 16,442 20,575 12,896 15,809 19,029 -2.6% 4.0% 8.1% Core EPS after perp interest (Rmb) 3383 HK 2.11 2.28 2.83 2.11 2.29 2.51 0.0% -0.4% 12.8% 1109 HK 3.25 3.74 4.47 3.47 4.07 4.50 -6.4% -8.1% -0.5% 3883 HK 2.51 3.10 3.53 2.29 2.93 3.50 9.8% 5.6% 0.9% 1966 HK 0.69 0.83 1.15 0.82 1.01 1.23 -15.6% -18.0% -6.5% 813 HK 3.58 4.65 5.82 3.71 4.49 5.40 -3.5% 3.5% 7.8% DPS 3383 HK HKD 1.00 1.03 1.18 0.91 0.97 1.06 9.7% 6.2% 11.6% 1109 HK Rmb 1.20 1.38 1.66 1.23 1.44 1.57 -2.0% -3.6% 5.3% 3883 HK Rmb 0.90 1.12 1.27 0.84 1.07 1.27 7.1% 4.1% 0.1% 1966 HK HKD 0.26 0.32 0.44 0.27 0.33 0.41 -1.9% -5.0% 8.5% 813 HK HKD 1.67 2.05 2.56 1.50 1.82 2.16 11.1% 12.7% 18.6% Source : Bloomberg Finance LP, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 7 16 October 2020 Property China Property

Figure 3:China property sector – Rolling forward P/E

9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0.0

Source : Bloomberg Finance LP, Deutsche Bank estimates

Figure 4: China property sector – Rolling forward P/BV

1.80 1.60 1.40 1.20 1.00 0.80 0.60 0.40 0.20 0.00 Jan-10 Feb-11 Mar-12 Apr-13 May-14 Jun-15 Jul-16 Aug-17 Sep-18 Oct-19

Sector Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : Bloomberg Finance LP, Deutsche Bank estimates

Page 8 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property China homebuilding industry: Diversification needed on three fronts

China property policy landscape today: heavily regulated growth

China's property sector has always been heavily regulated by central and local government policies, which were previously used as countercyclical tools to stabilize local level economic performance. During 2005-16, cycles in China 's property market occurred roughly once every three years, and resulted in big swings in the valuations of developers. Nevertheless, the housing market has become less volatile since late 2016, with property prices and sales largely moving sideways in 2017-19. The main reason for this was a fundamental shift in the government's policy stance, aiming to maintain housing market stability. The main purpose of housing is purely accommodation, not investment. The change in policy landscape reshapes the risks and returns of the homebuilding industry.

Less market risk: Nationwide boom-bust property cycle disappears Since 2017, the central government has delegated more property policy decisions to local governments. Local governments have the discretion to implement and adjust local level policies, including home purchase restrictions, favorable policies for talent migrants, etc. The policies aim to achieve housing price stability over the medium/long term. As a result, property cycles have become less synchronized across cities. The correlation of property prices across 70 cities fell from 0.81 before 2017 to around 0.4 subsequently.

While there are housing cycles at a provincial level, most developers have already expanded geographically or are in the process of regional expansion. This geographical diversification is a key underlying reason for developers' more stable sales performance, and is a factor that rating agencies consider when assigning ratings to the companies.

Figure 5: Property price correlation across 70 cities Figure 6: Residential property price and volume

1.0 corr y/y % property sales volume, y/y m/m annualized % 100 50 property price in 100 cities, rhs

0.8 80 40

60 30 property 0.6 cycles 40 disappeared 20

0.4 20 10

0 0 0.2 -20 -10

0.0 -40 -20 '13 '14 '15 '16 '17 '18 '19 '20 '08 '09 '10 '11 '12 '13 '14 '15 '16 '17 '18 '19 '20

Source : WIND, Deutsche Bank Source : WIND, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 9 16 October 2020 Property China Property

Lower expected return: development margins have limited upside To achieve the central government's goal of suppressing house price movements, local governments applied micro-management through non-market means, such as imposing limits on future presale prices when government sites are put up for tender, and imposing price limits when developers apply for presale permits. In order to obtain presale permits, developers often have to accept launch prices 10%- 15% below prevailing secondary market prices. When the best-in-class and poor quality homes nearby are priced without much differentiation, brand premium fails to be reflected in pricing, and can only be reflected in higher sell-through rates. Developers used to tackle these rules by deferring launches to beyond completion or preparing two contracts of different contract amounts, but these loopholes have been largely closed in the past two years.

Most sites acquired during late 2016 to 2017 are subject to selling price limits, but the land market was overheated at that time and such restrictions were ignored. As a result, margins were compressed from 2H19 onwards, when the impact of high- cost land bank started to kick in. The margin squeeze was prominent in the 1H20 results across the board.

Although the upside of housing prices is capped, competition for pure residential sites is more intense than before when developers' geographical exposures overlap. The average land prices of 300 cities, based on Soufun, increased 7.2% yoy in 7M20 (5.9%/16%/-1% for T1/T2/T3 cities). Meanwhile, the average selling prices indicated by NBS rose 5.7% yoy and the NBS 70-city primary home price index rose 4.8% yoy. Although the data are not directly comparable, they do suggest that land prices have been rising more quickly than home prices, particularly in Tier-1 and Tier-2 cities. Sites acquired via public tenders often fetch barely 20% gross margins, and single-digit net margins if a company's cost of borrowings is high.

Figure 7: CREIS 300-city average land A.V. Figure 8: NBS 70-city primary home price index

120% T1 T2 T3/4 40% 100%

80% 30%

60% 20% 40%

20% 10% 0%

-20% 0%

-40%

05/20

01/20

09/19

05/19

01/19

09/18

05/18

01/18

09/17

05/17

01/17

09/16

05/16

01/16

09/15 05/15 -10% 01/15

All cities Tier-1 Tier-2 Tier-3

Jul-19

Jul-18

Jul-17

Jul-16

Jul-15

Jan-20

Jan-19

Jan-18

Jan-17

Jan-16

Jan-15

Oct-19

Oct-18

Oct-17

Oct-16

Oct-15

Apr-20

Apr-19

Apr-18

Apr-17

Apr-16 Apr-15

Source : CREIS, Deutsche Bank Source : NBS, Bloomberg Finance LP, Deutsche Bank

Page 10 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Margins across companies are converging to industry average as their operating scale expands Another issue is that over the past few years, the top developers have opted for scale expansion to achieve 30-50% p.a. contract sales growth on a gross basis. Given the sheer size, it becomes difficult for them to fetch above-industry-average development margins on a portfolio basis if they keep replenishing land bank solely from public land tenders.

Based on the financial results of 26 major China property developers1 , we observe convergence in their gross margins to the industry average from 2019 to 1H20, indicating that the "excess returns from branding" these companies enjoyed in the early days are being wiped out.

Given this situation, operating efficiency, i.e. stringent cost control on land and SG&A expenses, becomes crucial. Mid-sized and small developers usually face higher costs-to-revenue (8-10%), and some may still enjoy some economies of scale along with development pipeline expansion. Large developers may spend only 7%+/- of revenue as SG&A expenses, and further improvement could be difficult.

Figure 9: China developers – Gross margins across major China property developers

50.0%

45.0%

40.0%

35.0% 33.6% 31.7% 33.5% 29.8% 30.0% 28.6% 30.1% 26.7% 26.7% 27.6% 25.0%

20.0%

15.0%

10.0% 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Source : Bloomberg Finance LP, company reports

Geographical exposure overlaps increasing Over the last decade, the central government announced several policy directives on developing new city clusters and economic regions, which subsequently attracted numerous investments in the property markets in the regions. As a result, major branded developers usually have a similar geographical focus, often driven by policy initiatives. Land tender markets in these regions often heat up, and land prices usually rise more quickly than housing prices.

1 Includes Agile, China Aoyuan, China Jinmao, China SCE, CIFI, China Merchant Shekou, COLI, Country Garden, China Resources Land, Evergrande, Seazen, Greentown, Guangzhou R&F, KWG, Logan, Longfor, Powerlong, Ronshine, Shimao, Sino-Ocean Land, SUNAC, Times China, China Vanke, Yuzhou, Zhenro.

Deutsche Bank AG/Hong Kong Page 11 16 October 2020 Property China Property

Diversification #1: Alternative means of access to land determines development margins

To lower land costs, developers used to pre-negotiate with local governments and co-develop projects with peers to reduce land competition. There is, however, less room for discussion with local governments on pure residential sites nowadays, and joint development has become a means to mitigate development risks instead of reducing competition. Alternative landbanking methods have become more crucial in reducing land costs as a % of sales. We prefer developers with more diversified channels of landbanking.

Urban Renewal (UR)/ City operation projects (COP): Defined as primary land development, Urban Renewal projects involve negotiation with existing residents/ occupiers on relocation and/or conversion of industrial sites into residential/ commercial sites, while City Operation projects involve direct negotiation with local governments (instead of dwellers on the ground), town-planning/designs, introduction of leading companies in the desired industries, and the development and operation of commercial/residential areas. COP in particular requires a good network in specific industries and/or specific development expertise. In both cases, the developable area is obtained in phases at costs largely fixed at the time of conversion agreement, hence ensuring a lower cash burden at the beginning of the project, and higher returns than land auctions.

The disadvantage, though, is that the timing of conversion is dependent on negotiations with land owners and local government approvals, making the timing uncertain. Landbank replenished in this way could be a long-term driver of margin improvement.

Integrated property developments: China Resources Land and Longfor are early entrants in the integrated residential/commercial property segment. The merits are attractive, including lower sales risks, better ancillary facilities for homebuyers, and better footfall for retail malls from the neighborhood. Development involves more expertise than pure residential projects and hence return is also better. One specific type of integrated property development is Transit-Oriented-Developments (TOD), which connects the developments to major public transportation hubs.

Integrated developments demand more skillsets and the development cycle is usually longer, hence competition for such sites is less intense than for pure residential sites. We believe this is the best illustration of execution capability and we prefer companies that have better access to TOD to those with a cookie-cutter way of homebuilding.

Industry co-operation/ industrial parks/ theme parks/ cultural and tourism- related projects: This model is not new – developers aim to obtain low-cost land bank and operate income-generating properties that can generate tax revenue and economic benefits for local governments. We think these projects tend to be capital intensive and may not generate sustainable recurrent income streams upon completion.

M&A of small and cash-strained developers: According to China Index Academy, the top 100 largest real estate developers accounted for 61.5% of the total industry in 2019 and are set to continue to gain market share from small developers. Small developers are restrained by limited access to funding, especially bank loans and mortgage loan quotas, a lack of scalability, which leads to higher per-unit

Page 12 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property development costs, and a lack of brand recognition. Major developers with operating and financing cost advantages are likely to scale up their business via inorganic means.

Amongst the major Hong Kong-listed China developers, Jinmao is the pioneer in city operation projects, and SOEs are better positioned in this segment than private companies.

Urban renewal projects give local players cutting edge Urban renewal (UR) is more common in the Greater Bay Area (GBA), where governments are supportive of redevelopment and land use conversion. In most cities, the UR sites need to be put up for public tender upon land use rights conversion; if the site is won by third parties, the developer gets the primary development earnings but loses the development rights. On the other hand, developers are allowed to take ownership directly upon conversion if the sites are in Shenzhen, Huizhou, Zhuhai or Dongguan. UR business requires strong local knowledge that only local players can achieve. The margins can be as good as 60%+ all-in, which further splits into mid-20% from property development and the rest from primary land development.

Most Guangdong-based developers have access to UR projects, while new entrants to GBA can only acquire land through tenders, which may fetch only razor- thin margins.

Figure 10: Hong Kong-listed China property companies with alternative landbanking channels

Potential number of projects, developable GFA, salable GFA converted in 1H20 Type of landbanking Company resources (mil sqm) Urban Redevelopment Times China 150 projects, 52 m sqm 1.4 Urban Redevelopment Logan 87 projects, 24.8m sqm, Rmb455bn 3.5 Urban Redevelopment China Aoyuan 50 projects, 30.6m sqm, Rmb659bn 0.5 Urban Redevelopment Kaisa 167 projects, 100m sqm, Rmb2,618bn 0.7 Urban Redevelopment Agile 13 cooperation agreements, 7m sqm, Rmb240bn 1.5 Urban Redevelopment R&F 80 projects, 40m sqm salable area 1.3 32 projects, 18m sqm (leasable commercial GFA 2.6m sqm), Urban Redevelopment KWG Rmb610bn N/A Urban Redevelopment CR Land 19 projects, 16.3m sqm (attri 8m sqm), Rmb 273bn N/A MOU Country Garden Rmb671 bn City Operation China Jinmao 26.4m sqm (17.4m sqm attributable) 10 projects and nursing Industry cooperation SUNAC Culture & Tourism, convention / exhibition, healthcare community Integrated property China SCE 19 malls of 1.24m sqm in aggregate 8 projects 10.6m sqm investment pty landbank, 54% of which is shopping Integrated property CR Land mall 90 malls, with 48 to be opened by 2020; among which 65 are Integrated property / TOD Longfor TOD commercial projects N/A Source : company reports, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 13 16 October 2020 Property China Property

Diversification #2: Access to various low-cost financing channels mitigates refinancing risks

The debt profiles of Hong Kong-listed China developers are usually more diversified than those of their unlisted or A-share-listed peers, thanks to easy access to offshore bond markets and/or club loans by Hong Kong banks on top of tapping the onshore bond market. Most have built up long issue/credit track records, which enable better access to offshore markets; this in turn mitigates refinancing risks and hence financing costs are cheaper.

Although in the near term developers can ride the current favorable bond market sentiment in refinancing their maturities at cheaper costs, in the medium term developers may need to obtain financing at a lower cost than peers. The latest trend is green bond issuance, but many of them would need to improve ESG disclosures /scores from current levels before they can access this channel.

Diversification #3: Branching out from property development

When the property industry turned into a race for homebuilding scale, most developers prioritized building and churning residential units, which ensured the quickest capital recycling. In a way this has made the top developers look more alike and their products more commoditized. The flip side is that fewer incompetent players rushed into investment property development, resulting in a better return environment for commercial properties development and leasing. For pure homebuilders that wish to penetrate the commercial properties segment, the entry barriers they face are know-how and experience.

In recent years, some investments in "new-economy-related" segments have yielded decent returns. Examples include modern logistics facilities and long-stay rental apartments, particularly if land costs are cheap and/or local governments offer subsidies and/or cheaper access to financing. Some long-stay rental apartments are modified from existing under-rented or underutilized properties (say offices, retail areas or even ancillary facilities), and are able to obtain low-cost borrowing through the issuance of ABS.

Moreover, companies with expertise in developing and managing commercial properties could offer services to third-party customers and turn this operation into a fee-based income-generating business.

Emerging real estate development / real estate service platform model Branded developers are increasingly moving away from traditional business models and the package segment of property development / investment business and into stand-alone real estate services available to third parties in addition to self- developed properties. One prominent example is property management services, in which companies make use of their brands to bid for service contracts of properties built by other companies, while providing all-round value-added services to create more value for their businesses.

Page 14 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Other types of real estate services include:

n Project management: Opening up the development platform and providing landowners with full-scale project design/development/presale/delivery services and the means to fulfill all regulatory requirements. Currently Greentown Management (9979.HK), Vanke, Central China, etc, offer such services. n Asset management – for instance, management of shopping malls/offices on behalf of owners n Property sales agencies n Landscaping, home interior decoration EPC services n Primary land formation, land conversion, planning and other matters negotiation services

Spin-offs – killing two birds with one stone When asset-light businesses are embedded in asset-heavy real estate companies, it is difficult to get their value recognized, as the former usually have a small earnings base against development / rental income. That is why the value of real estate services is often hidden and the best way to realize this value is perhaps via spin-offs/ disposals. Moreover, those platform-like asset-light businesses open to third parties are often valued at higher P/E multiples than property development business, and offer developers an alternative means to replenish capital.

Deutsche Bank AG/Hong Kong Page 15 16 October 2020 Property China Property Leverage-driven growth is poised for a setback

For as long as selling price growth remains heavily regulated by the authorities and the room for margin expansion is limited, developers' borrowing costs will be the sole factor determining their profitability. Each developer's credit spreads are determined by its credit profile, credit track record, funding support from both onshore and offshore banks, debt structure, etc. Put simply, a developer aggressively leveraging up to expand its development pipeline may soon face a sharp margin squeeze, which would offset the advantage from scaling up the business.

Sanity check on growth vs. leverage Take a look at the ROE trends across HK-listed China property developers since 2010. ROEs peaked in 2018 when margins peaked, but still managed to stay well above pre-2017 levels. However, in contrast to the general impression that Chinese developers opt for a fast asset-churn model, the reality is that the turnover of land banks has stayed largely steady since 2017 – or the pace of land acquisition was faster than the pace of property development.

Industry ROE was rather enhanced by leverage over the last few years, as low trading valuations discouraged companies from recapitalizing their balance sheets. Net debt/equity peaked in 1H19 and was still at high levels as of Jun-20. In addition, companies have turned to seeking hybrid capital (perpetual securities onshore and offshore that are treated as equity) and capital contributions from minority shareholders. The leverage helped companies build up adequate salable resources to support strong sales growth. The high unbooked sales are supposed to bring down leverage upon recognition in the 2-3 years ahead. To this end, the realization of profits from contract sales a few years back is equally important as maintaining high contract sales growth.

Figure 11: China property developers – ROE Figure 12: China developers – Total assets (excl pre-sale proceeds) / shareholders equity 19.3% 20.0% 8.0 17.8% 7.0 7.3 18.0% 16.5% 7.0 6.6 15.3%15.8% 15.8% 16.0% 5.8 6.0 14.0% 13.6% 6.0 14.0% 12.4% 4.9 4.5 12.0% 5.0 3.9 10.0% 4.0 3.5 8.0% 3.0 6.0% 2.0 4.0% 2.0% 1.0 0.0% 0.0 2012 2013 2014 2015 2016 2017 2018 2019 1H20 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Note: 1H20 numbers are annualized Source : company data, Deutsche Bank Source : company data, Deutsche Bank

Page 16 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 13: China property developers – asset turnover Figure 14: China property developers – net gearing

30.0% 140% 123% 26.0%26.5%26.6% 117% 24.7% 120% 103% 107% 25.0% 22.3% 20.8%20.8% 100% 19.7% 74% 76% 74% 71% 73% 77% 20.0% 17.8% 64% 66% 80% 57% 52% 53% 50% 54% 60% 46% 15.0% 40% 10.0% 20% 0% 5.0% 2012 2013 2014 2015 2016 2017 2018 2019 1H20 0.0% Net gearing on total equities (including MI and perpetuals) 2012 2013 2014 2015 2016 2017 2018 2019 1H20 Net gearing on attributable equities

Note: 1H20 numbers are annualized Source : company data, Deutsche Bank Source : company data, Deutsche Bank

Taking a closer look at the ROE trends across companies from end-2018 to 1H20 (annualized), companies like SUNAC and Guangzhou R&F that were previously highly leveraged are in de-leveraging mode, which is reflected in their ROE. Most other companies increased their leverage by less than the group average, but there are a few outliers like Evergrande (3333.HK) that still experienced considerable ROE declines, while Aoyuan maintained a strong rising ROE trend.

The asset turnover of the Hong Kong-listed developers has generally slowed down. For companies that continuously build up leasing property portfolios, lower asset turnover and ROE decline is normal, but for pure homebuilders the decline in asset turnover could mean that the pace of landbanking is still ahead of revenue growth, or simply that their sales growth has slowed down.

Figure 15: Change in ROE vs change in leverage (end-2018 Figure 16: Change in ROE vs change in asset turnover to 1H20) (end-2018 to 1H20)

15% Agile Agile 15% 10% Aoyuan Aoyuan Powerlong COLI Powerlong Logan 10% SCE SCE KWG 5% Jinmao Jinmao Logan KWG 5% Sino-Ocean Shimao Greentown Chg in leverage 0% Greentown Sino-Ocean COLI CIFI ShimaoChg in asset tn -2.0Seazen -1.0CRLand 0.0 1.0 2.0 3.0 4.0 5.0 0% Ronshine -5% Industry Zhenro -20.0% -15.0% -10.0% -5.0% 0.0% 5.0% 10.0% Vanke CRLand -5% Ronshine GZR&F CIFI Times GZR&F -10% Zhenro Seazen Industry -10% SUNAC Country Gdn Yuzhou Times -15%

Chg in ROE (ppt) ROE in Chg Longfor Yuzhou SUNAC Chg in ROE (ppt) ROE in Chg CMSK Longfor Vanke -15% -20% Country Gdn -20% -25% Evergrande CMSK -25% -30% Evergrande -30%

Source : company reports, Bloomberg Finance LP, Deutsche Bank Source : company reports, Bloomberg Finance LP, Deutsche Bank

Leverage trend may need to be reversed as interest costs heavily cannibalize development profits In 1H20, spot financing costs have come down across the board, thanks to LPR cuts in 1H20 (15 base points in total), a buoyant onshore bond market and recovering offshore debt market in 2Q20, so average interest costs are also trending down. However, gross interest expenses as a % of revenue actually stayed on an uptrend. This can be partly explained by developers increasingly investing in JV projects; the revenues of such projects are not consolidated on the income statements.

Deutsche Bank AG/Hong Kong Page 17 16 October 2020 Property China Property

Most of the interest expense is capitalized and is recognized as COGS upon future delivery of units and recognition of development revenue under IFRS. As such, the high interest expenses will put further pressure on future gross margins. While this trend persists, industry gross margins are likely to come under further pressure in the next 1-2 years, in our view.

During the 1H20 results, more companies unveiled plans to reduce leverage and average borrowing costs, a sign that more developers are finally aware of the interest cost burden that eats into earnings. Companies' moves to improve their credit strength may imply that the credit-driven, high-asset-churn model is falling out of favor.

Figure 17: China developers – average borrowing costs across major China property developers

14.0%

12.0%

10.0%

8.1% 8.0% 7.8% 8.0% 6.9% 6.1% 6.0% 5.7% 6.2% 6.1% 6.0%

4.0%

2.0% 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Source : company reports, Deutsche Bank

Figure 18: China developers – gross interest expenses as % of revenue

13% 12.2% 12%

11%

10% 9.5% 9.4% 8.9% 9% 8.5% 8.5% 8.2% 7.8% 8% 6.8% 7%

6%

5%

4% 2012 2013 2014 2015 2016 2017 2018 2019 1H20

Source : company report, Deutsche Bank

Page 18 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

COVID-19 filtered strong credit profile companies from weak counterparts In contrast to their converging trend in margins, developers showed divergence in their credit strength during the COVID-19 shock. Prior to the shock, thanks to strong contract sales, even the highly leveraged companies had sufficient cash inflows to meet their working capital and capex requirements, so the sector's credit outlook was largely on a stable to improving trend. The COVID-19 outbreak disrupted pre- sale launches and construction schedules in 2Q20, impacting cash inflows and the short-term liquidity of those with weak credit profiles, triggering credit rating /rating outlook downgrades. On the other hand, the financially prudent companies remained calm and companies that have been consistently improving their credit profile and liquidity eventually saw credit rating upgrades recently after the COVID- 19 impact subsided.

Figure 19: S&P/Moody's credit rating changes for major China property developers

Company Action Rating Action Date Agency Before After SUNAC 1-Apr-19 S&P Rating upgrade B+ BB- SUNAC 3-Apr-19 Moody's Rating upgrade B2 B2 Ronshine 9-Apr-19 Moody's Rating upgrade B3 B2 Zhenro 9-Apr-19 Moody's Rating upgrade B3 B2 Zhenro 12-Apr-19 S&P Outlook change Stable Positive KWG 18-Apr-19 S&P Outlook change Stable Negative Kaisa 16-May-19 S&P Resume rating Not rated B Kaisa 15-May-19 Moody's Resume rating Not rated B2 Ronshine 9-Aug-19 S&P Rating upgrade B B+ Yanlord 23-Jan-20 Moody's Outlook change Under review Negative Yango 23-Jan-20 Moody's Rating upgrade B2 B1 Seazen 15-Jan-20 Moody's Outlook change Negative Stable Yida China 2-Mar-20 Moody's Rating downgrade Caa2 Caa3 China Jinmao 27-Mar-20 S&P Outlook change Stable Negative Greentown China 31-Mar-20 Moody's Outlook change Stable Negative China Logistics Properties Holdings 31-Mar-20 Moody's Rating downgrade B3 Caa1 China Logistics Properties Holdings 31-Mar-20 Moody's Outlook change Stable Negative Agile 2-Apr-20 Moody's Outlook change Stable Negative Agile 9-Apr-20 S&P Outlook change Stable Negative China SCE 9-Apr-20 S&P Outlook change Stable Negative Yuzhou 9-Apr-02 Moody's Outlook change Stable Negative Yuzhou 17-Apr-20 S&P Rating downgrade BB- B+ Guangzhou R&F 30-Apr-20 Moody's Outlook change Stable Negative Guangzhou R&F 30-Apr-20 Moody's Rating downgrade Ba3 B1 Yuzhou 25-May-20 Moody's Rating withdrawal B+ NA Evergrande 23-Jun-20 Moody's Outlook change Stable Negative Yuzhou 23-Jun-20 Moody's Outlook change Negative Stable China South City 12-Aug-20 S&P Rating upgrade B- B China Logistics Properties Holdings 14-Aug-20 Moody's Rating withdrawal Caa1 NA China South City 27-Aug-20 Moody's Rating upgrade Not rated B2 Guangzhou R&F 27-Aug-20 S&P Rating downgrade B+ B Powerlong 27-Aug-20 S&P Outlook change Stable Positive Powerlong 31-Aug-20 Moody's Outlook change Stable Positive Country Garden 2-Sep-30 S&P Outlook change Stable Positive Shimao 4-Sep-20 S&P Outlook change Stable Positive Longfor 4-Oct-20 Moody's Rating upgrade Baa3 Baa2 Country Garden 18-Sep-20 Moody's Rating upgrade Ba1 Baa3 Evergrande 24-Sep-20 S&P Outlook change Stable Negative Note: Based on S&P Long-Term Foreign Issue Credit Rating and Moody's Long-Term Rating or Senior Unsecured Debt rating. Source : Bloomberg Finance LP, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 19 16 October 2020 Property China Property

The Three Red Lines – a warning to the industry

21jingji.com first reported on 13 August 2020 the potential new guidelines to be imposed on developers by MOHURD and PBoC, with 12 major developers summoned on 20 August 2020 to discuss the industry's financial leverage. It also reported that while no formal announcements have been made and no concrete timeline set out yet, developers could be placed in one of four different categories based on three key criteria (the "Three Red Lines"), and their gross debt growth could be capped at 0-15%. The criteria include:

1. Adjusted leverage: (Total liabilities - presale proceeds) / (Total assets - presales proceeds) ≤ 70% 2. Net gearing: Net debt to shareholder equity ≤ 100% 3. Cash coverage: Cash (excluding restricted cash) / short-term debt ≥ 1x

n Category Red: All three limits are breached – gross debt growth to stay at 0% n Category Orange: Two limits are breached – gross debt growth not to exceed 5% n Category Yellow: One limit is breached – gross debt growth not to exceed 10% n Category Green: All criteria are met – gross debt growth capped at 15%

Again, no formal announcement has been made yet, and there are some grey areas that still need to be clarified. That said, the intention behind the demand that developers de-leverage is crystal clear, given increased cases of default among property developers, against a gloomy backdrop of a total Rmb85.1 bn of defaults in the onshore debt market and USD6.98 bn of defaults in the offshore debt market as of late Sep-20, according to Bloomberg.

Although the timing of implementation (or whether the guidelines will be implemented strictly after all) remains unclear, developers are already taking preemptive measures in response (e.g., by improving their debt profiles and short- term liquidity).

YTD 2020 bond defaults In a way, such limits are not entirely new; in fact, the NDRC has been imposing Macrolink Culturaltainment Dev't (000620 similar leverage limits on state-owned enterprises (especially construction CH) companies) for a long time. Similar restrictions were imposed in mid-2019 to Tahoe Group (000732 CH) prohibit further growth of developers' gross debt, but in the end, they were not Yida China (3639 HK) strictly implemented. Century Sunshine (509 HK) Tianjin Real Estate Group Oceanwide Hldgs (000046 CH) For simulation purposes, if we apply the balance sheet positions of the HK-listed developers as of end Dec-19 and end Jun-20, most companies are in the range of having breached 1-2 of the Three Red Lines (mostly on adjusted leverage and net D/E). These companies' average cash coverage is well above the required 1x. That is to say, developers are mostly concerned with liquidity risks, while the MOHURD and the PBoC are concerned about both liquidity and credit risks; from a macro perspective, we believe that the central government could possibly consider how much of the "funding resources" developers have taken up within the economy vs. other industries.

Page 20 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 20: China developers – adjusted leverage (total liabilities - presale proceeds) / (total assets - presales proceeds) as of period-end

90% 90% 85% 85% 80% 80% 75% 75% 70% 70% 65% 65% 60% 60% 55% 55% 50% 50% 45% 45% 40% 40%

2019 1H20 Average Limit

Note: Perpetual securities are assumed as equity. KWG and China Jinamo presale proceeds figures are based on "other payables" on 1H20 balance sheets. Source : company data, Deutsche Bank

Figure 21: China developers – net debt to total shareholder equity as of period-end

200% 200% 180% 180% 160% 160% 140% 140% 120% 120% 100% 100% 80% 80% 60% 60% 40% 40% 20% 20% 0% 0%

2019 1H20 Average Limit

Note: Perpetual securities are assumed to be equity. Source : company data, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 21 16 October 2020 Property China Property

Figure 22: China developers – cash coverage ratio (cash-on-hand / short-term debt) as of period-end

450% 450%

400% 400%

350% 350%

300% 300%

250% 250%

200% 200%

150% 150%

100% 100%

50% 50%

0% 0%

2019 1H20 Average Minimum

Source : company data, Deutsche Bank

Policy-driven de-leveraging goals may take time to achieve Trimming overall financial leverage across the industry (except for those in the Green Category) would mean a broad-based slowdown in landbanking, increasing asset turnover (trimming developers' land bank size while accelerating contract sales), especially for developers with lower margins. In reality, the government has already laid heavy controls on debt refinancing and issuance of new debts – property developers are required to apply for refinancing loan/debt quota in advance. Since early 2020, even syndicated loan arrangements require loan quota pre-approval from the NDRC. As of now, new loan/debt quotas are usually difficult to obtain.

Theoretically, regulators can defer any refinancing quota approvals or suspend any onshore debt issuance in order to effectively curb gross debt growth. The industry will face a maturity wall in 2021, and developers are paving the way to refinance the 2021 maturities ahead. Yet, so far, we have not heard of developers encountering problems in obtaining quota, except for the highly geared. In fact, Guangzhou R&F, which is in the Red Category, was suspended from issuing Rmb2.6 bn of ABS in early Sep-20, and it subsequently announced a share placement plan.

From developers' point for view, we doubt that those in the Yellow to Orange categories have strong incentives just to improve their scores if they do not need sharp gross debt growth, or if the move has no impact on their credit rating anyway. Those in the Red Category do have an imminent need to quickly restore their balance sheets. However, simply dumping their units in order to raise cash is not enough to improve their scores from the Red to the Orange category. The only way is to by means of asset disposals/spin-offs, and the scale has to be big.

Page 22 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

In any case, land demand would fall sharply from current heated levels if all companies aim to improve their scores from here, with a possible spillover impact on housing price expectations. Real estate FAI, comprised of 60% RE construction FAI and 30% land capex (including land sales and land formation) may also slow further.

The beneficiaries should be the lower-leveraged companies, which could replenish land bank during the soft land market. Being able to replenish land bank against the property cycle and securing better margins are additional advantages from which prudent companies can benefit.

Figure 23: Estimated number of breaches of "red lines," based on end-Jun-20 balance sheet positions

Red lines breached Companies 3 Evergrande, R&F, SUNAC

2 Agile, Powerlong

Aoyuan, China Jinmao, China SCE, CIFI, Country Garden, KWG, Logan, Longfor, Seazen, Greentown, Ronshine, Shimao, Sino-Ocean,Times China, 1 Vanke, Yuzhou, Zhenro

0 COLI, CRLand, Longfor, Sino-Ocean Land Source : company data, Bloomberg Finance LP, Deutsche Bank

Asset de-consolidation as a fast track to achieving lower leverage As common practice, developers own 55-65% attributable stakes in their land bank, with developers pooling together passive minority investors (such as insurance / real estate funds) in order to jointly develop within property projects – i.e., something like a development platform that invites third-party participation. In some cases, developers even offload project stakes to below 50% so as to de- consolidate project assets and liabilities from their consolidated balance sheets (even if they remain as the major operators of the projects). This could offer a fast track to offload certain interest-bearing liabilities. However, we understand that project-level refinancing is more restrictive for projects held at the JCE level. Hence, there is a limit to the extent to which projects can be de-consolidated.

Deutsche Bank AG/Hong Kong Page 23 16 October 2020 Property China Property Sector view and strategy

Sector view – Not on a secular uptrend for everyone anymore

Against the backdrop of the market and policy headwinds discussed above, it is hard to argue that the China property sector is (as a whole) a secular uptrend story like those that we have witnessed over the past decade. Aggressive players that have been counting on credit-driven growth have been adversely affected the most. While mid/small-caps tend to deliver stronger contract sales growth, mega-scale developers (with gross contract sales of >Rmb500bn) are witnessing slowing growth.

Valuations reflect financial strength rather than brand value, land bank size or operating scale On average, valuations of developers with better credit quality (S&P BB+ rated or above) are higher than those of their lower-rated peers. The sector currently trades at an average of 6.6x/5.6x FY20/21F P/E and a 5.2%/6.1% dividend yield, but there is an obvious valuation gap across the IG-rated companies vs. those that are HY rated. Most IG-rated companies (as well as Shimao, with its credit outlook having just been revised to positive by S&P), trade at a 2Y PEG of 0.4-0.5x. The exception is China Jinmao, which is BBB-rated with a negative rating outlook.

Other BB- and B-rated developers trade at a 2Y PEG of only 0.2-0.3x, suggesting that investors would rather pay a premium for companies' financial resiliency, even if their earnings growth outlooks are more moderate. For companies with a similar scope in terms of contract sales and their earnings growth outlooks, investors would have a clear preference for companies with good credit quality. The correlation of valuation premium/discount against land bank size or scope of contract sales is not obvious.

For privately owned companies, their individual debt issue rating is one notch lower than the issuer rating in order to reflect subordination risks. For example, the debt issues of an S&P BB-rated company are rated as B+. The yield gap within the same rating category tends to be narrow, but the yield gaps across two categories (BB- vs. B+) are wider.

Page 24 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 24: China property developers – valuation comparison

9-Oct-20 Price MCap P/E (x) PEG Div Yield P/B Net debt/EBI Net D/E (%) S&P Moody's Company LC USD b 2020E 2021E 2022E 2Y 2020E 2021E 2022E 2020E 1H20 1H20 Rating Rating Investment grade China Vanke-H 23.9 46.5 5.4 4.8 4.4 0.5 5.0% 5.7% 6.2% 1.06 1.0 35 BBB+ Baa1 COLI 19.9 28.1 5.0 4.4 3.9 0.38 5.8% 6.6% 7.7% 0.64 3.7 32 BBB+ Baa1 CRLand* 36.1 33.2 9.9 8.4 7.0 0.57 3.7% 4.4% 5.3% 1.16 2.0 46 BBB+ Baa1 Longfor 43.9 34.0 11.8 10.0 8.5 0.65 3.2% 3.8% 4.4% 2.13 2.2 59 BBB Baa2 China Jinmao 4.2 7.0 5.9 4.8 3.9 0.26 5.7% 7.1% 8.5% 0.94 7.3 85 BBB- Baa3 Sino-Ocean 1.6 1.6 4.1 3.6 3.2 0.28 8.6% 10.2% 12.2% 0.20 4.9 67 NR Baa3 Country Garden 10.0 28.3 4.4 3.8 3.4 0.32 6.1% 7.0% 7.8% 1.03 1.6 60 BB+ Baa3 Average 6.6 5.7 4.9 0.43 5.5% 6.4% 7.5% 1.02 3.2 55

High Yield BB rated Shimao* 31.9 14.5 7.9 5.9 4.7 0.29 5.2% 6.4% 8.0% 1.21 2.5 60 BB+ Ba1 Logan 12.2 8.7 4.6 3.9 3.3 0.24 7.3% 8.8% 10.4% 1.40 2.0 72 BB Ba3 CIFI 5.9 6.3 4.9 4.1 4.1 0.24 6.4% 7.5% 7.5% 1.04 4.1 62 BB Ba3 Seazen 6.6 5.3 4.1 3.5 3.0 0.24 6.4% 7.5% 8.8% 1.04 1.8 65 BB Ba2 Agile* 10.9 5.5 4.6 4.1 3.3 0.29 9.2% 9.4% 10.8% 0.69 3.2 81 BB Ba2 Greentown China 15.1 4.9 11.3 10.3 9.4 1.18 2.0% 2.2% 2.4% 1.04 5.0 75 BB- Ba3 Times China 10.9 2.7 3.0 2.6 2.1 0.16 8.5% 9.9% 11.8% 0.77 3.2 89 BB- Ba3 SUNAC 30.6 18.4 4.1 3.4 3.4 0.20 4.6% 5.4% 5.4% 1.11 6.7 188 BB- Ba3 Average 5.6 4.7 4.2 0.35 6.2% 7.2% 8.2% 1.04 3.6 86 B-rated or unrated Central China 4.2 1.5 4.2 3.5 3.5 0.19 7.5% 9.3% 9.3% 0.90 2.0 86 B+ Ba3 Yuzhou 3.3 2.3 3.3 2.9 2.5 0.21 9.5% 11.1% 12.8% 0.57 4.6 94 NR Ba3 China Aoyuan* 8.1 2.8 2.9 2.3 2.0 0.15 12.5% 11.9% 13.6% 0.97 3.9 82 B+ B1 KWG 11.1 4.6 4.7 3.8 3.8 0.21 7.9% 9.3% 9.3% 0.75 3.7 77 B+ B1 Powerlong 6.1 3.3 6.0 4.7 4.7 0.22 6.7% 8.3% 8.3% 0.63 3.0 91 B+ B1 Ronshine 6.0 1.3 3.0 2.2 2.2 0.10 8.3% 10.3% 10.3% 0.48 5.2 92 B+ B1 Evergrande 19.6 33.0 8.1 7.0 7.0 0.61 5.1% 6.2% 6.2% 1.35 8.7 219 B+ B1 China SCE* 3.6 2.0 4.6 3.8 2.7 0.16 7.3% 8.7% 12.2% 0.64 3.9 80 B+ NR Zhongliang 5.0 2.3 3.3 2.7 2.7 0.15 10.4% 12.8% 12.8% 1.23 1.1 38 B+ NR Guangzhou R&F 10.3 5.0 3.1 2.8 2.8 0.22 12.0% 13.4% 13.4% 0.37 6.7 198 B B1 Kaisa 4.0 3.2 3.9 3.2 3.2 0.17 3.8% 5.1% 5.1% 0.70 7.7 139 B NR Zhenro 4.8 2.7 5.9 4.7 4.7 0.25 2.5% 3.5% 3.5% 0.96 6.1 87 B NR Average 4.4 3.6 3.5 0.21 7.9% 9.3% 10.3% 0.70 4.6 91 Sector average 6.7 5.7 5.1 0.43 5.4% 6.3% 7.0% 1.15 3.5 83

* Deutsche Bank estimates Source : Bloomberg Finance LP, Deutsche Bank

The relevance of spot financing costs to equity valuations We pick the companies with credit rating upgrades/downgrades between 2010-15 and now, and we compare with companies that had stable credit profiles during the same period. For the companies with stable credit profiles, P/E compression took place across time, reflecting the decelerating earnings growth outlooks of these large-caps. Meanwhile, PEGs across the two periods varied little. That said, developers with rating upgrades or changes in outlook do currently trade at higher P/Es than their corresponding historical average P/E, and vice versa. For the sector as a whole, current sector P/Es are not too different from the 2010-15 average. We argue that improvements in credit profiles (mainly through scaling up operations, geographical diversification and enhancing cashflow and liquidity) have led to gradual re-ratings.

Deutsche Bank AG/Hong Kong Page 25 16 October 2020 Property China Property

Figure 25: China property – companies with credit rating changes vs. P/E

2010-15 2010-15 FY20/21 Present Company Bloomberg Avg fwd P/E S&P/ Moody's Avg fwd P/E S&P/ Moody's Rating code Rating range Rating range Move Sector 5.61 5.92 China Overseas 688 HK 9.03 BBB+ / Baa1 4.57 BBB+ / Baa1 Same CRLand 1109 HK 11.48 BBB+ / Baa1 9.10 BBB+ / Baa1 Same Country Garden 2007 HK 4.52 BB to BB+ 3.97 BB+ /Baa3 Same (upgraded in Sep-20) Longfor Group 960 HK 8.65 BB+ /Ba3 10.70 BBB /Baa2 Upward Shimao 813 HK 6.48 BB to BB- 6.87 BB+ Upward Seazen 1030 HK 3.27 BB- 3.68 BB Upward CIFI 884 HK 3.42 B+ / B1 4.27 BB / Ba3 Upward Logan 3380 HK 4.20 BB- / B1 4.26 BB /B1 Slighly upward SUNAC 1918 HK 3.48 B+ to BB- 3.58 BB- Upward Times China 1233 HK 2.15 B+ /B2 2.76 BB- Upward Greentown China 3900 HK 5.56 CCC+ to BB- 9.90 BB- /Ba3 Upward China Aoyuan 3883 HK 3.52 B / B2 2.42 B+ / B1 Upward Agile 3383 HK 6.11 BB- / Ba2 4.24 BB / Ba3 Mixed Evergrande 5.42 BB- / B1-B3 6.09 B+ / B2 Mixed KWG 1813 HK 4.08 BB- / Ba3 4.02 B+ / B1 Downward Guangzhou R&F 2777 HK 3.06 BB- / Ba3 2.80 B /B1 Downward Source : Bloomberg Finance LP, Deutsche Bank estimates

Going forward, the valuation that investors are willing to pay in order to achieve industry growth could be even more synchronized with developers' credit quality, which would be most easily reflected in their spot financing costs. With regard to business/financial/liquidity risks, it is true that credit and equity investors' perceptions are not necessarily similar. However, financing cost is a key input for the sector's future earnings, and gradual cost savings from cheaper borrowing costs will likely determine future margin trends. This, along with headroom for further debt growth (in the case that MOHURD/PBoC guidelines are actually implemented), could offer companies cheaper cost curves and more favorable landbanking opportunities vs. those in the absence of such guidelines. Hence, although a company may sacrifice its growth prospects in order to de-leverage, this path is credit positive, and it also serves as a catalyst for equity re-rating after de- leveraging is complete, likely lifting share price performance in the medium term.

Highlighting potential re-rating candidates in the long run P/E expansion can occur among companies with improving credit quality or among those that show progress toward improvement (especially from, say, B-rated to BB- rated, or BB-rated to BBB-rated. Persistent improvement in credit quality depends not only on development scale expansion (although this was the case in the early- to-mid-2010s), but also on proactive financial policy to avoid high leverage, as well as dedication toward fulfilling credit agencies' rating requirements. For instance, Shimao and Country Garden's rating outlooks have recently been upgraded by agencies, while CIFI and China Aoyuan's credit outlooks have been rated as positive for over 12 months, and both companies are working on improving their credit profiles in order to attain a rating upgrade. Conversely, for mid-B-rated companies with potential for further deterioration in credit quality (often triggered by weakening sales and/or limited access to funding channels), investors' concerns about the financial strength of these companies would likely prevail, so that the stocks are set to be value traps.

Therefore, it is likely that developers with downgraded credit outlooks would be keen to take swift action in order to restore their outlooks and to prevent downgrades. The quickest way to accomplish this might be the disposal of assets and operations. This is particularly obvious when low BB-rated issues face downgrade pressure. In this case, a one-notch downgrade can have a considerable impact on access to certain institutional investors, and hence, credit costs. Should they realize the asset disposals, this could be a strong catalyst for re-rating, in our view. Agile is one such example. It rolled back non-property-related capex in order to preserve capital, paving the way for potential spin-off(s).

Page 26 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

4Q20 sector strategy: cautiously optimistic

We are more positive on 4Q20 performance, given that: 1) 2020 is likely to be a more back-end-loaded year for contract sales run-rates than usual, due to COVID-19; 2) Rmb strength since Jun-20 (which is likely to be more resilient throughout 2H) should be a tailwind for share price performance, especially for companies with more USD liabilities and 3) historically, the sector has outperformed the broad market and yielded positive returns in 4Q. Ten-year average share price performance in 4Q has been +11%, and during the period, positive returns were recorded for eight out of the ten years.

Contract sales are set to remain buoyant In the final quarter of 2020, contract sales performance is still likely to be a near-term catalyst. Based on announced Sep-20 sales figures, major HK-listed China developers achieved 69% of their 2020 sales targets. Most of them have ample launches scheduled in 4Q20. The low sales run-rate should not mask the fact that 9M20 sales are already up by 9% YoY despite the COVID-19 disruption, and almost all of the companies have not lowered their sales targets during interim results (which are 14% above FY19 contract sales), indicating the management teams' confidence.

Deutsche Bank AG/Hong Kong Page 27 16 October 2020 Property China Property

Figure 26: China property developers – Contract sales performance of major HK-listed companies in 9M20

Monthly sales (bn) YTD sales (bn) 2020 Target YTD Developers Ticker Aug-20 Sep-20 MoM% 9M19 9M20 YoY% Target growth completion Agile 3383 HK 12.0 12.1 1% 87.6 89.8 2.5% 118 4% 76% Aoyuan 3883 HK 10.9 12.1 11% 78.6 83.4 6.1% 130 13% 64% CCRE 832 HK 5.3 6.5 24% 45.1 45.1 0.1% 80 26% 56% China SCE 1966 HK 9.2 12.0 30% 54.7 69.0 26.3% 93 33% 74% CIFI 884 HK 25.6 26.0 2% 136.8 154.4 12.9% 230 21% 67% COLI * 688 HK 28.8 34.9 21% 290.2 257.2 -11.4% 400 14% 64% Country Garden 2007 HK 60.9 64.6 6% 422.9 446.8 5.6% 607 n/a 74% CR Land 1109 HK 27.2 29.0 7% 175.4 191.0 8.9% 262 8% 73% Evergrande 3333 HK 51.5 141.6 175% 453.2 592.3 30.7% 650 8% 91% Seazen 1030 HK 20.6 24.0 16% 197.7 163.0 -17.5% 250 -7% 65% Greentown 3900 HK 16.2 20.1 24% 79.5 113.9 43.3% 250 79% 46% GZ R&F 2777 HK 10.9 14.0 29% 92.5 86.6 -6.3% 152 -5% 57% Jinmao 817 HK 21.5 16.0 -26% 123.8 161.8 30.7% 200 33% 81% Kaisa 1638 HK 9.4 16.1 72% 55.1 71.0 28.9% 100 -38% 71% KWG 1813 HK 9.6 10.3 7% 58.2 65.9 13.3% 103 22% 64% Logan 3380 HK 13.0 13.1 0% 71.7 83.5 16.5% 110 29% 76% Longfor 960 HK 24.2 30.0 24% 174.6 186.3 6.7% 260 18% 72% Powerlong 1238 HK 7.2 8.1 12% 45.1 54.3 20.4% 75 50% 72% Ronshine 3301 HK 12.0 15.6 30% 94.0 100.1 6.5% 154 10% 65% Shimao 813 HK 29.6 32.2 9% 174.0 201.2 15.6% 300 43% 67% Sino-Ocean 3377 HK 9.1 16.0 76% 88.9 76.0 -14.5% 130 -7% 58% SUNAC 1918 HK 64.2 68.9 7% 369.5 380.7 3.0% 600 9% 63% Times China 1233 HK 8.9 10.3 16% 50.7 59.7 17.9% 82 10% 73% Vanke 2202 HK 58.7 54.5 -7% 475.6 492.8 3.6% n/a n/a n/a Yuzhou 1628 HK 11.5 11.7 1% 48.9 77.1 57.7% 100 49% 77% Zhenro 6158 HK 12.3 14.3 16% 90.0 96.2 6.8% 140 8% 69% Total / Median 570.3 714.2 14.2% 4,034 4,399 7.9% 5,577 14% 68.7% Aggregate growth 25.2% 9.0% Note: * COLI reports its contracted sales in HKD before and during 2019 and in RMB in 2020, while the rest are reported in RMB. Country Garden, GZ R&F, Kaisa and Logan report attributable sales, while the rest report gross sales. Evergrande reports September data from 01.09.2020 to 08.10.2020. Source : company data, Deutsche Bank

Although there are concerns that housing prices may soften (due to the headline news of Evergrande offering 30% sales discounts), Evergrande ended up achieving sales of Rmb141.6 bn during September through the National Holiday. Moreover, we do not yet expect sharp price cuts from most companies. Although some news reports indicate that the PBoC is guiding for mid-/small-cap banks to refrain from being overly exposed to the property sector via mortgage lending, so long as mortgage rates remain stable, we believe that sell-through rates should remain stable and that the contract sales targets are largely achievable.

Retail rental recovery Another positive catalyst for the sector is the gradual recovery of operating performance in major shopping malls. Initially, the luxury retail segment was adversely affected by the pandemic, but it recovered mainly due to buyers only buying onshore while being unable to travel overseas. Listed companies' upcoming retail mall developments are often part of TOD, given that the retail outlook is more positive than that of stand-alone malls or street shops.

Page 28 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Upside catalysts – Financial curbs less stringent / less strictly implemented Our base case assumption is that the financial curbs (The Three Red Lines) will be implemented by early 2021, with most of the terms being the same as what 21Jingji.com reported (and by Bloomberg as well). As we discussed previously, the guidelines may cast more severe impacts on the few Red Category companies, but not on most Yellow/Orange/Green Category peers. Nevertheless, concerns over policy implementation could remain as an overhang on valuations. If the policy is deferred or implemented in a less stringent way, we believe this could lift investor sentiment.

Disposals and spin-offs could remain as major catalysts CRLand, Agile and Shimao are among the developers that have laid spin-off plans for property management/real estate service operations on the table, while KWG has just finished the spin-off of its property management arm, which is to be listed in the short term. ShimaoServices, the property management operations of Shimao, has obtained Stock Exchange approval for listing (source: Bloomberg), while CRLand is still working on its planned spin-off of property management business. The share prices of both companies were once lifted by the spin-off news, and we believe that the valuations have not yet fully reflected the value creation.

Deutsche Bank AG/Hong Kong Page 29 16 October 2020 Property China Property Property market overview – more stable

Apart from maintaining a stable housing market with stable prices, another Central government policy objective is to contain the default risks of the property industry and their impact on the rest of the economy. Since local-level policies have been implemented, policy adjustments have become more frequent, and are likely to be so until markets can be stabilized. As a countercyclical tool, we expect this fine- tuning of measures at the local level to continue, and we note that the impact on property stock valuations is becoming far less profound than it was years ago.

Local government policy bias to turn less accommodative when COVID- 19 impact subsides The China property market was hit hard by the pandemic in 1Q20, with primary home sales volume dipping 26% yoy, as per NBS data. Sales then recovered gradually amid monetary easing (the five-year LPR fell by 15bps during Feb-Apr 2020, and it has been stable since then; M2 growth remained at about 10% YTD), although 8M20 sales volume was still down by 2.5% yoy. Most major cities have recorded rising housing prices yoy. At the same time, land markets have heated up since May-20, with nationwide land value transacted up 12% yoy YTD. Within the 300 cities, land prices in the Tier-1 to Tier-2 cities have increased by 15-17% yoy YTD. Meanwhile, in low-tier cities, land prices have been largely flat, but land area (in terms of developable area) sold has increased by 41% yoy.

Figure 27: China nationwide land value sold Figure 28: 300-city land area (in terms of developable GFA) sold

(RMB bn) Land sale value (LHS) Growth YoY (RHS) 180% T1 T2 T3/4 160% 1,800 60% 70% 140% 1,600 49% 60% 120% 100% 1,400 50% 80% 34% 40% 60% 1,200 28% 25% 40% 30% 1,000 20% 18% 20% 12% 8% 20% 0% 800 7% 6% -20% 1% 10% 600 -2% -40% -9% 0% -60% 400 -17% -10% -80% -24% -100%

200 -20%

Jul-20

Jul-19

Jul-18

Jul-17 Jul-16

- -30% Jul-15

Jan-20

Jan-19

Jan-18

Jan-17

Jan-16

Jan-15

Oct-19

Oct-18

Oct-17

Oct-16

Oct-15

Apr-20

Apr-19

Apr-18

Apr-17

Apr-16

Apr-15

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005 7M20

Source : NBS, Deutsche Bank Source : CREIS, Deutsche Bank

Page 30 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 29: China nationwide primary residential area sold Figure 30: Residential price vs. mortgage rates

(mn sqm) Residential GFA sold Growth YoY 25.0 4.0 1,600 54% 60% 47% 50% 1,400 15.0 40% 5.0 1,200 29% 27%

Thousands 22% 22% 30% 1,000 20% 19% 18% 9% 20% 5.0 800 8% 7% 5% 4% 1% 2% 1% 10% 6.0 600 -9% 0% 400 -5.0 -19% -10% 200 -20% 7.0

- -30% -15.0

J- J- J- J- J- J- J- J- J- J-

11 12 13 14 15 16 17 18 19 20

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002 2001

70-city newly built home price index, % mom annualized

Source : NBS, Deutsche Bank Source : Bloomberg Finance LP, Deutsche Bank

Since Jul-20, several local governments have announced market cooling measures, including Shenzhen, Hangzhou, Nanjing, Ningbo, Dongguang, Shenyang and Wuxi, etc. At the same time, local governments are offering more preferential policies on home purchases to skilled professionals working in their cities. Overall, we believe that the local-level tightening measures are mild and that they are likely to only slow home price growth (rather than bringing growth to a halt).

Yet, the monetary policy backdrop should remain benign We are not overly concerned about local-level policy shifts and their impact on listed developers' sales performance, so long as monetary policy remains benign. In particular, interest rates look to remain steady, and mortgage availability could remain adequate. In fact, according to Rong360.com, mortgage rates for primary home purchases offered in 41 cities have continued to edge down as of Aug-20, and on average, they are still 36 bps above the 5Y LPR benchmark rate.

Inventory trending normal, and it may edge up amid more launches ahead, but this is no cause for concern Based on CREIS data for 75 cities, GFA available for sale (inventory) was up 11.2% YoY as of Aug-20. If we compare the inventory level against rolling past-12-month primary sales volume, the inventory absorption period would be 12.5 months, higher than 10.1x 8M19 levels, but still around the long-term average. As more launches are scheduled in 4Q20, we believe that near-term supply could be met with demand and that inventory and selling prices could stabilize.

Figure 31: Inventory mth – overall Figure 32: Inventory mth – T1/2 cities Figure 33: Inventory mth – T3 cities

(month) (month) (month) 25 20 30 18 25 20 16 12.5 14 20 15 13.0 12.5 12 15.6 15 10 12.4 10 8 10 6 10.5 5 4 5 T1 T2 2 0

0 0

Jul-12

Jul-13

Jul-14

Jul-15

Jul-16

Jul-17

Jul-18

Jul-19

Jul-20

Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Jan-18

Jan-19

Jan-20

Jul-20

Jul-19

Jul-18

Jul-17

Jul-16

Jul-15

Jul-14

Jul-13

Jul-12

Jul-11

Jul-10

Jul-20

Jul-19

Jul-18

Jul-17

Jul-16

Jul-15

Jul-14

Jul-13

Jul-12

Jul-11

Jul-10

Jan-20

Jan-19

Jan-18

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11

Jan-10

Jan-20

Jan-19

Jan-18

Jan-17

Jan-16

Jan-15

Jan-14

Jan-13

Jan-12

Jan-11 Jan-10

Source : CREIS, Deutsche Bank Source : CREIS, Deutsche Bank Source : CREIS, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 31 16 October 2020 Property China Property

Long-term housing supply is constrained by funding and land supply Housing completions and unsold units after completion have traditionally been the key indicators for gauging housing price inflection points. Housing completions have been closely tracking housing starts during the previous 1-2 years, but in recent years, the pattern has become less clear. Completions are, in fact, more correlated to contract sales for the year rather than the previous year's housing starts, as developers may simply hold off on the portion of unsold properties in order to complete them at a later time (but only when the bulk of the units are pre-sold).

Based on the resumption of the housing starts growth trend in 2018-19, we could have deduced that housing completions would grow by 5-10% each year in 2020- 22. Yet, in reality, the pandemic has halted both sales and construction, both of which are recovering at a similar pace.

For long-term housing supply, we track housing starts (which are a function of land acquisitions 6-9 months prior to the housing start) and housing market sentiment. The key constraints on construction and land acquisitions are available funding for developers and their balance sheet strength. The central government's restrictions on leverage effectively put a cap on long-term housing starts, and hence, housing supply.

Figure 34: China housing starts vs completions YoY Figure 35: China housing starts vs. GFA sold YoY

100.0% 50 80.0% 40 30 60.0% 20 40.0% 10 20.0% 0 0.0%

-10 -20.0%

-20 -40.0% 2001 2004 2007 2010 2013 2016 2019 2022F Res GFA Sold Res New Start

-60.0%

Jul-17

Jul-12

Jan-20

Jan-15

Jan-10

Jun-20

Jun-15

Jun-10

Oct-18

Oct-13

Apr-16

Apr-11

Feb-17

Sep-16

Feb-12

Sep-11 Dec-17

Residential housing completed % yoy Dec-12

Aug-19

Aug-14

Nov-15

Nov-10

Mar-19

Mar-14

May-18 May-13

Source : NBS, Deutsche Bank Source : NBS, Deutsche Bank

Long-term housing demand is likely to stem from upgrades for quality accommodations

Although China's property market has close to 20 years of history since the land reform of the early 2000s, housing demand remains intact. Over the past decade, population growth, urbanization and declining household size have been major drivers. Going forward, the demand for quality living spaces could take the lead in driving long-term housing demand.

Page 32 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 36: Major drivers of housing demand in the long-term in China

2020 Major drivers of housing demand in long term

Population Living space Overall Household Urbanization aged between and living Affordability population size 25-39 condition

National property sales volume of 1.7- 1.8bn sqm

Rising but at a Growing but at Declining in Declining Improving slightly slower Stable a slower pace long term further further pace

Source : Deutsche Bank, WIND

Population growth trend does not favor long-term housing demand Based on the latest NBS demographic data, neither the population growth trend nor birth rate trend support long-term housing demand growth in China. In particular, the population between 25 and 39 years old, which has been the major homebuying force, remains largely flat and may decrease from 2025 as deduced from the existing population pyramid.

Nevertheless, the introduction of the two-child policy, which brought about an increase in second births since 2017, may have supported the near-term upgrade demand for bigger homes, in our view.

Figure 37: New births and birth rate in China Figure 38: China population growth

(mn) (mn) New birth (LHS) Birth rate (RHS) Total population (LHS) 35 5% 1,600 Population growth (RHS) 4% 30 1,400 4% 25 1,200 3% 1,000 20 3% 800 2% 15 2% 600 10 400 1% 1% 5 200

0 0% 0 0%

2017

2013

2009

2005

2001

1997

1993

1989

1985

1981

1977

1973

1969

1965

1961

1957

1953

1949

2018

2015

2012

2009

2006

2003

2000

1997

1994

1991

1988

1985

1982

1979

1976

1973

1970

2025F

2021F

2024F 2021F

Source : NBS, WIND, Deutsche Bank Source : NBS, WIND, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 33 16 October 2020 Property China Property

Figure 39: Breakdown of new births in China Figure 40: Population between 25 and 39 years old in China

First Second Third and above (mn) (mn) Largely flat in Declining in 20.00 400 medium term long term 18.00 350 16.00 14.00 300 12.00 250 10.00 200 8.00 150 6.00 4.00 100 2.00 50 -

0

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

2019

2017

2015

2013

2011

2009

2007

2005

2003

2029F

2027F

2025F

2023F 2021F

Source : WIND, Deutsche Bank Source : NBS, WIND, Deutsche Bank

Urbanization remains a homebuying demand driver but is weakening in lower-tier cities As most economists predicted, the urbanization rate in China over the past decade saw a rapid increase from 49.9% in 2010 to 60.6% in 2019. We assume it will continue to rise, but at a slower pace, before approaching 70%.

A closer look at city level population found a slightly different pattern. While Tier-1 cities show persistent permanent population growth (mainly due to migration), the growth trend is more flattish in "New Tier-1 cities" 2 and Tier-2 cities, and even saw a slight decline in 2019. We looked at 70 Tier-3 cities and found the average population size per city actually peaked in 2015 and has been declining since then. Hence, we can deduce that the net population inflow mostly happens in the higher tier cities, although there is a general expansion trend with some towns/counties becoming cities of 500,000 people, which explains the nationwide urbanization trend.

2 Including Shenyang, Qingdao, Tianjin, Hangzhou, Suzhou, Nanjing, Hefei, Zhengzhou, Wuhan, Xian, Chengdu, Chongqing, Changsha, Dongguan, Foshan.

Page 34 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 41: Rural and urban population and urbanization Figure 42: City-average permanent populations in different rate in China city tiers in China

(mn) (mn) Rural 20.0 18.2 18.4 18.6 17.7 18.0 1,600 Urban 80% 17.0 17.2 17.4 18.0 16.4 16.7 15.6 1,400 Urbanization rate (RHS) 70% 16.0 14.0 1,200 60% 11.6 12.0 10.8 11.0 11.2 11.4 11.0 10.3 10.6 10.7 10.9 9.8 1,000 50% 10.0 8.0 6.3 800 40% 6.0 6.0 5.7 5.7 5.8 5.8 5.6 6.0 5.6 6.0 4.9 5.0 5.0 5.1 4.9 5.1 5.0 5.1 5.1 4.9 4.7 600 30% 4.0 3.5 400 20% 2.0 0.0 200 10% 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

- 0% Tier 1 New tier 1 Tier 2 Tier 3

2018

2016

2014

2012

2010

2008

2006

2004

2002

2000

1998

1996

1994

1992

1990

2030F

2028F

2026F

2024F

2022F 2020F

Source : WIND, Deutsche Bank Source : WIND, Yicai, Deutsche Bank

Cities in China fight for talent and offer favorable land policies, which draws homebuying demand. For example, Qingdao offers a one-off settling allowance for fresh talent registered with the Hukou who hold a doctor's degree or master's degree of Rmb150k and Rmb100k, respectively, when first buying a home; Zhengzhou offers Rmb1.5k for doctors, Rmb1k for masters degree holders, and Rmb0.5k for bachelors degree holders for 36 months for talents within three years of graduation.

Household size is likely to shrink further, backing housing demand The household size in China has decreased over the last two decades. From 3.88 persons in rural China and 3.47 persons in urban China in 1997, household size has shrunk to 3.20 persons in rural China and 2.98 persons in urban China in 2018. Fewer marriages could be one of the reasons behind this trend – people who were married were fewer and older than the peak year in 2013, and with more singles, we expect household size will continue to shrink further, thus supporting end-user demand. One thing to note though, is that such demand could be partly met by government-subsidized rental apartments instead.

Figure 43: Household size in China Figure 44: Marriage age in China

(person) (mn) 40 or above 35-39 30-34 25-29 20-24 Urban Rural 30 4.5 3.88 4.0 25 3 4 4 4 3.5 3.20 3 3 4 2 4 20 3 3 3 3.0 3.47 2 3 3 3 4 4 2 2 3 2.5 2.98 15 1 2 3 2 2 9 9 9 3 2.0 8 8 10 3 7 8 10 10 6 6 9 1.5 8 7 1.0 5 8 7 8 8 9 9 10 9 9 8 0.5 6 6 5 4

- -

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2018

2015

2012

2009

2006

2003

2000

1997

2030F

2027F

2024F 2021F

Source : WIND, Deutsche Bank Source : WIND, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 35 16 October 2020 Property China Property

Living spaces and conditions are improving; upgrade demand set to prevail Using the NBS's data on average living space per Hukou population and adjusting for the permanent resident population, the average living space in urban areas continues to rise. While housing demand in the early 2000s was largely investment demand and first-time homebuying demand, these figures show that upgrade demand for space is perhaps more prevalent now, along with improving economic conditions and wages.

Figure 45: Per capita urban permanent residents living space in China

(sqm)

30 25.7 26.3 24.4 25.0 25 23.2 23.8 21.6 21.7 22.2 19.6 20 18.0 15.9 14.3 15

10

5

-

2019

2018

2017

2016

2015

2014

2013

2012

2011

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

2025F

2024F

2023F

2022F

2021F 2020F

Source : NBS, WIND, Deutsche Bank

Residential estates tend to run down quickly 5-8 years after completion in China, and we believe that those built over 20 years ago could become obsolete, as they are often underequipped and poorly managed. Based on the last population census data (2015), 45% of the houses nationwide were built before 2000, 9% were built without a kitchen and 20% were built without a toilet. Replacement or upgrade demand for better layouts and property management services is likely the main driver, in our view. In particular, the COVID-19 outbreak raises many concerns on hygiene standards and community support when the estate is forced to shut down, and having quality property management services is a much higher priority than it was years ago.

Figure 46: Housing with kitchen by Figure 47: Housing with toilet by unit Figure 48: Housing by completion unit % in China % in China year by unit % in China

100% 100% 6% 100% 12% 15% 9% 10% 10% 14% 14% 16% 10% 18% 19% 14% 21% 21% 20% 17% 24% 20% 20% 20% 28% 34% 80% 80% 40% 33% 80% 36% 38% 38% 60% 60% 60% 37% 35% 94% 88% 85% 91% 90% 90% 86% 86% 84% 90% 40% 79% 40% 79% 80% 83% 76% 40% 80% 81% 80% 72% 67% 60% 64% 62% 66% 20% 20% 20% 45% 48% 45%

0% 0% 0% 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 2005 2010 2015 National Urban Rural National Urban Rural National Urban Rural No Kitchen Yes No toilet Yes Before 2000 2000-2009 2010 and after

Source : NBS, Deutsche Bank Source : NBS, Deutsche Bank Source : NBS, Deutsche Bank

Page 36 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Affordability stays stable With the mortgage rate relatively stable since 2018 and with local governments Affordability assumptions: strictly limiting the price of primary home launches, housing affordability is less Mortgage rate: 4.9% elastic than in the early 2010s, though the affordability in Tier-1 cities remains over LTV: 70% 100% due to high prices. Terms: 240 months Unit size: 100 sqm

Figure 49: Affordability in China Figure 50: Affordability in Tier-1 cities Figure 51: Affordability in New Tier-1 cities

70% 110% 60%

60% 90% 50% 50% 70% 40% 40% 50%

30% 30% 30%

Mthly Mortgage Pmt to Income Mean Mthly Mortgage Pmt to Income Mean Mthly Mortgage Pmt to Income Mean +1SD -1SD +1SD -1SD +1SD -1SD

Source : WIND, Deutsche Bank Source : WIND, Yicai, Deutsche Bank Source : WIND, Yicai, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 37 16 October 2020 Property China Property

Rating Company Lucia Kwong

Buy Agile Group Research Analyst +852 - - 2203 6256 Asia China Price at 15 Oct 2020 (HKD) 10.56 Price target - 12mth (HKD) 13.50 Property Reuters Bloomberg Property 3383.HK 3383 HK 52-week range (HKD) 11.69 - 7.31 HANG SENG INDEX 24,119 It's not just about Hainan Price/price relative 12.5

Initiate with BUY: Leverage may have peaked 10 We initiate coverage on Agile with a BUY rating and 12-month forward target price 7.5

of HK$13.5. Agile's earnings were dragged down by the policy tightening in Hainan 5 during 2019, while it had to gear up due to the capex deployed in its environmental Jan '19 Jul '19 Jan '20 Jul '20 protection business. Agile finally began to de-leverage in 1H20 and is now targeting Agile Group HANG SENG INDEX (Rebased) to contain gross debt levels to preserve credit ratings. With some of the restrictions Performance (%) 1m 3m 12m in Hainan relaxed, we expect the recognition of the pent-up high-margin sales Absolute 6.6 9.3 15.9 should bring about strong earnings recovery in FY20 (+102% YoY), followed by 17% CAGR in FY21/22. Its fundamentals, particularly its low land-cost advantage, HANG SENG INDEX -1.4 -8.0 -6.1 diversified land access especially in GBA, and above industry-average margins are Source: Deutsche Bank weighed by a weakened credit profile. We view Agile as a potential re-rating case Key indicators (FY1) due to its de-leveraging potential. ROE (%) 14.7 Net debt/equity (%) 77.7 Spin-offs in the pipeline – building new services platforms Book value/share (CNY) 16.35 Agile announced the spin-off of A-City in Jun-20, which could serve to realize value Price/book (x) 0.6 and enhance the company's funding capability. Hence, we believe Agile could consider other business disposals/spin-offs to speed up capital recycling. Net interest cover(x) 13.6 Moreover, by creating the new business platforms to serve not only Agile but third- Operating profit margin (%) 27.9 party customers, they could create value in using the brand. Source: Deutsche Bank

Comparatives Valuation and risks Agile Group (3383.HK),HKD10.92 Buy We set our target price based on a 5.6x FY20E P/E on the back of a 16% 2Y EPS 2019A 2020E 2021E CAGR and 0.35x PEG, translating to a 5.1x FY21E P/E and 56% discount to its Dec- P/E(x) 8.0 4.5 4.1 20E NAV (HK$31). Our TP takes into account the sensitivity of Agile's earnings to single market policy changes (Hainan), the holding discount of value of A-Living EV/EBITDA(x) 4.7 4.0 3.4 attributable to Agile and existing credit profile. Risks: a delay in the spin-offs which Price/book(x) 0.7 0.6 0.5 could affect the de-leveraging progress, drastic policy tightening, and changes in Source: Deutsche Bank mortgage availability.

Forecasts and ratios Year End Dec 31 2018A 2019A 2020E 2021E 2022E Sales (CNYm) 56,144.9 60,239.1 75,284.3 89,368.4 106,714.7 EBITDA(CNYm) 20,187.3 16,843.9 21,965.8 23,246.7 27,123.1 Reported NPAT(CNYm) 7,125.0 7,511.8 8,715.6 8,530.8 10,601.1 Reported EPS FD(CNY) 1.84 1.93 2.24 2.20 2.73 DB EPS FD (CNY) 1.45 1.04 2.04 2.20 2.73 DB EPS growth (%) -13.6 -28.0 95.4 7.7 24.3 PER (x) 6.0 8.0 4.6 4.3 3.5 EV/EBITDA (x) 3.6 4.7 4.1 3.4 2.6 DPS (net) (CNY) 0.86 0.90 0.87 0.87 1.00 Yield (net) (%) 9.8 10.8 9.2 9.2 10.6 Source: Deutsche Bank estimates, company data

Page 38 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Investment thesis

As a GBA and Hainan-focused property developer, Agile has gone through the ups of the housing market boom in GBA cities, and the downs of the austerity measures in Hainan in 2017-19. Agile's balance sheet has been impacted by weak Hainan sales and non-property business expansion, but Agile is determined to restore the balance sheet from this year onwards, amid concerns of a potential credit rating downgrade.

Since 1H20, Agile has slowed down capex deployment in its environmental protection business, and is proceeding with the spin-off of its asset-light real estate service operations (A-City), which should help improve its gearing and bring value to Agile. Agile is a potential re-rating case on an improving credit outlook, in our view.

Housing demand in Hainan is set to gradually become more end-user driven, though policy risk could prevail. Agile should thus continue to enjoy higher development margins thanks to the Hainan and Zhonghan development pipeline, thus keeping its ROE above the industry average. Agile is also increasingly active in urban renewal projects and its local knowledge and ties could be a competitive advantage in securing land at lower costs through different means.

Outlook

Agile achieved 65% of contract sales target in 8M20 and is under less pressure to meet the target. Sales in the last four months of the year should come from projects in YRD and GBA and less from Hainan.

Hainan recovery to lift sales, revenue and profitability outlook Due to the policy tightening in Hainan in 2Q18, buyers were required to provide proof of two years of payments of the Social Security Rate to the NSSF in order to be eligible buyers. As a result, Agile recognized only Rmb3.5 bn in sales at Agile Hainan Clearwater Bay in FY19, mainly from those under the talent migration scheme. The lack of sales recognition was the major reason for its lukewarm earnings growth in FY19 (if one-off gains are excluded). Nevertheless, contract sales were in fact less volatile, as buyers held a long-term bullish view on the Hainan housing market and secured units at the prevailing prices. Some buyers became eligible "local buyers" under the talent migration program and less-stringent criteria on the Social Security Rate.

Such sales restrictions were relaxed by late 2019, and Agile was able to recognize Rmb11 bn in 1H20, which accounted for the bulk of the pent-up sales. Contract sales in 8M20 have been resilient, with Rmb14 bn achieved out of the Rmb30 bn salable resources for the year.

As the Hainan Clearwater Bay project normally fetches a ~50-60% development margin, and should continue to contribute ~15% to the total development revenue p.a. in the next two FY, Agile's average development margin should remain around 30-33%, with projects outside Hainan fetching 27-28% margin by our estimates. The margin could be much lower than FY17-18 but still higher than the industry average. Against this backdrop, we expect Agile's blended gross margins to be stable at 31-33%, and with 25% top-line growth in FY20 and in the high-teens in FY21/22, we look for 102% yoy earnings growth in FY20 and a 16% CAGR in FY21/22.

Deutsche Bank AG/Hong Kong Page 39 16 October 2020 Property China Property

It is worth noting that contract sales for the Hainan projects are likely to be recognized in the following FY based on the current policies, and the Clearwater Bay project could continue to be a steady earnings contributor in the upcoming 4-5 years before the land bank depletes.

Other discussion

Non-property development segments – still low contribution to earnings Agile's non-property development revenue could account for >15% of the total over the next 2 years according to our forecasts, mainly to be boosted by the property management business (we use Bloomberg consensus forecasts for A-Living and adjust for inter-segment eliminations). These operations are unlikely to lift earnings growth, but their values could potentially be unlocked with spin-offs/disposals.

Spin-offs to create more business platforms Apart from the spun-off A-Living, Agile announced on 24th June 2020 the planned spin-off of A-City Group which is still in progress. The spin-off, if successful, could improve Agile's fundraising capability, thus restoring the headroom to buy land. More importantly, the businesses Agile proposes to spin off are aimed at building standalone platform to offer services to third-party customers. In fact, Agile has a wide variety of such services using the Agile brand. By this we mean, we believe the brand value of a developer can ultimately be better revealed when compared to traditional listed property companies.

On a separate note, we also note the company may consider spinning off the non- property development businesses (given limited options to cut leverage if they do not wish to slow down land bank replenishment and the pace of development in the long run) , although the company has no such imminent plan. Indeed, the development of the asset-heavy environmental business (committed investments of Rmb17.5 bn to be paid in phases) has already crowded out certain landbanking opportunities, in our view. To establish the business, the company could introduce investors in the long run.

Credit outlook looks set to improve The lack of property sales contribution from Hainan, paired with heavy capex, led to a sharp deterioration in Agile's financial position in 2018-19, with net-debt/total equity as high as 131% (net-debt/shareholder equity even higher at 152% as of end Dec-19). In April 2020, S&P revised Agile's company credit outlook to negative. In case of a one-notch downgrade from the current rating (BB to BB-), its USD debt could become single B-rated from the current BB- rated, which could considerably impact the future cost of borrowing. However, it seems that the company has become more determined to restore the balance sheet since then, and is targeting its gross debt to remain below Rmb100 bn by end-2020, with limited gross debt growth in the next two years. Moreover, we estimate Agile has breached two of the Three Red Lines (adjusted leverage and net debt/equity), and we believe spin-offs and disposals of project stakes will be needed to raise cash.

Land bank and land bank access Agile has gradually accumulated urban renewal projects mainly within the GBA, and locked in 7.7 m sqm of attributable developable area by Jun-20, with potential salable resources of Rmb238 bn. Agile targets to make 2.5m sqm of such sites (Rmb70 bn salable resources) to become available for sale within the next 3 years. Separately, it has also locked in integrated industrial park projects in 11 provinces

Page 40 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property and has acquired 6.5m sqm of land bank with salable resources of Rmb64 bn so far. We believe access to low-cost land bank is, and should remain, one of Agile's key strengths.

Valuation

Based on segment assets and liabilities as of Jun-20, property development accounted for 81% of total assets but over 100% of net segment equity. Hence, we believe P/E remains a more valid valuation yardstick than the NAV discount for now, though it may become more appropriate to use SoTP valuations in the long run if more of Agile's asset-light businesses become more established and/or listed separately. We apply a 5.6x FY20E P/E, which is derived from the 16% 2Y EPS CAGR and 0.35x PEG used to derive our target price, which has taken into account the current credit profile (S&P BB rated) and the high potential for improvement in its gearing going forward.

Our target price translates to a 56% discount to our end-FY20E NAV estimate of Dev prop value assumptions HK$31. We derive our NAV estimates based on end-FY20E shareholder equity, Landbank (attri): 39.7m Sqm which includes the mark-to-market investment property values as per the IFRS. On ASP: Rmb13,900/sqm top of this, we add: 1) the estimated property profits of the existing attributable land Avg GPM after LAT: 24% bank, assuming they are all sold and cashed in; 2) the A-Living Group market value SG&A to sales: 8.0% attributable to the company. In other words, this resembles the future book value when the land bank is fully crystallized.

Figure 52: Agile Group – NAV breakdown

HK$ MM 2020E Per sh (HK$) 2021E Per sh (HK$) Development properties 36,044 9.20 39,050 9.97 Equity 57,055 14.57 63,118 16.11 Attributable interest in A-Living 28,368 7.24 28,368 7.24 NAV 121,466 31.01 130,535 33.32 Source : Deutsche Bank estimates

Our NAV estimates tally with our ASP assumptions in deriving FY20-22 earnings forecasts – we assume 5% ASP growth in 2020 due to a YoY increase in Hainan sales contributions, and 2% ASP growth in 2021-22.

We believe Agile should trade at a higher discount to NAV than Shimao and CRLand for a few reasons: 1) At present, Agile is still sensitive to policy changes in the Hainan property market; 2) Agile's financial position is currently weak, though we expect it to improve in the next 12 months; 3) the equity value of A-Living that is attributable to Agile has to be subject to a holding discount.

Risks Key macro risks include: a weakening in housing demand due to an economic slowdown, a resurgence of the pandemic, an abrupt change in mortgage availability which could affect cash collection, and Rmb fluctuations which affect offshore financing.

Company specific risks: 1) potential further disposal of project stakes which could dilute earnings due to sharing of profits with other parties in the long term, although this is an effective way to lower leverage in the near-term; 2) Agile has included subscribed sales in the contract sales figures. In case of mortgage tightening, it would take a long time to receive payments and convert subscribed sales into

Deutsche Bank AG/Hong Kong Page 41 16 October 2020 Property China Property contract sales and even recognized sales; 3) delays or cancellation of spin-offs, which could slow down the de-leveraging process.

Figure 53: Agile – Margin trends Figure 54: Agile – Gearing and S/T debt ratios

65% 152% Gross margin 160% 142% 50% 60% Gross dev't margin before LAT 126% 45% 55% Gross dev't margin after LAT 140% Core Net Margin 110% 40% 50% 120% 102% 91% 35% 100% 45% 79% 83% 78% 83% 30% 77% 71% 40% 80% 64% 58% 25% 32.3% 49% 35% 60% 42% 20% 30% 15% 40% 25% 10% 27% 20% 20% 41% 29% 44% 40% 44% 40% 38% 38% 5% 0% 0% 15% 10.3% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 10% 5% S/T debt ratio Net debt/total equity Net debt/common equity* 0% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 55: Agile – EBITDA ratios and borrowing costs Figure 56: Agile – Land bank by location as of end Jun-20 (in terms of GFA)

X Net debt / EBITDA EBITDA/Interest Avg borrowing costs 0.7% North 8.6% 9.3% 6.0 8.0% 9.0% 7.1% 5.7 7.1% 7.1% 7.1% 7.1% 8.0% 5.0 6.5% Central 10.3% 6.2% 7.0% 4.0 6.0% 3.3 3.3 West (incl 3.2 3.2 2.9 5.0% Yunnan) 2.7 3.0 2.5 2.6 2.3 2.2 2.3 4.0% East 1.9 1.9 2.0 31.8% 2.0 3.0% 1.4 South 2.0% 17.6% 1.0 1.0% Hainan 0.0 0.0% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Overseas

21.6%

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank

Figure 57: Agile – Contracted sales GFA and ASP Figure 58: Agile – Recognized GFA and ASP

14,553 15,160 12 13,901 14,179 14,462 16,000 7 14,154 16,000 12,871 13,239 12,189 14,000 6 11,960 14,000 10 10.9 11,215 10,415 5.9 10,134 9.9 12,000 5 12,000 8 8,724 8.9 8.7 5.1 5.2 10,000 4.8 10,000 8.0 4 4.7 4.7 4.5 4.6 6 7.4 8,000 8,000 3 8,642 8,809

MM sqm MM 5.8 6,000 sqm MM 6,000 4 5.1

2 Rmb/sqm 4,000 4,000 Rmb/sqm 2 2,000 1 2,000 0 0 0 0 2015A 2016A 2017A 2018A 2019A 2020A 2021A 2022A 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E

Contracted sales GFA (LHS) Contracted ASP (RHS) GFA recognized (LHS) ASP recognized (RHS)

Source : Company data, Deutsche Bank estimates Source : Company data, Deutsche Bank estimates

Page 42 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 59: Agile – Rolling forward P/E Figure 60: Agile – Rolling forward P/BV

9.00 1.20 8.00 1.00 7.00 6.00 0.80 5.00 0.60 4.00 3.00 0.40 2.00 0.20 1.00 0.00 0.00 Jan-10 Feb-11 Mar-12 Apr-13 May-14 Jun-15 Jul-16 Aug-17 Sep-18 Oct-19 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20

Agile Mean +1 s.d. Agile Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : Company data, Bloomberg Finance LP, Deutsche Bank Source : Company data, Bloomberg Finance LP, Deutsche Bank

Figure 61: Agile – Consolidated P&L forecasts

2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue 46,679 51,607 56,145 60,239 75,284 89,368 106,715 Property development 44,752 49,262 52,488 54,177 64,771 75,300 89,593 Property investment 189 167 189 173 181 190 200 Hotel 670 684 722 802 385 577 750 Property management 1,069 1,290 2,133 3,577 7,347 10,310 12,733 Others - 205 614 1,510 2,600 2,990 3,439 Cost of sales (34,313) (30,920) (31,471) (41,881) (50,579) (60,140) (72,722) Gross profit 12,366 20,687 24,674 18,358 24,705 29,228 33,993

SG&A (3,556) (4,304) (5,228) (6,025) (6,474) (7,864) (8,857) Other operating income/expenses (63) (244) 138 3,645 2,782 835 835 EBIT 8,747 16,139 19,584 15,978 21,013 22,198 25,970

Gross interest expenses (3,763) (2,949) (6,402) (7,465) (8,066) (7,955) (8,100) Interest capitalized 2,638 2,050 3,658 4,935 5,324 5,250 5,346 Interest income 146 434 704 1,009 1,201 1,081 1,081 Share of results of associates and JCE 7 169 27 1,086 927 889 1,008 Other non-operating income/expenses (335) (141) 327 86 86 86 86 Pre-tax exceptional items 43 166 1,503 967 (7) - - Profit before tax 7,483 15,869 19,401 16,596 20,478 21,550 25,391

Income tax (4,433) (9,089) (11,043) (7,363) (8,456) (9,259) (10,566) Profit tax (1,824) (3,799) (4,205) (3,487) (4,505) (4,741) (5,459) LAT (2,610) (5,290) (6,838) (3,876) (3,951) (4,518) (5,107) Profit before minority interests 3,050 6,780 8,358 9,233 12,021 12,291 14,825 Interest expense for perpetual bonds 415 473 677 850 1,125 1,125 1,125 Minority interests (351) (282) (556) (871) (1,902) (2,311) (2,727) Reported net profit 2,284 6,025 7,125 7,512 8,994 8,855 10,973 Core net profit 2,744 6,518 5,630 4,054 8,200 8,855 10,973 Dividends 1,555 2,864 3,349 3,528 3,473 3,542 4,060 Div payout 68% 48% 47% 47% 39% 40% 37% Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 43 16 October 2020 Property China Property

Figure 62: Consolidated balance sheet forecasts Balance Sheet 2016A 2017A 2018A 2019A 2020E 2021E 2022E Investment properties 6,327 5,887 8,804 8,496 8,496 8,496 8,496 Properties under development + Land (L/T) 11,541 19,900 18,976 34,820 33,079 33,079 33,079 Interests in associates and JCEs 4,739 8,084 10,959 15,179 14,107 15,496 17,004 Investments (L/T) 278 278 - - - - - Property, plant and equipment 7,309 7,573 8,754 11,702 11,749 13,201 15,048 Intangible assets 55 1,458 2,101 5,475 5,475 5,475 5,475 Deferred tax assets 699 987 1,434 1,351 1,351 1,351 1,351 Other assets 254 - - 262 262 262 262 Non-current assets 31,202 44,166 51,027 77,285 74,519 77,360 80,715

Completed properties held for sale 13,976 9,916 8,447 13,448 8,562 7,245 6,142 Properties under development + Land (S/T) 46,321 52,753 78,772 90,291 119,164 126,467 131,594 Inventories - - 46 343 343 343 343 Trade and other receivables (S/T) 11,463 16,396 27,735 35,360 38,189 40,480 42,909 Amounts due from related parties 4,383 6,548 12,511 5,182 5,182 5,182 5,182 Tax prepayments 1,761 2,254 3,165 6,077 6,381 6,700 7,035 Other receivables, prepayments and deposits 308 1,204 3,681 2,388 2,507 2,632 2,764 Investments (S/T) - - - 302 302 302 302 Restricted cash 9,879 11,078 9,285 9,004 9,274 9,552 9,838 Cash and cash equivalents 12,432 19,042 35,776 33,551 33,739 47,432 61,668 Current assets 100,522 119,191 179,419 195,946 223,643 246,336 267,778 Total assets 131,725 163,358 230,446 273,232 298,161 323,696 348,493

Pre-sale deposits 10,617 19,461 25,490 33,654 40,969 49,543 54,523 Accruals, trade and other payables 21,102 23,264 42,534 53,918 59,309 64,054 69,179 Taxes payable 10,717 13,361 17,015 17,563 18,441 19,363 19,944 Other payables - 241 7 236 236 236 236 Bank and other borrowings (S/T) 12,815 27,146 35,333 42,297 40,182 39,379 41,348 Current liabilities 55,252 83,473 120,378 147,668 159,138 172,575 185,229

Bank and other borrowings (L/T) 31,181 34,529 53,196 54,373 59,810 64,595 67,824 Deferred tax liabilities 1,137 1,175 1,884 3,180 3,180 3,180 3,180 Other liabilities - 4 6 2,675 2,675 2,675 2,675 Non-current liabilities 32,318 35,708 55,087 60,228 65,665 70,450 73,680 Total liabilities 87,570 119,181 175,465 207,895 224,803 243,025 258,909

Issued capital 400 400 400 400 400 400 400 Share premium and reserves 6,826 3,650 5,470 5,796 5,796 5,796 5,796 Retained earnings 28,083 32,285 35,369 38,277 43,799 49,112 56,025 Attributable equities 35,310 36,335 41,239 44,474 49,995 55,308 62,221

Perpetual bonds 5,598 5,529 8,335 13,567 14,067 14,067 14,067 Minority interests 3,248 2,312 5,407 7,296 9,296 11,296 13,296 Total equities 44,155 44,176 54,981 65,336 73,358 80,671 89,584 Source : Company data, Deutsche Bank estimates

Page 44 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 63: Agile Group – Key model assumptions

Unit 2016A 2017A 2018A 2019A 2020E 2021E 2022E Presold and unrecognized as of year-start (b/f from previous yr) Unrecognized sales Rmb MM 15,000 10,000 20,000 40,000 36,550 44,495 53,806

Contract sales forecasts Total basis since 2017 Salable resources Rmb MM 76,416 128,200 180,000 203,000 220,000 251,451 280,006 - of which Hainan 15,000 15,000 15,000 Contract sales target 46,000 60,000 110,000 113,000 118,000 141,600

Contracted sales GFA MM sqm 5.81 7.4 8.0 8.9 8.7 9.9 10.9 Y/Y % chg 15% 27% 8% 12% -2% 14% 10% Contracted ASP Rmb/Sqm 10,134 12,189 12,871 13,239 13,901 14,179 14,462 Y/Y % chg 16% 20% 6% 3% 5% 2% 2% Contracted sales Rmb MM 58,880 89,710 102,670 117,970 121,193 141,020 158,337 Y/Y % chg 33% 52% 14% 15% 3% 16% 12%

Sell-through rate 73% 71% 60% 63% 54% 55% 56% Development sales recognition 2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue Rmb MM 44,752 49,262 52,488 54,177 64,771 75,300 89,593 ASP recgonized at Revenue Rmb/Sqm 8,809 10,415 11,215 11,960 14,154 14,553 15,160 GFA recgonized at Revenue MM sqm 5.08 4.73 4.68 4.53 4.58 5.17 5.91 Gross margin at consol level % 28% 42% 48% 30% 33.8% 33.7% 32.3% Property development landbank 2016A 2017A 2018A 2019A 2020E 2021E 2022E Landbank as of year-end MM sqm 32.60 34.10 40.42 49.85 52.10 56.51 60.28 - GBA % 11.10 9.80 8.34

Avg costs of landbank Rmb/Sqm 1,501 2,400 2,825 3,530

Landbank as of year-end (attri) MM sqm 32.60 34.10 36.23 39.70 41.16 44.64 47.62 Attributable interest % 100% 100% 90% 80% 79% 79% 79%

Urban renewal pipeline MM sqm n/a n/a 2.26 3.85

GFA acquired during the year MM sqm 2.32 7.46 11.10 10.89 8.00 11.44 12.15 GFA acquired during the year (Attri) MM sqm 2.32 7.46 9.09 9.15 6.80 10.29 9.72 Average land costs Rmb/Sqm 7,328 4,700 3,838 4,334 3,467 3,571 3,678 Land premium Rmb MM 19,200 35,062 42,600 47,197 27,738 40,847 44,702 Land premium (Attri) Rmb MM 19,200 34,600 29,358 35,900 23,577 36,762 35,761

GFA starts MM sqm 3.82 6.25 12.40 7.74 8.63 9.38 10.17 GFA under construction as of year-end MM sqm 6.47 10.92 20.64 16.87 22.26 23.63 24.58 GFA completed MM sqm 4.62 3.1 4.8 6.4 6.9 8.0 9.2 Source : Company data, Deutsche Bank estimates

Figure 64: Agile – Operating cash flow breakdown

Operating cashflow 2016A 2017A 2018A 2019A 1H20 Cash collection ratio % 85% 87% 60% 52% 85% Sales proceeds Rmb Bn 50 59.4 62.0 60.8 34.1 Other income Rmb Bn 2 3.10 7.10 9.7 5.0 Total cash inflow 52.0 62.5 69.1 70.5 39.1

Attri Land premium paid Rmb Bn 17.0 36.3 45.9 35.9 10.0 Land capex as % contract sales % 29% 53% 56% 38% 25% Construction capex Rmb Bn 11.6 14.4 18.9 26.9 10.8 Non-prop business Rmb Bn 7.5 Tax, Interest, SG&A Rmb Bn 14.7 20.8 24.7 25.7 9.0 Dividends Rmb Bn 1.3 2.3 3.8 3.8 1.8 Total cash outflow 45 74 93 100 32

Net cash in/outflow Rmb Bn 7.4 -11.3 -24.2 -29.3 7.5 Source : Company, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 45 16 October 2020 Property China Property

Rating Company Lucia Kwong

Buy CR Land Research Analyst +852 - - 2203 6256 Asia China Price at 15 Oct 2020 (HKD) 35.90 Price target - 12mth (HKD) 43.50 Property Reuters Bloomberg 1109.HK 1109 HK 52-week range (HKD) 38.15 - 27.11 HANG SENG INDEX 24,119 The all-round player Price/price relative 40

Initiating with BUY: Checks all the boxes 30 We initiate coverage on CRLand with a Buy rating and a 12M forward target price 20

of HK$43.5. CRLand has unique and successful track records in both investment 10 properties and residential development. With already the industry's second-largest Jan '19 Jul '19 Jan '20 Jul '20 recurring income base, CRLand targets to double it within the next 5 years. We CR Land HANG SENG INDEX (Rebased) expect its contract sales growth could resume to mid-teens in FY21/22E, and Performance (%) 1m 3m 12m development margins are set to stay above peers. Together with diversified land Absolute 2.1 1.7 9.2 access, prudent financing management and cheap financing costs, CRLand is an uncommon all-round player and warrants a valuation premium, in our view. We see HANG SENG INDEX -1.4 -8.0 -6.1 the future spin-off of its property management arm as a share price catalyst. Source: Deutsche Bank Key indicators (FY1) Cutting edge from integrated developments ROE (%) 12.2 As of Jun-20, CRLand has an IP development pipeline of 2.7m sqm (to open by 2022) Net debt/equity (%) 43.0 vs. 6.2m sqm of shopping malls/offices currently in operation. With unparalleled Book value/share (CNY) 27.69 access to low-cost funding (4.5%) and a healthy cashflow, the company has ample Price/book (x) 1.1 headroom to take up more integrated projects going forward. There is less competition for such projects to start with, so margins could stay above peers in the Net interest cover (x) – medium term. Operating profit margin (%) 28.3 Source: Deutsche Bank

Valuation and risks Comparatives We set our target price based on NAV and apply a 15% discount to the average of CR Land (1109.HK),HKD36.10 Buy end-FY20E NAV of HK$48.09/sh and end-FY21E NAV of HK$52.25, which is derived 2019A 2020E 2021E from adding the expected future development earnings of the existing land bank to P/E (x) 8.9 9.6 8.4 Jun-20 shareholder equity, plus the value of its property management business. This translates to 11/9.6x FY20/21E P/E plus the estimated value of the property EV/EBITDA (x) 5.8 6.7 6.3 management business. Risks: a weaker-than-expected rental recovery, delay of IP Price/book (x) 1.3 1.1 1.0 completions, a further decrease in attributable stakes in projects, and a slower sell- Source: Deutsche Bank through of projects.

Forecasts and ratios Year End Dec 31 2018A 2019A 2020E 2021E 2022E Sales (CNYm) 121,188.9 147,735.9 178,809.4 227,442.0 278,963.7 EBITDA (CNYm) 43,895.9 46,640.7 51,411.3 58,621.5 71,120.0 Reported NPAT (CNYm) 24,237.9 28,672.3 23,150.4 26,662.5 31,905.2 Reported EPS FD(CNY) 3.50 4.12 3.25 3.74 4.47 DB EPS FD (CNY) 2.78 3.11 3.25 3.74 4.47 DB EPS growth (%) 17.8 11.6 4.4 15.2 19.7 PER (x) 7.8 8.9 9.6 8.4 7.0 EV/EBITDA (x) 4.9 5.8 6.7 6.3 5.3 DPS (net) (CNY) 1.06 1.06 1.20 1.38 1.66 Yield (net) (%) 4.9 3.8 3.8 4.4 5.3 Source: Deutsche Bank estimates, company data

Page 46 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Investment thesis

CRLand is a pioneer in integrated property developments in China, with the first flagship integrated property development (Shenzhen MIXc) carried out in the mid- 2000s. Its expertise in developing investment properties was a key competitive advantage for securing quality sites at reasonable costs, while strong execution capability brought about a high return on investment.

CRLand used to count on parental support (CRH) for incubating projects and for asset injection as a fast track to building up its scale, IP portfolio and development pipeline with high margins. But as the company becomes more established, it is gradually diversifying the channels of land access to preserve margins at 30%+.

Thanks to prudent financing management (it has fulfilled all requirements under the Three Red Lines), CRLand has seamless access to low-cost funding (both equity and debt). Hence CRLand is in an advantageous position to replenish land at better pricing and timing, especially when some aggressive peers have been forced to slow down on landbanking. The upcoming spin-off of its property management arm is a positive, and although maybe not a strong unlocking of value, we believe it could be a near-term share price catalyst. We think CRLand is a good example of our investment theme on how developers can thrive in this increasingly challenging industry.

Outlook CRLand recognized only 2.9m sqm of GFA in 1H20 but maintains its target to deliver 10.3m sqm in FY20, and a new high of 13.5/14.6m sqm in FY21/22. Its delivery pipeline and development revenue growth should thus more than offset any development margin squeeze due to product mix change – Shenzhen projects with ultra-high margins were a key earnings contributor in FY17-19, and such high- margin projects are not going to repeat. We expect development margins to compress by 5ppts in FY20 YoY to 31.5%, with a 2-ppt further squeeze in FY21 before becoming stable at 30%. Net-net, we should still see FY21/22 net profit growth resume to 15%/20%.

In 9M20, CRLand achieved 73% of its FY20 contract sales target of Rmb262 bn (+8% YoY), so it is likely to achieve the target given the Rmb412 bn in resources to be launched in 2H20 in total. While there is no guidance yet, we believe FY21 sales growth should pick up to the low to mid-teen levels, as it was able to replenish quality sites at a reasonable cost during the COVID-19 outbreak in Beijing for example, and we estimate these projects could be readily available for sale from late FY21 onwards.

Retail and hotel operations were the weaker segments in 1H20. We expect a strong recovery of retail rental income, as witnessed by the recovery of shopper traffic and sales from mid-2020 onwards. In the medium term, we expect rental and property management income growth to exceed that of development profits, as 10 new shopping malls are scheduled to open in FY21 on top of the 42 currently in operation, followed by 12 new malls in FY22. CRLand targets to achieve a Rmb24- 30 bn recurring income in FY25 vs. the Rmb12 bn level now, which is already the second largest after Vanke, but CRLand's operating margins and yield-on-cost are significantly higher.

Deutsche Bank AG/Hong Kong Page 47 16 October 2020 Property China Property

Other discussion

High presale proceeds on the balance sheet is a plus, in our view CRLand has consistently guided for unrecognized sales close to the presale proceeds item presented in current liabilities (now reclassified as contract liabilities). While we understand that timing differences and accounting treatments, etc., could explain the discrepancy between the unrecognized sales claimed by developers and the actual contract liabilities, CRLand seems to have picked a more conservative approach in giving analyst guidance.

Going for land access diversification to maintain land bank quality CRLand is off the fast track of leveraging its parent's balance sheet to grow its business scale. At this size and IP portfolio, we believe the company is considering ways to sustain quality growth going forward, rather than near-term earnings growth. That is why it has worked on M&A, and penetrated into urban renewal, city operation/development on top of its leading expertise in transit-oriented developments. CRLand has likely one of the most diversified land banking channels among the HK-listed developers.

Property management business – small business scale relative to company CRLand is spinning off its residential and commercial property management business. Similar to other developers, we believe the potential spin-off could create value, but with a 1H20 net profit of Rmb364 m vs. a FY20E net profit base of Rmb24 bn, the value-add may not be very significant after all. That said, we still believe the spin-off could be a near-term positive share price catalyst.

Valuation

As of Jun-20, 23.2% of CRLand's total assets came from property investments/ Dev prop value assumptions management/hotels. We thus believe that it is more appropriate to valuate Landbank (attri): 42.3m Sqm CRLand's fair value based on NAV rather than P/E, although non-development ASP: Rmb19.170/sqm income only accounts for 12-15% of total. Our NAV estimate is derived from end- Avg GPM after LAT: 25.3% FY20E shareholder equity, which includes the mark-to-market investment property SG&A to sales: 5.5% values. On top of this, we add: 1) the estimated development property profits of the existing attributable landbank, assuming they are all sold and cashed in; 2) the property management value which is derived from the annualized 1H20 net profit of the business and the average forward P/E of the listed property management companies. In other words, this resembles the future book value when the land bank is fully sold.

Figure 65: CRLand – NAV estimate breakdown

HK$ MM 2020E Per sh (HK$) 2021E Per sh (HK$) Development properties 108,910 15.27 117,481 16.47 Property Management 19,319 2.71 21,250 2.98 Total 128,228 17.98 138,731 19.45 Shareholders equity 214,727 30.11 233,896 NAV 342,955 48.09 372,627 52.25 Number of shares - basic (mn) 7,130.9 7,131 NAV per share 48.09 52.25 Source : Deutsche Bank estimates

Page 48 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Our NAV estimates also tally with our price assumptions in deriving FY20-22 earnings forecasts – we have assumed 2-3% ASP growth in the next few years and then flat growth.

Our 12-month target price is based on a 15% discount to NAV, taking into account the strong financial positioning, market positioning, diversified product track record and also the earnings outlook through FY22. Our target price implies an 11x FY20E forward P/E plus the estimated value of the property management business.

Risks Key macro risks include: a weakening of housing demand due to the economic slowdown, especially if there is a resurgence of the pandemic, and Rmb fluctuations that could also affect developers such as CRLand in terms of offshore financing.

Company-specific risk: CRLand is less impacted by the industry tightening measures in our view, as they have refrained from aggressive leverage to start with. That said, CRLand's net debt/total equity has hovered at 36-38% levels, and for central-government-owned SOEs, they are often subject to more stringent controls on leverage. Should CRLand's sales turnover slow, its pace of landbanking will also have to slow down accordingly.

Other risks include: 1) a delay in its mall openings; 2) slower-than-expected rental income recovery; 3) gross margins continuing the margin squeeze trends beyond FY21; 4) lower-than-estimated attributable interest of projects (hence higher MI and lower associate/JCE profits).

Figure 66: CRLand – Margin trends Figure 67: CRLand – Gearing and S/T debt ratios

50% 43% 80% 69% 30% 45% 40% 70% 64% 64% 38% 25% 40% 43% 35% 60% 34% 40% 48% 47% 47% 35% 31% 32% 32% 43% 43% 46% 20% 36.5% 50% 30% 36% 34% 32% 33.0% 40% 30% 15% 30% 30% 31% 30.0% 30.0% 26% 28% 25% 30% 23% 24% 26% 26% 10% 26% 25% 25% 20% 24% 16.1% 15.9% 14.9% 14.7% 20% 13.7% 12.9% 5% 15% 11.7% 11.4% 10% 18% 15% 24% 17% 16% 14% 14% 14% Gross margin 10% 0% 0% Gross dev't margin before LAT 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 5% Gross dev't margin after LAT Core Net Margin 0% S/T debt ratio Net debt/total equity 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Net debt/common equity*

Source : Company data, Deutsche Bank estimates Source : Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 49 16 October 2020 Property China Property

Figure 68: CRLand – EBITDA ratios and borrowing costs Figure 69: CRLand – Land bank breakdown by city tiers (in terms of GFA)

X Net debt / EBITDA EBITDA/Interest 100% Avg borrowing costs (RHS) 10.0 4.6% 4.7% 90% 9.0 27% 28% 4.6% 80% 33% 32% 8.0 4.5% 4.4% 4.5% 70% 7.0 4.4% 4.4% 60% 6.0 9.4 4.4% 4.5% 50% 5.0 4.2% 4.3% 9.1 40% 63% 60% 57% 4.0 4.2% 59% 7.4 7.6 4.2% 6.5 6.9 7.0 30% 3.0 6.0 2.2 2.3 1.9 4.1% 1.5 1.4 1.5 20% 2.0 1.1 1.0 4.0% 10% 1.0 10% 12% 8% 11% 0.0 3.9% 0% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 2017A 2018A 2019A 1H20A

Tier-1 Tier-2 Tier-3

Source : Company data, Deutsche Bank estimates Source : Company data, Deutsche Bank estimates

Figure 70: CRLand – Contract sales GFA and ASP Figure 71: CRLand – Recognised GFA and ASP

19,423 25 18,857 20,000 16 17,573 18,033 20,000 18,304 18,487 17,294 16,882 16,680 17,572 14 18,000 16,903 18,000 20 13.8 16,000 12 12,407 19.5 11,719 14,000 16,000 10 10,790 11.5 15 13,924 16.8 12,000 12,599 14.3 14,000 8 9.4 10,000 13.2 8,000 10 sqm MM 7.5 MM sqmMM 12.0 6 7.0 7.3 7.2 10.2 12,000 6.1 6,000 Rmb/sqm 4 Rmb/sqm 7.8 4,000 5 6.8 10,000 2 2,000 0 8,000 0 0 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E

Contracted sales GFA (LHS) Contracted ASP (RHS) GFA recognized (LHS) ASP recognized (RHS)

Source : Company data, Deutsche Bank estimates Source : Company data, Deutsche Bank estimates

Figure 72: CRLand – Operating cash flow

Operating cashflow 2016A 2017A 2018A 2019A 1H19 1H20 Cash collection % 94% 76% 88% 90% 94% 87% Sales proceeds Rmb Bn 101.2 115.5 162.0 219.5 76.4 96.7 Other income Rmb Bn 6.5 7.4 5.4 17.6 4.4 9.8 Total cash inflow 107.70 122.90 167.40 237.10 80.8 106.5

Attri Land premium paid Rmb Bn 37.7 84.8 89.7 91.2 40.3 16.3 Land capex as % contract sales 35% 49% 43% 38% 34% 15% Construction capex Rmb Bn 29.5 26.9 35.7 66.3 23.0 38.8 Tax Rmb Bn 20.3 19.6 30.0 37.9 18 22 Finance Cost Rmb Bn 3.3 3.3 5.5 7.7 3 4 S,G&A, div and others Rmb Bn 14.2 12.1 10.9 18.4 6 10 Total cash outflow 105.0 146.7 171.8 221.5 90.7 90.8

Net cash in/outflow Rmb Bn 2.7 -23.8 -4.4 15.6 -9.9 15.7 Source : Company data, Deutsche Bank

Page 50 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 73: CRLand – Consolidated P&L forecasts

2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue 9 3,543 101,943 121,189 147,736 178,809 227,442 278,964 Property development 8 4,474 89,511 105,148 127,199 157,578 201,706 249,213 Property investment & Management 6,205 7,646 9,519 12,028 12,552 15,320 17,460 Construction services & others 2,865 4,786 6,522 8,510 8,680 10,416 12,291 Cost of sales ( 61,980) (60,981) (68,607) (91,736) (116,542) (154,690) (189,865)

SG&A (5,415) (7,036) (8,337) (10,815) (13,768) (17,058) (20,922) Other operating income/expenses 547 492 (957) 694 2,136 2,136 2,136 EBIT 26,696 34,417 43,288 45,880 50,635 57,830 70,312

Gross interest expenses (2,879) (5,048) (6,274) (7,741) (6,973) (7,664) (7,851) Interest capitalized 2,713 3,445 4,532 6,414 5,927 6,514 6,674 Interest income 1,668 1,259 1,980 2,164 1,784 1,115 776 Share of results of associates and JCE 514 202 1,297 3,718 5,577 6,536 6,986 Pre-tax exceptional items 4,133 5,150 6,904 10,560 - - - Profit before tax 32,845 39,425 51,726 60,994 56,949 64,331 76,896 ------Income tax (13,594) (17,675) (24,449) (26,643) (22,929) (24,843) (30,126) Profit tax ( 7,920) (8,958) (11,727) (13,513) (12,529) (14,153) (16,917) LAT (5,674) (8,717) (12,722) (13,129) (10,400) (10,690) (13,208) Profit before minority interests 19,251 21,750 27,277 34,352 34,020 39,488 46,771 Interest expense for perpetual bonds - - 288 289 348 348 348 Minority interests (2,565) (2,060) (2,752) (5,390) (10,522) (12,477) (14,517) Reported net profit 16,685 19,690 24,238 28,672 23,150 26,663 31,905

Income tax adjustment 1,033 1,288 1,726 2,640 - - - Other adjustment 339 551 236 895 - - - Core net profit 13,924 16,379 19,296 21,647 23,150 26,663 31,905 Dividends 4,175 5,651 7,340 7,576 8,566 9,865 11,805 Div payout 30% 35% 38% 35% 37% 37% 37%

Source : Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 51 16 October 2020 Property China Property

Figure 74: CRLand – Consolidated balance sheet forecasts Balance Sheet 2016A 2017A 2018A 2019A 2020E 2021E 2022E Investment properties 81,405 99,209 126,864 156,490 182,532 208,533 235,895 Properties under development + Land (L/T) 1,932 2,288 3,233 4,665 4,665 4,665 4,665 Interests in associates and JCEs 8,612 13,498 30,941 40,831 51,407 51,130 43,364 Investments (L/T) 48 52 1,110 1,131 1,188 1,247 1,247 Property, plant and equipment 7,728 8,345 10,773 11,104 11,328 11,536 11,728 Intangible assets 12 433 419 437 458 481 481 Trade, loan and other receivables (L/T) ------Deferred tax assets 3,272 4,894 7,181 8,620 8,620 8,620 8,620 Other assets 347 785 1,259 3,320 3,320 3,320 3,320 Non-current assets 103,356 129,504 181,781 226,597 263,517 289,532 309,320

Completed properties held for sale 21,092 23,835 32,475 37,874 48,751 77,384 83,551 Properties under development + Land (S/T) 146,321 199,654 272,026 317,248 364,251 371,976 384,910 Inventories 652 954 1,094 1,088 1,110 1,132 1,154 Trade and other receivables (S/T) 38,129 42,471 44,076 51,292 53,856 56,549 59,377 Amounts due from related parties 9,664 22,038 41,070 51,743 54,331 57,047 59,899 Tax prepayments 6,239 8,220 10,689 11,701 12,871 13,514 14,190 Other receivables, prepayments and deposits ------Investments (S/T) - - 1,562 866 909 955 955 Pledged bank deposits + Restricted cash + Time deposits ------Cash and cash equivalents 39,935 53,774 70,969 63,699 44,593 31,043 28,020 Current assets 262,034 350,947 473,962 535,511 580,671 609,600 632,056 Total assets 365,390 480,451 655,743 762,108 844,188 899,132 941,377

Pre-sale deposits 90,408 119,373 192,265 226,720 254,899 275,119 291,724 Accruals, trade and other payables 50,307 64,270 88,246 98,213 101,160 104,194 107,320 Amounts due to related parties 10,383 10,909 22,930 15,776 17,038 18,401 19,873 Taxes payable 13,284 19,613 22,407 28,562 31,419 33,932 36,647 Dividend payable ------Other payables - - - 450 450 450 450 Bank and other borrowings (S/T) 10,257 25,658 22,101 21,345 22,412 23,084 23,546 Current liabilities 174,640 239,823 347,948 391,067 427,378 455,182 479,561

Bank and other borrowings (L/T) 57,980 79,899 110,111 113,200 133,576 140,255 140,255 Deferred tax liabilities 10,628 12,268 15,242 19,440 19,440 19,440 19,440 Other liabilities 3,075 4,221 1,737 4,928 4,928 4,928 4,928 Non-current liabilities 71,682 96,387 127,090 137,569 157,944 164,623 164,623 Total liabilities 246,323 336,210 475,039 528,635 585,323 619,805 644,184

Issued capital 593 656 656 674 674 674 674 Share premium and reserves 31,133 39,636 45,847 57,559 57,559 57,559 57,559 Perpetual convertible bonds ------Retained earnings 67,901 79,427 91,873 115,342 129,926 146,724 166,824 Attributable equities 99,627 119,718 138,376 173,574 188,159 204,956 225,057

Perpetual bonds - - 5,000 10,000 9,287 9,287 9,287 Minority interests 19,441 24,522 37,329 49,898 61,420 65,083 62,850 Total equities 119,068 144,240 180,705 233,473 258,866 279,326 297,193

Source : Company data, Deutsche Bank estimates

Page 52 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 75: CRLand – Key model assumptions

Unit 2016A 2017A 2018A 2019A 2020E 2021E 2022E Unrecognized sales Rmb MM 88,760 99,300 126,090 187,350 223,900 251,729 271,698 Contract sales Salable resources Rmb MM 215,040 260,000 310,000 450,000 511,677 616,909 651,204 Contract sales target Rmb MM 96,000 120,000 183,000 242,000 262,000

Contracted sales GFA MM sqm 7.8 10.2 12.0 13.2 14.3 16.8 19.5 Y/Y % chg 15% 31% 18% 11% 8% 17% 16% Contracted ASP Rmb/Sqm 13,924 16,903 17,572 18,304 18,487 18,857 19,423 Y/Y % chg 11% 21% 4% 6% 1% 2% 3% Contracted sales Rmb MM 108,089 172,411 210,675 242,500 264,867 316,678 379,445 Y/Y % chg 27% 60% 22% 15% 9% 20% 20% Sell-through rate 50% 59% 60% 54% 49% 49% 54%

Contracted sales (attri) 108,040 152,100 185,000 163,000 180,109 218,508 273,200 Y/Y % chg 22% -12% 10% 21% 25% Attributable stake 88% 88% 67% 68% 69% 72% Development sales recognition 2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue Rmb MM 85,400 89,511 105,148 127,199 157,578 201,706 249,213 Y/Y % chg 12% 5% 17% 21% 24% 28% 24% ASP recgonized at Revenue Rmb/Sqm 11,719 12,407 17,294 16,882 16,680 17,573 18,033 Y/Y % chg 9% 6% 39% -2% -1% 5% 3% GFA recgonized at Revenue MM sqm 7.3 7.2 6.1 7.5 9.4 11.5 13.8 Y/Y % chg 4% -1% -16% 23% 26% 22% 20% Gross margin at consol level % 32.3% 39.7% 42.9% 36.5% 33.0% 30.0% 30.0% Property development landbank 2016A 2017A 2018A 2019A 2020E 2021E 2022E DP landbank as of year-end MM sqm 38.08 40.82 50.14 58.52 60.36 62.66 67.01 DP landbank as of year-end (attri) MM sqm 38.08 32.65 40.11 41.67 42.25 43.86 46.91 Avg costs of DP landbank (Rmb/sqm) Rmb/Sqm NA 7,178 7,615 7,136 7,839 8,133 8,885 Attributable interest % 100% 80% 80% 71% 70% 70% 70%

GFA acquired during the year MM sqm 10.50 12.00 19.38 17.84 16.19 20.99 23.44 GFA acquired during the year (Attri) MM sqm 7.93 7.48 15.17 11.70 10.20 14.69 16.41 Attri interest 76% 62% 78% 66% 63% 70% 70%

Avg cost of land acquisitions Rmb/Sqm 5,951 8,731 6,838 7,083 9,208 9,392 9,580 Land premium Rmb MM 62,486 104,772 132,520 126,361 149,071 197,159 224,585 Land premium (Attri) Rmb MM 47,200 65,300 103,700 82,847 93,915 138,011 157,209

GFA starts MM sqm 8.50 17.10 20.51 19.43 20.38 19.68 20.75 GFA under construction as of year-end MM sqm 11.38 21.27 31.11 40.70 46.73 47.72 49.38 GFA completed MM sqm 8.9 7.2 10.7 9.8 14.4 18.7 19.1 Source : Company data, Deutsche Bank estimates

Figure 76: CRLand – Rolling forward P/E Figure 77: CRLand – Forward P/BV

12.0 1.6

10.0 1.4

8.0 1.2

6.0 1.0

4.0 0.8

2.0 0.6

0.0 0.4 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20

CR Land Mean +1 s.d. CR Land Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : Bloomberg Finance LP, Deutsche Bank Source : Bloomberg Finance LP, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 53 16 October 2020 Property China Property

Rating Company Lucia Kwong

Buy China Aoyuan Research Analyst +852 - - 2203 6256 Asia China Price at 15 Oct 2020 (HKD) 7.62 Price target - 12mth (HKD) 12.90 Property Reuters Bloomberg Property 3883.HK 3883 HK 52-week range (HKD) 12.14 - 7.11 HANG SENG INDEX 24,119 Urban renewal could be coming to Price/price relative 15

fruition 10

5 Initiating with BUY: Urban renewal could be back in focus 0 We initiate coverage on Aoyuan with a Buy rating and 12-month forward target Jan '19 Jul '19 Jan '20 Jul '20

price of HK$12.9. Aoyuan adopts a fast development cycle and achieved high sales China Aoyuan HANG SENG INDEX (Rebased) growth during FY16-19, which should translate into high revenue growth in FY20 and thereafter. Development margins are preserved thanks to diversified land Performance (%) 1m 3m 12m access (M&A, urban renewal) so that land costs are contained. Aoyuan achieved Absolute -3.3-26.1 -5.4 strong ROE, thanks also to increasing leverage, but the interest expense level is sub- HANG SENG INDEX -1.4 -8.0 -6.1 optimal as yet. The key share price driver for Aoyuan in the medium term stems from Source: Deutsche Bank potential conversion of urban renewal projects. Key indicators (FY1) No fast track ROE (%) 39.6 The urban renewal theme was a hot topic in 2018-19, together with the discussion Net debt/equity (%) 77.4 of investment opportunities in GBA, but cooled down as conversion of the projects Book value/share (CNY) 7.19 took longer than investors' expectations. In fact, the old plants' conversion often Price/book (x) 1.0 takes 4 years and old villages' conversion takes even longer. With several years of Net interest cover(x) 45.5 negotiation work, some projects are closer to successful conversion finally and Operating profit margin (%) 21.0 could lift portfolio margins and ASP. Source: Deutsche Bank

Valuation and risks Comparatives We set our target price based on 4.5x FY20E P/E on the back of 19% 2Y EPS CAGR China Aoyuan (3883.HK),HKD8.10 Buy and 0.25x PEG, translating to a 30% discount to end Dec-20E NAV (HK$18.3). Our 2019A 2020E 2021E TP has taken into account the higher leverage than peers with similar development P/E(x) 4.9 2.8 2.3 scale, current credit rating (B+ rated), relatively shorter land bank (good for 3 years EV/EBITDA(x) 5.9 4.2 4.1 of development). The share price was dragged by sell-through lagging behind peers Price/book(x) 1.9 1.0 0.8 in 3Q20. Potential strong sales in 4Q could thus become a short-term share price Source: Deutsche Bank catalyst in our view. Risks: failure of land conversion, slow delivery of units, steeper- than-expected margin squeeze, drastic policy tightening.

Forecasts and ratios Year End Dec 31 2018A 2019A 2020E 2021E 2022E Sales (CNYm) 31,005.8 50,531.2 77,456.4 97,507.0 104,959.5 EBITDA(CNYm) 6,725.9 10,944.2 16,616.2 20,098.1 21,420.0 Reported NPAT(CNYm) 2,408.9 4,200.8 6,826.6 8,375.0 9,551.9 Reported EPS FD(CNY) 0.90 1.56 2.52 3.09 3.53 DB EPS FD (CNY) 0.96 1.53 2.50 3.09 3.53 DB EPS growth (%) 59.3 59.5 63.4 23.5 14.1 PER (x) 4.4 4.9 2.8 2.3 2.0 EV/EBITDA (x) 7.0 5.9 4.2 4.1 4.1 DPS (net) (CNY) 0.36 0.55 0.90 1.12 1.27 Yield (net) (%) 8.5 7.3 12.9 15.9 18.1 Source: Deutsche Bank estimates, company data

Page 54 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Investment thesis

Aoyuan is a major GBA developer with 21% of land bank (by salable resources) located in GBA and another 17% located in other parts of South China as of Jun-20. The company relies heavily on M&A and urban renewal channels to obtain land, and is one of the key developers already with a sizable pipeline after several years of cultivation. With access to low-cost land sites outside mainstream public tender market, Aoyuan's average land costs are only 27% to ASP. The company has achieved strong contract sales during 2016-19 and tends to deliver similar development earnings growth on a 2-2.5 year lag. A fast development cycle, relatively stable margins and increasing leverage result in strong ROE, though we are concerned about the interest burden in the medium term, which may impact profitability.

The key theme for Aoyuan is the potential improvement in its land bank profile when some of its better-located urban renewal development projects in the pipeline can be converted or sold successfully. The Guangzhou Panyu site is a prominent example. Up to 7.4m sqm of salable area is approaching conversion, and if successful could further raise its land bank concentration in GBA, lift ASP and enhance margin.

Outlook

Aoyuan achieved contract sales of Rmb83.4 bn in 9M20, or 63% of the FY20 target of Rmb132 bn. Over the past years, the company has fetched 35-50% of full-year targets within 4Q alone, disregarding the policy environment. We believe the pattern is likely to repeat; in particular salable resources in 2H20 amount to Rmb170 bn. Beyond FY20, it is still aiming at >20% contract sales growth in FY21 and FY22.

Aoyuan has contract liabilities of Rmb79 bn on the Jun-20 balance sheet, of which Rmb 45 bn is expected to be delivered in 2H20. For FY20, we expect Rmb75 bn of property development revenue would be recognized on the consolidated P&L. Together with other non-development businesses, we thus look for >50% YoY revenue growth. Beyond FY20, we believe the strong contract sales in FY18-19 could be reflected in the P&L (Aoyuan has shown a persistent track record of delivering pre-sold units on a roughly 2-2.5-year lag). We estimate development margin is relatively stable at 27-28% throughout FY20-22, suggesting EBITDA growth could be in line with strong revenue growth.

In all, we expect Aoyuan to deliver strong earnings growth of 64% YoY in FY20, followed by 18% earnings CAGR in FY21/22.

The forecasts do not take into account potential earnings from primary land development – this profit appears when some urban renewal sites are required by the local government (e.g. Guangzhou) to put up for tender and are sold successfully, be it taken by third parties or Aoyuan. We exclude these earnings in our forecasts as timing is uncertain, in our view. Hence our forecasts are subject to upside when land use conversion happens.

Deutsche Bank AG/Hong Kong Page 55 16 October 2020 Property China Property

Other discussion

Urban renewal projects are closer to crystallization Aoyuan was one of the early entrants into the urban renewal business, mainly in GBA (Guangzhou, Zhuhai, Dongguan and Shenzhen). In 1H20, 0.33m sqm of GFA was successfully converted. On 28-Sep-20, the Guanghzou Panyu Nitrogen Fertilizer Plant site was tendered and won by Aoyuan and Henderson Land JV for Rmb6.78 bn. The project was first mentioned in 2017, and took 4 years to be successfully converted. Original salable area was 300,000 sqm but latest plan has increased to 500,000 sqm and hence A.V of Rmb23,380/sqm. The site is well located and is in close proximity from the Guangzhou University City, where ASP is at least Rmb45k /sqm.

The company expects other urban renewal projects of up to 7.4m sqm to potentially be converted in FY20/21 after several years of cultivation, and the ASP of these sites could be considerably higher due to better locations (Rmb 29k/sqm). Timing of conversion is highly uncertain, but successful conversion would supply up to one- third of the salable resources in FY22/23, and could lift the ASP from the current Rmb10k/sqm to Rmb12-13k/sqm.

The Guangzhou government is increasingly proactive in promoting urban renewal with a target of renewing over 380 villages in the next 10 years, not to mention the conversion of old plants; it has improved the regulatory framework accordingly in an attempt to accelerate the process. This could mean a sizable pipeline ahead, though we expect conversion would still take 5-6 years.

Optical margins are normalized but real profitability is strong As discussed above, Aoyuan will recognize the primary development profits on sites that need to be put up for tender per government requirements, being the difference between the land tender price and original land costs/expenses incurred in land use conversion. The margin can be higher than 60% in some cases and is not subject to LAT. After the ownership of the site is transferred and becomes ready for construction, the development margins could be normalized (25%+) and development profits are subject to LAT.

Credit profile is stable, but interest burden is a concern if debt growth continues Aoyuan is rated B+ by S&P, B1 by Moody's (B2 for senior debt) and BB- by Fitch, all with a positive outlook. The company is working towards credit rating upgrades. However, Aoyuan's effective borrowing cost is 7.5% in 1H21, which is not low compared to peers with similar credit ratings, and is above the industry average of 6.1%. Also, gross interest expense to gross debt is high at 8-9%, as some high-cost USD debts only come to maturity from Sep-21 onwards. The company intends to refinance some of the high-cost borrowings, including those onshore, to reduce the interest burden. We expect the effective cost of borrowing to edge down from FY21 onwards.

Aoyuan's gross interest expense to revenue was 15.2% in 1H20, which was similar to peers of a similar scale and credit rating, but still higher than the industry average (12.2%). Given most projects are consolidated to Aoyuan P&L, the figure does point to the fact that Aoyuan has relied on debt financing to sustain land acquisitions.

Aoyuan's net debt/total equity was 82% as of end Jun-20 but net debt/shareholder equity was high at 225%, suggesting that capital from minority shareholders has

Page 56 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property been a key funding source, especially on urban renewal projects. For now, Aoyuan has strong ROE because of leverage. In the medium term, if gross debt growth continues, this may put pressure on the company's profitability and deter its path to credit rating upgrade.

Based on Jun-20 financials, Aoyuan is in the Yellow Category with one of the Three Red Lines breached (Adjusted Leverage).

Valuation

Aoyuan derives the bulk of earnings from property sales, and property development Dev prop value assumptions assets accounted for 93% of Aoyuan's total as of Jun-20; hence, we believe P/E Land bank (attri): 38 m Sqm should be a more valid yardstick than NAV discount. Our price target is based on ASP: Rmb11,240/sqm 4.5x FY20E P/E which is derived from 18% 2Y EPS CAGR and 0.25x PEG. Despite a Avg GPM after LAT: 24.1% stable credit profile with positive outlook, Aoyuan's net gearing (net debt/total SG&A to sales: 9.1% equity and net debt/shareholder equity) is not low amongst developers with a similar development scale, though are comparable to those with similar credit rating. Our target price translates into a 30% discount to our end-FY20E NAV estimate of HK$18.3. We derive our NAV estimates based on end-FY20E shareholder equity which includes the marked-to-market investment property values per IFRS. On top of this, we add 1) estimated property profits of existing attributable land bank, assuming they are all sold and cashed in; 2) Aoyuan Healthy Life market value attributable to the company. In other words, this resembles the future book value when the land bank is fully crystallized.

Figure 78: Aoyuan – NAV breakdown

HK$ MM 2020E Per sh (HK$) 2021E Per sh (HK$) Development properties 24,717 9.1 26,878 9.9 Shareholder equity 22,162 8.2 28,279 10.5 Interest in Aoyuan Healty Life 2,513 0.9 2,513 0.9 NAV 49,392 18.3 57,670 21.3

Source : Deutsche Bank estimates

Our NAV estimates tally with our ASP assumptions in deriving FY20-22 earnings forecasts – we have assumed nil ASP growth in 2020-21 and 12% increase YoY in 2022, mainly due to product mix change – we assume the newly-converted urban renewal sites could start contributing to contract sales from 2022 onwards.

We believe Aoyuan would trade at a narrower discount to NAV, mainly because of its relatively short land bank – we estimate the land bank size of 48.7m sqm as of 1H20 would be sufficient for 3-4 years of development. Hence Aoyuan needs to recycle cash and replenish the land bank before it depletes. We have not taken into account sites which are currently under urban redevelopment and have not been successfully converted into developable sites.

Risks Key macro risks include: weakening of housing demand and retail demand due to economic slowdown, resurgence of pandemic, abrupt change in mortgage availability, which could affect cash collection, and Rmb fluctuations which affect offshore financing.

Company-specific risks: 1) delay in delivery of residential units presold; 2) failure of coversion of urban renewal projects into land bank or timing is much later than company expectations; 3) severe margin squeeze.

Deutsche Bank AG/Hong Kong Page 57 16 October 2020 Property China Property

Figure 79: Aoyuan – Margin trends Figure 80: Aoyuan – Gearing and S/T debt ratios

35% 189% 188% 31.1% 200% 60% 29.7% 29.2% 173% 170% 28.5% 28.3% 180% 164% 30% 28% 28% 27% 160% 50% 30% 28.2% 136% 25% 27% 27.7% 27.5% 140% 26% 27.9% 40% 120% 23% 24% 25% 24% 24% 88% 94% 94% 20% 23% 22% 23% 100% 83% 77% 77% 30% 80% 63% 63% 19% 51% 51% 15% 60% 20% 9.9% 10.5% 8.4% 8.3% 8.7% 8.6% 9.1% 40% 10% 8.2% 10% 20% Gross margin 16% 25% 51% 41% 44% 42% 39% 37% 5% Gross dev't margin before LAT 0% 0% Gross dev't margin after LAT 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Core net margin 0% S/T debt ratio Net debt/total equity 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Net debt/common equity*

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 81: Aoyuan – EBITDA ratios and borrowing costs Figure 82: Aoyuan – Recognized GFA and ASP

X Net debt / EBITDA EBITDA/Interest Avg borrowing costs 12 10,833 10,709 12,000 5.0 4.7 9.5% 10.0% 9,976 9,130 9,007 9,227 4.5 8.1% 9.0% 10 10,000 7.4% 7.5% 7.5% 7.5% 7.5% 4.0 3.8 3.8 7.2% 8.0% 6,993 7,397 9.6 8 8.8 8,000 3.5 7.0% 7.6 2.9 6 6,000 3.0 2.6 6.0% 2.3 2.4 2.2 sqm MM 2.5 2.0 2.2 5.0% 5.2 1.9 4 4,000 2.0 1.7 1.7 4.0% 1.5 3.3 Rmb/sqm 1.5 1.1 1.1 3.0% 2 2,000 1.0 1.6 2.4 1.0 2.0% 0 0 0.5 1.0% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 0.0 0.0% Axis Title 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E GFA recognized (LHS) ASP recognized (RHS)

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 83: Aoyuan – contracted sales GFA and ASP Figure 84: Aoyuan – Land bank breakdown by city-tiers (in terms of salable resources) as of end Jun-20

20 11,316 12,000 10,159 10,298 10,104 10,104 10,104 Urban redevelopment excluded 18 8,591 10,000 16 8,037 18.0 16.0 14 8,000 12 13.1 10 11.7 6,000 8 MM sqm MM 8.9 6 4,000 46.0% 4 Rmb/sqm 4.5 2,000 54.0% 2 1.9 3.0 0 0 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Axis Title Contracted sales GFA (LHS) Contracted ASP (RHS)

T1/T2 and international cities T3/T4

Source : Company data, Deutsche Bank estimates Source : company data, Deutsche Bank

Page 58 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 85: Aoyuan – Rolling forward P/E Figure 86: Aoyuan – Forward P/BV

6.0 1.80 1.60 5.0 1.40 4.0 1.20 1.00 3.0 0.80 2.0 0.60 0.40 1.0 0.20 0.00 0.0 -0.20 -1.0 -0.40 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20

Aoyuan Mean +1 s.d. Aoyuan Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : Bloomberg Finance LP, Deutsche Bank Source : Bloomberg Finance LP, Deutsche Bank

Figure 87: Aoyuan – Consolidated P&L forecasts

2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue 1 1,827 19,115 31,006 50,531 77,456 97,507 104,960 Property development 11,240 17,960 29,740 48,091 75,487 95,377 102,656 Property investment 73 119 186 273 281 290 298 Property management 514 1,036 1,080 2,167 1,688 1,840 2,006 Cost of sales ( 8,550) (14,004) (21,372) (35,510) (54,867) (69,683) (75,212) Gross profit 3,277 5,111 9,634 15,021 22,590 27,824 29,747

SG&A (1,082) (1,726) (3,168) (4,573) (7,049) (8,873) (9,551) Other operating income/expenses (285) 212 141 155 721 779 841 EBIT 1,911 3,598 6,606 10,604 16,262 19,730 21,037

Gross interest expenses (1,771) (2,135) (3,976) (7,452) (8,966) (9,345) (9,732) Interest capitalized 1,614 1,867 3,565 6,733 8,070 8,410 8,759 Interest income 54 75 179 360 539 559 538 Share of results of associates and JCE (32) (116) 35 (51) 204 196 419 Pre-tax exceptional items 310 337 544 394 79 - - Profit before tax 2,085 3,626 6,954 10,589 16,187 19,551 21,021

Income tax (1,078) (1,674) (4,015) (5,368) (7,811) (9,201) (9,584) Profit tax (657) (946) (2,090) (3,426) (5,018) (5,767) (5,991) LAT (421) (728) (1,925) (1,942) (2,793) (3,434) (3,593) Profit before minority interests 1,007 1,952 2,939 5,222 8,376 10,350 11,437 Minority interests (126) (312) (531) (1,021) (1,550) (1,975) (1,885) Reported net profit 881 1,640 2,409 4,201 6,827 8,375 9,552 Core net profit 1,238 1,613 2,574 4,122 6,767 8,375 9,552 Dividends 401 670 964 1,480 2,436 3,015 3,439 Div payout 32% 42% 37% 36% 36% 36% 36% Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 59 16 October 2020 Property China Property

Figure 88: Aoyuan – Consolidated balance sheet forecasts Balance Sheet 2016A 2017A 2018A 2019A 2020E 2021E 2022E Investment properties 5,425 6,360 8,833 10,072 10,072 10,072 10,072 Properties under development + Land (L/T) 15 81 338 - - - - Interests in associates and JCEs 164 214 1,939 5,865 6,569 7,265 8,183 Investments (L/T) 10 ------Property, plant and equipment 506 719 2,057 2,686 3,332 3,764 4,181 Intangible assets 5 33 7 8 8 8 8 Trade, loan and other receivables (L/T) 282 1,212 2,692 5,686 5,970 6,269 6,582 Deferred tax assets 183 305 677 998 998 998 998 Other assets - 771 508 2,107 2,107 2,107 2,107 Non-current assets 6,589 9,696 17,051 27,423 29,057 30,483 32,133

Completed properties held for sale 8,193 10,546 13,714 25,092 12,120 14,461 14,681 Properties under development + Land (S/T) 35,294 66,525 101,195 133,839 165,979 193,006 223,877 Inventories 26 138 67 84 92 101 111 Trade and other receivables (S/T) 3,604 7,407 12,274 26,259 27,572 28,950 30,398 Amounts due from related parties 849 2,594 2,267 5,369 5,369 5,369 5,369 Tax prepayments 616 1,041 1,968 2,914 3,205 3,461 3,738 Other receivables, prepayments and deposits 289 1,119 1,505 971 971 971 971 Investments (S/T) - 200 524 574 574 574 574 Restricted cash 486 1,771 5,356 21,251 21,251 21,251 21,251 Cash and cash equivalents 10,471 24,769 32,937 46,104 48,670 46,019 52,748 Current assets 59,830 116,110 171,808 262,458 285,803 314,164 353,718 Total assets 66,418 125,806 188,858 289,880 314,860 344,648 385,851

Pre-sale deposits 20,524 34,760 59,966 86,056 92,016 98,871 113,002 Accruals, trade and other payables 6,795 15,212 26,108 36,838 38,680 41,774 45,116 Amounts due to related parties 296 837 4,755 22,822 25,104 27,615 30,928 Taxes payable 2,593 3,172 5,535 8,081 8,889 9,778 10,951 Other payables 1,430 1,103 936 1,177 1,177 1,177 1,177 Bank and other borrowings (S/T) 4,506 20,490 23,732 41,873 43,129 44,423 46,644 Current liabilities 36,143 75,573 121,033 196,847 208,995 223,638 247,819

Bank and other borrowings (L/T) 13,875 19,880 33,990 53,891 60,358 69,411 79,823 Deferred tax liabilities 583 691 1,184 1,442 1,442 1,442 1,442 Other liabilities 1,187 2,535 1,918 704 704 704 704 Non-current liabilities 15,645 23,106 37,092 56,037 62,503 71,557 81,969 Total liabilities 51,787 98,680 158,124 252,884 271,498 295,195 329,788

Issued capital 25 25 25 25 27 27 27 Share premium and reserves 4,184 4,192 4,903 5,173 5,172 5,172 5,172 Retained earnings 4,708 5,938 6,944 9,831 14,221 19,581 25,694 Attributable equities 8,918 10,155 11,872 15,030 19,420 24,780 30,893

Minority interests 5,713 16,971 18,862 21,967 23,941 24,672 25,170 Total equities 14,631 27,126 30,734 36,997 43,361 49,453 56,063 Source : company data, Deutsche Bank estimates

Page 60 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 89: Aoyuan – Key model assumptions

Unit 2016A 2017A 2018A 2019A 2020E 2021E 2022E Unrecognized sales Rmb MM 29,200 51,600 110,000 170,500 191,902 217,051 Contract sales (gross basis)

Salable resources Rmb MM 40,000 70,000 140,000 190,000 220,000 275,257 356,177 Contract sales target Rmb MM 17,447 33,000 73,000 115,000 132,000 150,000 200,000

Contracted sales GFA MM sqm 3.0 4.5 8.9 11.7 13.1 16.0 18.0 Y/Y % chg 58% 51% 98% 32% 12% 23% 12% Contracted ASP Rmb/Sqm 8,591 10,159 10,298 10,104 10,104 10,104 11,316 Y/Y % chg 7% 18% 1% 6% 0% 0% 12% Contracted sales Rmb MM 25,602 45,590 91,278 118,060 132,215 162,004 203,218 Y/Y % chg 69% 78% 100% 29% 12% 23% 25%

Sell-through rate 64% 65% 65% 62% 60% 60% 60%

Development sales recognition 2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue Rmb MM 11,240 17,960 29,740 48,091 75,487 95,377 102,656 ASP recgonized at Revenue Rmb/Sqm 6,993 7,397 9,007 9,227 9,976 10,833 10,709 GFA recgonized at Revenue MM sqm 1.6 2.4 3.3 5.2 7.6 8.8 9.6 Gross margin at consol level % 26.1% 22.8% 29.7% 27.9% 28.2% 27.7% 27.5%

Property development landbank 2016A 2017A 2018A 2019A 2020E 2021E 2022E DP landbank as of year-end MM sqm 13.77 24.87 33.42 44.13 49.31 55.42 62.86 GBA + Hainan 26% 30% 23% 19% Other South China % 23% 26% 48% 23% Other regions 51% 44% 29% 57%

DP landbank as of year-end (attri) MM sqm 11.02 19.90 26.73 34.86 39.45 46.00 52.17 Avg costs of DP landbank (Rmb/sqm) Rmb/Sqm 1,855 2,131 2,102 2,536 3,079 3,568 4,007 Attributable interest % 80% 80% 80% 79% 80% 83% 83%

GFA acquired during the year MM sqm 3.14 12.86 12.58 16.09 13.48 18.44 20.65 GFA acquired during the year (Attri) MM sqm 2.67 9.85 10.33 12.12 9.44 12.91 14.46 Average land costs Rmb/Sqm 3,170 2,446 2,418 3,199 4,159 4,242 4,327 Land premium Rmb MM 9,950 31,458 30,432 51,472 56,053 78,218 89,357 Land premium (Attri) Rmb MM 8,472 24,104 25,494 33,897 39,237 54,753 62,550

GFA starts MM sqm 3.06 6.65 9.62 14.50 18.00 19.24 21.55 GFA under construction as of year-end MM sqm 5.42 9.01 15.00 21.13 30.83 37.74 46.08 GFA completed MM sqm 2.2 3.6 4.6 6.9 8.3 12.3 13.2 Source : company data, Deutsche Bank estimates

Figure 90: Aoyuan – Operating cashflow breakdown

Operating cashflow 2016A 2017A 2018A 2019A 1H19 1H20 Cash collection ratio % 90% 80% 78% 81% 89% 90% Sales proceeds Rmb Bn 23.0 36.5 71.2 95.8 95.8 45.8 Other income Rmb Bn 0.6 0.3 0.3 3.3 Total cash inflow 23.04 36.47 71.80 96.10 96.1 49.0

Attri Land premium paid Rmb Bn 6.3 22.2 26.8 28.9 13.3 18.9 Land capex as % contract sales 25% 49% 29% 24% 37% Construction capex Rmb Bn 9.7 16.0 27.0 38.0 18.1 15.1 Tax, Interest, SG&A Rmb Bn 4.8 7.3 11.5 17.8 9 11 Dividends Rmb Bn 0.3 0.4 0.7 1.0 0 0 Non-property acquisitions 0.7 2.7 2.6 3.8 6 -3

Total cash outflow 21.7 48.6 68.5 89.4 46.4 42.1

Net cash in/outflow Rmb Bn 1.3 -12.1 3.3 6.7 49.7 6.9 Source : company data, Deutsche Bank

Deutsche Bank AG/Hong Kong Page 61 16 October 2020 Property China Property

Rating Company Lucia Kwong

Buy China SCE Group Research Analyst +852 - - 2203 6256 Asia China Price at 15 Oct 2020 (HKD) 3.53 Price target - 12mth (HKD) 5.50 Property Reuters Bloomberg Property 1966.HK 1966 HK 52-week range (HKD) 4.63 - 3.01 HANG SENG INDEX 24,119 Still in high growth phase Price/price relative 6

Initiating with BUY: Defying the industry trend 4 We initiate coverage on China SCE with a Buy rating and 12M fwd target price of 2

HK$5.5. The company has successfully expanded its scale and geographical 0 exposure, and achieved high contract sales growth during FY16-19. Given the Jan '19 Jul '19 Jan '20 Jul '20 development cycle, it is on the verge of ramping up deliveries and revenue China SCE Group HANG SENG INDEX (Rebased) recognition from FY20 onwards. Similar to peers, it could see margin squeeze in Performance (%) 1m 3m 12m FY20/21, but could still deliver core earnings growth of 19%/39% in FY21/22 after Absolute -1.6 -9.0 4.3 milder growth in FY20, on our estimates. Among peers with a similar scale and credit rating, China SCE's net debt/total equity (and see-through leverage) is lower. HANG SENG INDEX -1.4 -8.0 -6.1 We thus see re-rating potential for the stock when earnings growth is realized. Source: Deutsche Bank Key indicators (FY1) Aiming at diversification and competitive edges ROE (%) 15.7 China SCE's commercial segments, FUNWORLD (shopping mall) series and Net debt/equity (%) 69.6 FUNLIVE (rental apartments) are paving the way for rapid expansion in FY21-24E. Book value/share (CNY) 4.62 The peak of opening of its shopping malls will fall in FY22, and the company is Price/book (x) 0.7 building up the IP development pipeline via strategically taking integrated property projects. Units under management are targeted to increase 10x by 2025. While Net interest cover(x) 15.2 short-term fees and rental income contribution are <10%, we believe the business Operating profit margin (%) 18.4 diversification yields decent returns, while competition for integrated property Source: Deutsche Bank

projects is usually less fierce and land costs are lower than pure residential sites. Comparatives China SCE Group (1966.HK),HKD3.62 Buy Valuation and risks 2019A 2020E 2021E Our target price is based on 7x FY20E P/E, which in turn is based on 28% 2Y EPS P/E(x) 4.8 4.6 3.8 CAGR and 0.25x PEG, translating into 5.7x FY21E P/E and a 53% discount to Dec- 20E NAV estimate (HK$11.8). Our TP has taken into account company size, stock EV/EBITDA(x) 6.8 7.0 6.0 liquidity and credit profile. Risks: delays of delivery of developments and shopping Price/book(x) 0.9 0.7 0.6 malls, credit rating downgrade that may affect borrowing costs, mortgage policy Source: Deutsche Bank tightening that affects sell-through rates.

Forecasts and ratios Year End Dec 31 2018A 2019A 2020E 2021E 2022E Sales (CNYm) 17,782.9 21,369.8 29,540.4 34,618.3 39,900.3 EBITDA(CNYm) 4,789.7 4,712.8 5,548.3 6,778.0 8,757.0 Reported NPAT(CNYm) 3,385.3 3,510.0 2,913.4 3,505.3 4,880.9 Reported EPS FD(CNY) 0.86 0.83 0.68 0.82 1.14 DB EPS FD (CNY) 0.56 0.63 0.68 0.81 1.13 DB EPS growth (%) 6.4 12.7 8.4 19.2 39.2 PER (x) 4.6 4.8 4.6 3.8 2.8 EV/EBITDA (x) 4.7 6.8 7.0 6.0 4.5 DPS (net) (CNY) 0.18 0.21 0.24 0.29 0.40 Yield (net) (%) 6.9 7.0 7.6 9.1 12.7 Source: Deutsche Bank estimates, company data

Page 62 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Investment thesis

Over the past decade, China SCE has gone through several transformations – from its hometown of Quanzhou, Fujian, it went through successful scale expansion (in Fujian and Bohai Rim) and geographical expansion to YRD, GBA and more recently Central China. Its property development business has been on a high-growth track – annual contract sales area increased 12x during 2010-19, while gross contract sales increased 21x, boosted by self-operated projects and co-operation with a wide range of peer developers.

The company is heading towards the Rmb100 bn contract sales mark; at the same time it is moving on other initiatives – it is proactively ramping up its shopping mall portfolio under the FUNWORLD business model, and rental apartments under the FUNLIVE layout (Dual-track strategy). China SCE's landbanking channels are increasingly skewed towards integrated development projects that allow the company to replenish both commercial and residential land bank at lower land costs. In addition, China SCE is "exporting" its brand via the fee-based business of asset management on behalf of third parties. Despite the high growth, leverage is still manageable.

We believe China SCE could be a re-rating name among the small cap China property developers in the medium term, when its earnings from contract sales over the past few years can be finally realized, and when its rental and fee income base becomes more visible.

Outlook

China SCE achieved strong contract sales growth during 2016-19 (51% CAGR on a gross basis and 36% CAGR on attributable sales basis). Given the 3-year development cycle, we expect delivery of presold units to pick up from FY20 onwards, as revealed by Rmb45 bn unbooked revenue as of Jun-20, which will be recognized on the consolidated income statement, and Rmb63 bn unbooked revenue which will be recognized at the JCE/associate level.

In 9M20, China SCE achieved 74% of the FY20 contract sales target of Rmb93 bn, and recorded 26% YoY growth while ASP rose 18% YoY to Rmb14,661/sqm. The company should be able to slightly beat the sales target, though it may not necessarily meet the internal target of Rmb100 bn due to COVID-19 impact in 1H20.

More projects to be recognized at associate/JCE levels in FY20/21 China SCE rapidly expanded its development pipeline during FY17-18 by taking up lower stakes in these projects, hence its attributable stake in the development land bank once dipped to 54% in FY18 from 65-75% in FY14-17. The attributable stake was eventually lifted when the company acquired majority stakes in the projects. Even so, we expect that more of such projects are set to be recognized in FY20/21, and they are often located in high-tier cities with ASP considerably higher than other projects to be recognized on a consolidated basis. Projects with majority ownership and to be consolidated on the P&L are mostly located in low-tier cities, hence recognized ASP is considerably lower than the actual blended ASP of its entire development portfolio.

We estimate the consolidated projects (some in low-tier cities) may fetch lower gross margins of 23-25% in FY20/21 vs. 25% in FY19, and earnings could be further diluted by MI. Rather, gross margins should be better at associate levels (28-30%).

Deutsche Bank AG/Hong Kong Page 63 16 October 2020 Property China Property

The projects acquired in FY19 and beyond, in which China SCE has higher stakes, could only contribute to profits from FY22 onwards. In all, we expect the temporarily-subdued margins to partly offset strong development revenue growth in FY20-21, but the company could still deliver strong earnings growth of 19%/39% in FY21/22 after a slower FY20.

Other discussion

Non-property development businesses could "serve as an auxiliary engine" With 2 FUNWORLD malls to open in 4Q20, another 4 malls by 2H21 and 9 malls scheduled to open in FY22, and other managed malls (asset-light model), we believe retail rental income could more than double in FY20-22. Most malls are of the size 55,000-74,000 sqm and are positioned as community malls / outlets across all city tiers.

The FUNLIVE model for rental apartments is a mix of asset-heavy development model and asset-light management model on behalf of investment funds, management contracts and master lease, etc. The product segment should consume little capital and yield better returns without much interest burden. The company has set aggressive targets of operating 200,000 units by 2025 from 22k units as of Jun-20.

As a whole, non-development profit, including rental apartment rental and fee- based businesses, will account for 9-11% of total operating profit in FY20-22 on our estimates. While this is not a significant contribution, the properties do fetch a high- single-digit yield on costs even in the first rental cycle. Also, the know-how in managing retail and rental apartments forms an entry barrier when competing for integrated property developments, so as to limit the competitors to only those with similar expertise, and land costs can be consequently lower.

See-through gearing is manageable China SCE's net debt/total equity was 68% as of Jun-20 (net gearing was 111%) , which is lower than most developers of similar development scale. Its off-balance sheet attributable debt was Rmb11.6 bn, as compared to investments in JCE/Assoc of Rmb13.4 bn on the balance sheet. The see-through gearing would be higher, given higher leverage at associate/JCE level. That said, the associate debt amounts to 25.5% of consolidated gross debt of Rmb45.5 bn, overall manageable in our view.

China SCE breached one of the Three Red Lines (Adjusted Leverage) as of Jun-20. The company is rated B+ by S&P and B1 by Moody's, but S&P downgraded its credit rating outlook to negative in Apr-20. The concern is the slow EBITDA growth vs. gross debt, as a considerable portion of earnings are reflected in the associate/JCE profit instead, which thereby explains the credit rating.

Page 64 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Valuation

The majority of China SCE's assets come from property development, while the bulk of its investment property portfolio is under development. Hence we believe P/E remains a valid valuation yardstick rather than NAV discount. We apply a 7x FY20E P/E to derive our 12-month target price, which is derived from 28% 2Y EPS CAGR and 0.25x PEG. We have taken into account the current credit profile and limited room for improvement, but on the other hand, its strong earnings growth outlook – which will be reflected in FY21/22.

Our target price translates into a 53% discount to our end-FY20E NAV estimate of Dev prop value assumptions HK$11.8. We derive our NAV estimates based on end-FY20E shareholder equity, Land bank (attri): 20.06m Sqm which includes marked-to-market investment property values per IFRS. On top of ASP: Rmb14,867/sqm this, we add the estimated property profits of the existing land bank, assuming they Avg GPM after LAT: 25.4% are all sold and cashed in. In other words, this resembles the future book value when SG&A to sales: 9.0% the land bank is fully crystallized.

Our NAV estimates tally with our ASP assumptions in deriving FY20-22 earnings forecasts – we have assumed 2-3% ASP growth through 2022.

Figure 91: China SCE – NAV breakdown

HK$ MM 2020E Per sh (HK$) 2021E Per sh (HK$) Development properties 27,863 6.6 30,274 7.2 Equity 22,156 5.2 24,772 5.9 NAV 50,019 11.8 55,045 13.0 Source : Deutsche Bank estimates

We believe China SCE shares would trade at a higher NAV discount to big-cap companies and the major retail mall landlord of CRLand, considering 1) non- development businesses still account for a small portion of earnings and are still at development stage; 2) stock trading liquidity; and 3) existing credit profile with limited room for imminent improvement.

Risks Key macro risks include: weakening of housing demand and retail demand due to economic slowdown, resurgence of pandemic, abrupt change in mortgage availability which could affect cash collection, and Rmb fluctuations which affect offshore financing.

Company-specific risks: 1) delay in delivery of residential units presold; 2) completion and opening of retail malls; 3) ramp-up of rental apartment portfolio comes slower than expected; 4) credit rating downgrade, which may lead to higher borrowing costs and lower profitability.

Deutsche Bank AG/Hong Kong Page 65 16 October 2020 Property China Property

Figure 92: China SCE – Margin trends Figure 93: China SCE – Gearing and S/T debt ratios

40% 160% 40% 34% 35% 136% 35% 140% 126% 121% 123% 35% 29% 28% 34% 107% 30% 34% 28% 27% 120% 101% 103% 30% 25% 26% 91% 28% 27% 100% 25% 25% 29% 29% 25% 80% 24% 25% 71% 72% 70% 72% 24% 26% 80% 60% 60% 64% 20% 20% 24% 24% 24% 23% 60% 15% 20% 12.4% 12.4% 12.2% 15% 11.1% 11.8% 40% 10% 9.8% 10.1% 10% 7.2% 20% 5% Gross margin 27% 19% 37% 32% 29% 27% 26% 25% 0% 0% 5% Gross dev't margin before LAT Gross dev't margin after LAT 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Core net margin 0% S/T debt ratio Net debt/total equity 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Net debt/common equity*

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 94: China SCE – EBITDA ratios and borrowing costs Figure 95: China SCE – Recognized GFA and ASP

X Net debt / EBITDA EBITDA/Interest 4 16,143 18,000 4.3 4.5 9.1% 10.0% 16,000 3.9 3.9 4.0 4 4.0 9.0% 12,400 3.5 3.5 3 14,000 8.0% 11,143 3.3 3.3 3.5 6.8% 3.1 12,000 6.5% 6.4% 6.7% 6.7% 6.5% 3.0 3 13,447 2.8 6.2% 7.0% 8,961 3.0 7,771 8,403 12,038 10,000 2.4 6.0% 2 2.5 2.1 2.1 2.2 2.2 8,000 1.9 5.0% sqm MM 2 1.8 2.0 1.7 6,000 1.6 4.0% 1.4 1 1.3 Rmb/sqm 1.5 1.3 4,000 3.0% 1.1 1 2,000 1.0 2.0% 0 0 0.5 1.0% 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 0.0 0.0% Axis Title 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E GFA recognized (LHS) ASP recognized (RHS)

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 96: China SCE – Contracted sales GFA and ASP Figure 97: China SCE – Land bank breakdown by GFA at of end Jun-20

9 17,365 20,000 9% 8 18,000 14,172 14,269 8.3 23% 7 6.3 7.7 16,000 12,379 14,000 6 11,631 6.7 14,736 14,979 12,000 5 12,728 10,000 4 8,000 MM sqm MM 4.1 3 6,000 2 4,000 Rmb/sqm 1.9 1 1.2 1.7 2,000 0 0 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Axis Title Contracted sales GFA (LHS) Contracted ASP (RHS) 68%

T1 T2 T3/T4

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank

Page 66 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 98: China SCE – Rolling forward P/E Figure 99: China SCE – Rolling forward P/BV

7.0 1.20

6.0 1.00 5.0 0.80 4.0 0.60 3.0 0.40 2.0

1.0 0.20

0.0 0.00 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20

China SCE Mean +1 s.d. China SCE Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : company data, Bloomberg Finance LP, Deutsche Bank Source : company data, Bloomberg Finance LP, Deutsche Bank

Figure 100: China SCE – Consolidated P&L forecasts

2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue 1 2,481 16,105 17,783 21,370 29,540 34,618 39,900 Property development 11,705 15,574 17,225 20,453 28,605 33,544 38,375 Property investment 137 123 131 285 309 369 729 Property management 165 270 337 458 504 579 666 Others 474 138 91 174 123 126 130 Cost of sales ( 9,355) (10,620) (11,636) (15,478) (21,992) (25,416) (28,278) Gross profit 3,126 5,485 6,147 5,892 7,549 9,203 11,623

SG&A (879) (1,494) (1,697) (2,132) (2,659) (3,116) (3,591) Other operating income/expenses 173 (251) 299 857 557 585 614 EBIT 2,420 3,740 4,748 4,617 5,447 6,672 8,646

Gross interest expenses (1,161) (1,569) (2,136) (2,942) (3,350) (3,613) (3,910) Interest capitalized 844 1,177 1,734 2,414 2,847 3,071 3,324 Interest income 39 41 88 206 143 159 124 Share of results of associates and JCE 803 808 535 154 940 977 1,312 Other non-operating income/expenses ------Pre-tax exceptional items 548 1,263 1,083 1,405 5 11 16 Profit before tax 3,494 5,461 6,052 5,854 6,034 7,276 9,512

Income tax (1,053) (2,012) (2,376) (1,831) (1,937) (2,322) (2,954) Profit tax (606) (1,367) (1,394) (1,443) (1,508) (1,819) (2,378) LAT (447) (645) (982) (388) (429) (503) (576) Profit before minority interests 2,440 3,449 3,677 4,023 4,096 4,954 6,558 Interest expense for perpetual bonds 50 52 58 35 - - - Minority interests (318) (557) (233) (478) (1,183) (1,449) (1,677) Reported net profit 2,072 2,840 3,385 3,510 2,913 3,505 4,881 Core net profit 1,380 1,903 2,200 2,650 2,910 3,497 4,869 Dividends 429 609 734 886 1,001 1,204 1,676 Div payout 31% 32% 33% 33% 34% 34% 34% Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 67 16 October 2020 Property China Property

Figure 101: China SCE – Consolidated balance sheet forecasts Balance Sheet 2016A 2017A 2018A 2019A 2020E 2021E 2022E Investment properties 7,429 10,252 20,270 22,632 25,632 30,632 32,632 Properties under development + Land (L/T) 8,552 6,939 7,758 13,249 13,249 13,249 13,249 Interests in associates and JCEs 1,404 3,424 5,839 9,900 10,840 13,116 15,628 Investments (L/T) 142 345 562 715 715 715 715 Property, plant and equipment 109 105 681 827 857 881 900 Intangible assets 4 3 3 3 3 3 3 Deferred tax assets 248 2,949 3,837 4,970 4,970 4,970 4,970 Other assets 507 341 327 343 343 343 343 Non-current assets 19,914 24,586 39,277 52,638 56,608 63,908 68,439

Completed properties held for sale 4,573 2,967 3,243 8,022 16,904 23,109 26,462 Properties under development + Land (S/T) 14,799 21,740 28,101 49,136 55,149 60,410 68,019 Trade and other receivables (S/T) 185 58 402 782 868 964 1,079 Amounts due from related parties 534 3,469 4,009 4,379 4,379 4,379 4,379 Tax prepayments 631 831 988 1,411 1,411 1,411 1,411 Other receivables, prepayments and deposits 1,597 2,882 4,856 8,450 8,872 8,872 8,872 Investments (S/T) - - 642 665 665 665 665 Pledged bank deposits + Restricted cash + Time deposits 1,391 1,497 4,458 4,748 5,128 5,435 5,707 Cash and cash equivalents 7,212 8,145 15,515 19,151 17,892 19,373 23,754 Current assets 30,921 41,589 62,214 96,744 111,269 124,618 140,349 Total assets 50,835 66,175 101,491 149,382 167,876 188,526 208,788

Pre-sale deposits 12,395 15,611 21,540 34,902 40,622 49,765 59,172 Accruals, trade and other payables 2,595 3,152 8,347 14,960 17,952 20,106 21,714 Amounts due to related parties 1,568 1,707 1,246 7,505 9,006 9,907 9,907 Taxes payable 855 1,644 2,600 2,953 3,101 3,256 3,419 Other payables 2,046 4,566 9,956 12,434 12,434 12,434 12,434 Bank and other borrowings (S/T) 3,427 7,958 10,537 12,295 12,664 13,297 13,962 Current liabilities 22,886 34,638 54,226 85,049 95,779 108,764 120,608

Bank and other borrowings (L/T) 14,851 13,565 22,800 29,782 33,951 38,365 42,202 Deferred tax liabilities 994 1,226 2,279 4,026 4,026 4,026 4,026 Other liabilities 33 188 45 239 239 239 239 Non-current liabilities 15,877 14,979 25,125 34,047 38,217 42,630 46,467 Total liabilities 38,763 49,617 79,351 119,096 133,995 151,395 167,074

Issued capital 296 330 353 361 365 365 365 Retained earnings 8,112 12,128 15,129 17,218 19,126 21,428 24,633 Attributable equities 8,408 12,458 15,482 17,579 19,491 21,793 24,998

Perpetual bonds 900 700 700 - - - - Minority interests 2,764 3,400 5,957 12,707 14,390 15,339 16,716 Total equities 12,072 16,558 22,139 30,286 33,881 37,131 41,714 Source : company data, Deutsche Bank estimates

Page 68 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 102: China SCE – Key model assumptions

Unit 2016A 2017A 2018A 2019A 2020E 2021E 2022E Unrecognized sales Rmb MM na na 21,000 28,000 42,790 49,803 61,012

Contract sales forecasts

Salable resources Rmb MM 25,509 na 83,000 120,000 170,000 202,981 213,219 Contract sales target 15,500 28,000 50,000 70,000 93,000

Contracted sales GFA MM sqm 1.66 1.9 4.1 6.3 6.7 7.7 8.3 Y/Y % chg 33% 15% 117% 52% 6% 16% 8% - of which Consol 1.33 1.46 2.44 3.61 3.5 4.3 4.7 Y/Y % chg 18% 10% 67% 48% -2% 20% 10% - of which Asso/JCE 0.33 0.5 1.7 2.7 3.1 3.5 3.7 Y/Y % chg 167% 37% 280% 58% 16% 11% 5%

Contracted ASP Rmb/Sqm 14,172 17,365 12,379 12,728 14,269 14,736 14,979 Y/Y % chg 22% 23% -29% 3% 12% 3% 2% - of which Consol 11,847 17,701 11,578 11,164 11,946 12,423 12,672 Y/Y % chg 9% 49% -35% -4% 7% 4% 2% - of which Asso/JCE 23,610 16,271 13,521 14,814 16,888 17,564 17,915 Y/Y % chg 30% -31% -17% 10% 14% 4% 2%

Contracted sales Rmb MM 23,524 33,247 51,358 80,501 95,293 114,090 124,717 Y/Y % chg 62% 41% 54% 57% 18% 20% 9% - of which Consol Rmb MM 15,780 25,925 28,237 40,355 42,283 52,900 59,086 Y/Y % chg 29% 64% 9% 43% 5% 25% 12% - of which Asso/JCE Rmb MM 7,744 7,322 23,121 40,146 53,010 61,190 65,632 Y/Y % chg 246% -5% 216% 74% 32% 15% 7%

Sell-through rate 92% na 62% 67% 55% 55% 58%

Contracted sales value (Attri) Rmb MM 16,525 25,933 34,328 41,465 55,270 66,172 74,830 Y/Y % chg 51% 57% 32% 21% 33% 20% 13%

Attributable sales ratio % 70% 78% 67% 50% 58% 58% 60%

Development sales recognition 2016A 2017A 2018A 2019A 2020E 2021E 2022E GFA recgonized at Revenue MM sqm 1.39 1.26 1.07 1.84 3.29 3.29 3.51 Y/Y % chg % 3% -10% -15% 72% 79% 0% 7% ASP recgonized at Revenue Rmb/Sqm 8,403 12,400 16,143 11,143 8,961 12,038 13,447 Y/Y % chg % 8% 48% 30% -31% -20% 34% 12% Development revenue Rmb MM 11,705 15,574 17,225 20,453 29,490 34,581 39,562 Y/Y % chg % 12% 33% 11% 19% 44% 17% 14% Gross margin at consol level % 24% 34% 34% 25% 24% 25% 27% Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 69 16 October 2020 Property China Property

Figure 103: China SCE – Major operating data

Property development landbank 2016A 2017A 2018A 2019A 1H20 Landbank as of year-end MM sqm 9.10 14.82 23.17 30.88 31.21 Avg costs of landbank Rmb/Sqm 2,864 3,611 3,669 4,002 4,313

Landbank as of year-end (attri) MM sqm 6.89 9.70 12.45 18.52 20.06 Attributable interest % 76% 65% 54% 60% 64% Number of cities entered 15 17 34 47 54

GFA acquired during the year MM sqm 1.68 6.45 9.00 9.80 3.32 GFA acquired during the year (Attri) MM sqm 1.57 2.51 4.00 6.17 2.62 Average land costs of newly acquired land Rmb/Sqm 7,166 4,990 4,327 4,872 5,853 Land premium Rmb MM 11,600 32,167 38,923 47,725 19,431 Land premium (Attri) Rmb MM 11,237 12,502 17,295 30,155 15,354

GFA starts (estimates) MM sqm 1.05 4.04 6.69 7.89 GFA under construction as of year-end MM sqm 2.24 5.00 13.66 19.04 18.21 GFA completed (estimates) MM sqm 1.65 1.3 1.6 2.5

Investment property 2016A 2017A 2018A 2019A 1H20 IP landbank MM sqm 0.33 0.74 0.89 0.98 1.24 No. of FUNWORLD malls in operation 2 2 3 3 LFA in operation MM sqm 0.151 0.151 0.671 0.671

Operating cashflow 2016A 2017A 2018A 2019A 1H20 Cash collection ratio % 93% 86% 79% 97% Sales proceeds Rmb Bn 16.6 22.2 27.0 40.2 40.2 Other income Rmb Bn 1.6 0.90 1.70 3.3 5.7 Total cash inflow 18.2 23.1 28.7 43.5 45.9

Attri Land premium paid Rmb Bn 10.1 16.5 16.0 25.0 15.0 Land capex as % contract sales % 61% 64% 47% 60% Construction capex Rmb Bn 4.0 4.8 6.0 9.5 6.2 Non-prop business 0 0 0.7 0.7 Tax, SG&A Rmb Bn 3.5 3.8 4.5 6.0 2.8 Interest expenses Rmb Bn 1.2 1.5 2.1 2.8 1.5 Dividends Rmb Bn 0.6 0.6 0.6 0.9 Total cash outflow 19 27 30 45 26

Net cash in/outflow Rmb Bn -1.2 -4.1 -1.2 -1.4 20

Source : company data, Deutsche Bank

Page 70 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Rating Company Lucia Kwong

Buy Shimao Group Research Analyst +852 - - 2203 6256 Asia China Price at 15 Oct 2020 (HKD) 31.50 Price target - 12mth (HKD) 42.50 Property Reuters Bloomberg Property 0813.HK 813 HK 52-week range (HKD) 37.50 - 20.74 HANG SENG INDEX 24,650 Virtuous circle in place Price/price relative 40

Initiating with BUY: At the sweet spot 20 We initiate coverage on Shimao with a Buy rating and 12M forward target price of

HK$42.5, given 1) its stronger-than-average margin and earnings outlook; 2) 20- 0 30% contract sales growth in the next few years; 3) lower borrowing costs if its Jan '19 Jul '19 Jan '20 Jul '20 credit profile improves further. Stock price should be backed by an increasing Shimao Group HANG SENG INDEX (Rebased) dividend payout, hence a yield with growth stock. Performance (%) 1m 3m 12m Steadfast development pipeline growth through M&A Absolute -2.9 -8.7 31.9 Shimao has built a successful track record in acquiring land via M&A. The HANG SENG INDEX -1.4 -8.0 -6.1 development scale has expanded significantly without a significant increase in Source: Deutsche Bank leverage. One reason was that acquisitions often replenished readily available Key indicators (FY1) saleable resources. With strong contract sales growth in FY17-19, unbooked sales ROE (%) 15.4 reached Rmb140 bn as of Jun-20 and will be recognized in the next 2 years, thus Net debt/equity (%) 51.2 offering good earnings visibility. Also, Shimao aims for contract sales to resume Book value/share (CNY) 24.05 20-30% growth over the next few years. Price/book (x) 1.1 Strong credit profile and low funding costs help preserve margins Net interest cover(x) 25.9 Shimao looks set to maintain high GPM of 30% thanks to both disciplined Operating profit margin (%) 22.7 landbanking and cheap financing costs. We believe the continuing improving credit Source: Deutsche Bank

profile and relatively clean balance sheet may help lower funding costs going Comparatives forward, thus preserving above-average margins, and such sales in turn generate Shimao Group (0813.HK),HKD31.85 Buy higher operating CF for further landbanking . 2019A 2020E 2021E Valuation and risks P/E(x) 6.3 8.2 6.3 The stock trades at 7.7/5.9 FY20/21 P/E and 48% discount to SoTP NAV of HK$63/ EV/EBITDA(x) 5.5 5.6 4.8 sh. Our target price is based on 10.4x FY20E P/E, given 26% 2Y EPS CAGR and 0.4x Price/book(x) 1.2 1.1 1.0 PEG. Key risks: delay of spin-off, weaker-than-expected contract sales in 4Q20. Source: Deutsche Bank

Forecasts and ratios Year End Dec 31 2018A 2019A 2020E 2021E 2022E Sales (CNYm) 85,512.7 111,517.0 149,483.0 185,138.7 235,204.4 EBITDA(CNYm) 21,962.3 27,822.9 35,018.5 43,728.9 55,866.2 Reported NPAT(CNYm) 8,572.5 10,612.6 12,029.9 15,571.9 19,589.0 Reported EPS FD(CNY) 2.56 3.22 3.42 4.40 5.53 DB EPS FD (CNY) 2.48 3.09 3.35 4.40 5.53 DB EPS growth (%) 26.2 24.8 8.5 31.0 25.8 PER (x) 6.3 6.3 8.2 6.3 5.0 EV/EBITDA (x) 6.1 5.5 5.6 4.8 4.7 DPS (net) (CNY) 1.04 1.35 1.46 1.80 2.24 Yield (net) (%) 6.6 6.9 5.3 6.5 8.1 Source: Deutsche Bank estimates, company data

Deutsche Bank AG/Hong Kong Page 71 16 October 2020 Property China Property

Investment thesis

Without overly stretching its balance sheet, Shimao strikes a balance between sustainable sales growth and leverage – it strictly controls net debt/total equity (including perp) at below 60%, while contract sales growth has been driven by fast churn (asset turnover was faster than the industry average). Gross margins are set to stay at 30% levels, given stringent cost control on all fronts, as management is incentivized to improve profitability. Shimao is thus at the sweet spot of likely attaining higher ROE than peers. Shimao has a strong edge in landbanking via M&A and is able to grow its salable resources quickly. With such high operating efficiency and prudent financial management policy, we believe Shimao is one of the key outperformers among the big-cap property developers.

Outlook Shimao achieved 67% of its sales target of Rmb300 bn in 9M20, and we believe the company is likely meet its sales target, given Rmb400 bn salable resources available in 2H20. Expected strong headline sales figures could be one of the near- term share price catalysts, in our view.

Shimao is one of the few companies that still provides medium-term sales growth targets to investors. It aims at contract sales growth of 20-30% in the next few years after a slower 2020. Indeed, with Rmb400 bn salable resources available for sale in 2H20 alone and property under construction at 51.6m sqm as of Jun-20 vs. 42.8m sqm as of Dec-19, the adequate development pipeline is paving the way for stronger growth in FY21.

Shimao has unbooked sales of Rmb140 bn (on a consolidated basis) as of Jun-20, which should be recognized in the next 2 years or so. We thus forecast development revenue together with non-development revenue to increase 24%/27% in FY21/22 after 34% growth in FY20E.

Shimao has maintained a stable margin trend of 29-30% since FY17, thanks to disciplined landbanking and business expansion via M&A. The unrecognized sales as of Jun-30 can still fetch gross margin of 30%, hence margin pressure is low and the overall earnings CAGR should stay at 26% in FY21/22. It also raised the dividend payout guidance from 35-40% to 40-45%.

Other discussion

Property management spin-off aims at building a standalone platform Shimao's property management operation, Shimao Services, has received HKEx approval for listing and raise as much as USD1 bn (source: Bloomberg news). Shimao considers the benefits of forming a separate platform for a more focused business development, lining up strategic investors, and eventually increasing services to third-party property developers. We think the value creation and fund- raising capability of the property management business could be reflected in the valuation in the medium term.

Potential interest cost savings in the medium serve as margin buffer Shimao is marginally rated as "Yellow Category" under the The Three Red Lines, which could be rectified easily, in our view, to "Green Category". In fact, the company has restricted the net debt/total equity (including perpetual securities as equity) to stay below 60% and has good liquidity coverage (low short-term debt to total debt ratio, high cash coverage, adequate cashflow etc.). The company is BB+

Page 72 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property rated by S&P and its credit rating outlook was upgraded to positive in early Sep-20. We believe Shimao is working towards a credit rating upgrade to investment grade in the medium term, and if successful, this could bring about further interest cost savings and help preserve profitability.

Valuation

We estimate investment properties and hotel account for ~10% of total assets and <10% of operating profit, while the bulk of earnings are generated from property development. Hence we believe it is more appropriate to value the stock in terms of P/E than NAV discount, which is more valid for companies with a higher recurrent income base. We apply 10.4x FY20E P/E to derive the target price, which is derived from 26% 2Y EPS CAGR and 0.4x PEG. We benchmark Shimao's fair PEG to that of the investment-grade rated property developers, which are trading at 0.28-0.5x 2Y PEG and an average of 0.43x based on Bloomberg consensus (see Figure 24 for more details). We have thus factored in re-rating potential from improving credit outlook on a 12-month basis when we consider the fair valuation of the stock.

Our target price translates into 33% discount our end-FY20E NAV estimate of HK Dev prop value assumptions $63. We derive our NAV estimates based on end-FY20E shareholder equity which Landbank (attri): 51.9m Sqm includes the marked-to-market investment property values per IFRS. On top of this, ASP: Rmb17,675/sqm we add 1) estimated property profits of existing attributable land bank, assuming Avg GPM after LAT: 24% they are all sold and cashed in; 2) property management value, which is derived SG&A to sales: 6.1% from our model estimates on property management profits and applying the average forward P/E of listed property management companies. In other words, this resembles the future book value when the land bank is fully crystallized.

Figure 104: Shimao – NAV breakdown

HK$MM 2020E Per sh (HK$) 2021E Per sh (HK$) Development properties 107,983 30.52 117,032 33.08 Property Management 22,999 6.50 22,999 6.50 Total 130,981 37.02 140,030 39.58 Equity 91,736 25.93 103,567 29.28 NAV 222,718 62.96 243,597 68.86 Source : Deutsche Bank estimates

Our NAV estimates tally with our ASP assumptions in deriving FY20-22 earnings forecasts – we have assumed 0-2% ASP growth.

Shimao's land bank is sufficient for 5-6 years' development. The longer land bank life would lead to a wider NAV discount than say, CRLand, whose land bank life is ~4 years by our estimates.

Risks Key macro risks include: weakening of housing demand due to economic slowdown, unexpected resurgence of the pandemic, and Rmb fluctuations which affect offshore financing.

Company-specific risks: 1) delay of spin-off of Shimao Services; 2) weaker-than- expected contract sales in 4Q20; and 3) Shimao's attributable interest in its land bank has come down from 70-75% till FY17 to 62% as of end Jun-20. The strong contract sales growth may be "diluted" upon earnings recognition, and the sharing of profits to minority shareholders would increase, should the attributable interest keep declining.

Deutsche Bank AG/Hong Kong Page 73 16 October 2020 Property China Property

Figure 105: Shimao – Margin trends Figure 106: Shimao – Gearing and S/T debt ratios

35% 32% 30% 31% 30% 30% 30% 140% 35% 28% 119% 30% 28% 109% 108% 120% 102% 30% 30% 94% 94% 30% 29% 29% 29% 90% 25% 27% 29% 100% 87% 25% 26% 25% 24% 24% 24% 80% 64% 20% 20% 23% 24% 24% 58% 57% 57% 22% 56% 51% 60% 51% 49% 15% 15% 10.8% 40% 10% 10.4% 9.4% 9.7% 9.1% 8.4% 8.9% 8.7% 10% 20% 5% Gross margin 24% 27% 21% 29% 29% 27% 25% 24% 5% Gross dev't margin before LAT 0% 0% Gross dev't margin after LAT 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Core net margin 0% S/T debt ratio Net debt/total equity 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Net debt/common equity*

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 107: Shimao – EBITDA ratios and borrowing costs Figure 108: Shimao – Recognized GFA and ASP

X Net debt / EBITDA EBITDA/Interest Avg borrowing costs 14 17,404 17,398 20,000 5.0 8.0% 16,601 18,000 6.9% 4.4 12 15,001 4.5 12.8 5.3% 7.0% 13,585 13,807 16,000 5.8% 5.8% 10 4.0 5.6% 5.5% 3.7 11,373 11,551 14,000 3.1 3.1 5.4% 5.4% 6.0% 10.1 3.5 3.3 3.4 8 12,000 2.7 2.8 5.0% 8.6 10,000 3.0 3.2 2.4 2.4 6 7.0 8,000 2.5 2.1 4.0% sqm MM 1.9 2.0 5.4 5.9 6,000 2.0 1.8 1.7 4 4.9 4.9 3.0% 4,000 Rmb/sqm 1.5 2 2.0% 2,000 1.0 0 0 1.0% 0.5 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E 0.0 0.0% Axis Title 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E GFA recognized (LHS) ASP recognized (RHS)

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank estimates

Figure 109: Shimao Contracted sales GFA and ASP Figure 110: Shimao – Landbank breakdown by salable value as of end Jun-20

30 17,745 17,745 17,745 18,100 20,000 10% 16,623 16,483 18,000 25 20% 13,851 26.2 16,000 12,101 14,000 20 22.5 12,000 19% 15 17.2 10,000 14.7 8,000 MM sqm MM 10

10.7 6,000 Rmb/sqm 5 4,000 5.5 4.9 6.1 2,000 0 0 2015A 2016A 2017A 2018A 2019A 2020E 2021E 2022E Axis Title Contracted sales GFA (LHS) Contracted ASP (RHS) 51%

T1 T2 Strong T3/T4 Other T3/T4

Source : company data, Deutsche Bank estimates Source : company data, Deutsche Bank

Page 74 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 111: Shimao – Rolling forward P/E Figure 112: Shimao – Forward P/BV

8.0 1.40

7.0 1.20 6.0 1.00 5.0 0.80 4.0 0.60 3.0 2.0 0.40 1.0 0.20 0.0 0.00 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20 J-10 J-11 J-12 J-13 J-14 J-15 J-16 J-17 J-18 J-19 J-20

Shimao Mean +1 s.d. Shimao Mean +1 s.d. +2 s.d. -1 s.d. -2 s.d. +2 s.d. -1 s.d. -2 s.d.

Source : company data, Bloomberg Finance LP, Deutsche Bank Source : company data, Bloomberg Finance LP, Deutsche Bank

Figure 113: Shimao – Consolidated P&L forecasts

2016A 2017A 2018A 2019A 2020E 2021E 2022E Revenue 5 9,286 70,426 85,513 111,517 149,483 185,139 235,204 Property development 56,197 66,796 80,907 105,291 142,180 174,975 223,050 Property investment 2,177 2,699 2,999 3,525 2,601 3,631 3,849 Property management - 646 895 1,988 3,990 5,785 7,520 Others 913 285 712 712 712 748 785 Cost of sales ( 42,938) (48,996) (58,564) (77,386) (104,669) (129,651) (165,112) Gross profit 16,349 21,430 26,949 34,131 44,814 55,487 70,092

SG&A (4,095) (4,452) (5,453) (7,206) (9,716) (11,664) (14,112) Other operating income/expenses 570 21 (198) (56) (79) (95) (114) EBIT 12,824 16,999 21,298 26,868 35,018 43,729 55,866

Gross interest expenses (6,861) (5,734) (9,077) (10,004) (11,115) (12,150) (13,066) Interest capitalized 5,315 5,002 7,954 8,795 8,670 9,477 10,192 Interest income 370 2,060 786 924 1,133 1,395 1,559 Share of results of associates and JCE (448) (315) (233) 97 389 559 670 Other non-operating income/expenses - - - - (52) - - Pre-tax exceptional items 1,997 679 1,910 2,335 309 - - Profit before tax 13,196 18,692 22,638 29,015 34,352 43,010 55,221

Income tax (5,685) (8,121) (10,327) (12,635) (14,133) (17,576) (22,504) Profit tax (3,674) (4,108) (5,789) (6,991) (6,740) (8,478) (10,906) LAT (2,012) (4,013) (4,538) (5,645) (7,393) (9,099) (11,599) Profit before minority interests 7,510 10,571 12,311 16,380 20,219 25,433 32,717 Minority interests (2,339) (2,730) (3,476) (5,482) (7,139) (8,706) (11,857) Reported net profit 5,172 7,840 8,835 10,898 13,080 16,727 20,860 Core net profit 6,251 6,930 8,551 10,478 12,848 16,727 20,860 Dividends 2,273 2,791 3,429 4,455 5,181 6,356 7,927 Div payout 36% 40% 40% 43% 40% 38% 38% Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 75 16 October 2020 Property China Property

Figure 114: Shimao – Consolidated balance sheet forecasts Consolidated Balance Sheet (Rmb MM) 2016A 2017A 2018A 2019A 2020E 2021E 2022E Investment properties 32,271 34,036 36,891 56,063 60,063 62,063 64,063 Properties under development + Land (L/T) 8,219 8,177 7,966 8,218 8,218 8,218 8,218 Interests in associates and JCEs 10,096 14,947 16,966 24,167 26,556 28,315 30,185 Investments (L/T) 941 1,069 1,158 1,169 1,169 1,169 1,169 Property, plant and equipment 13,494 13,514 14,578 15,923 15,873 15,718 15,447 Intangible assets 1,841 1,841 1,841 2,009 2,009 2,009 2,009 Deferred tax assets 2,299 2,524 2,807 3,055 3,208 3,368 3,537 Other assets 1,630 7,449 4,952 5,484 5,484 5,484 5,484 Non-current assets 70,789 83,556 87,158 116,087 122,579 126,343 130,111

Completed properties held for sale 18,477 18,348 21,849 27,634 31,904 23,895 28,622 Properties under development + Land (S/T) 119,519 136,494 177,162 220,485 270,085 345,512 449,681 Other Inventories 298 319 - - - - - Trade and other receivables (S/T) 20,257 15,584 19,923 18,733 19,107 21,018 22,069 Amounts due from related parties 4,547 17,507 18,199 24,422 24,422 24,422 24,422 Tax prepayments 2,692 2,744 3,716 4,407 4,583 4,721 4,863 Other receivables, prepayments and deposits 90 1 12 63 66 73 76 Investments (S/T) 3,000 ------Restricted cash 2,876 4,469 5,888 7,266 7,484 7,708 7,940 Cash and cash equivalents 19,359 28,537 43,688 52,357 65,948 74,366 49,352 Current assets 191,114 224,003 290,439 355,367 423,601 501,715 587,025 Total assets 261,903 307,559 377,597 471,454 546,180 628,058 717,135

Pre-sale deposits 31,903 34,117 47,173 74,652 88,996 117,649 143,617 Accruals, trade and other payables 27,308 33,524 50,585 79,058 89,335 100,949 114,072 Amounts due to related parties 27,789 33,869 38,235 41,502 47,728 52,501 57,751 Taxes payable 13,683 15,641 20,595 25,216 28,999 31,318 33,824 Other payables 171 131 - 140 140 140 140 Bank and other borrowings (S/T) 17,755 18,195 31,306 36,782 38,621 40,552 41,769 Current liabilities 118,609 135,477 187,895 257,350 293,819 343,109 391,172

Bank and other borrowings (L/T) 49,188 69,309 77,825 89,773 105,933 118,645 134,068 Deferred tax liabilities 5,667 6,025 6,596 7,533 7,533 7,533 7,533 Other liabilities 222 - - 93 93 93 93 Non-current liabilities 55,077 75,335 84,422 97,399 113,559 126,271 141,694 Total liabilities 173,686 210,812 272,317 354,750 407,378 469,379 532,866

Issued capital 349 349 342 342 362 362 362 Share premium and reserves 2,199 2,691 3,031 3,432 9,671 9,671 9,671 Retained earnings 49,908 54,594 55,861 62,481 70,380 80,751 93,684 Attributable equities 52,456 57,635 59,234 66,255 80,414 90,785 103,718 Source : company data, Deutsche Bank estimates

Page 76 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Figure 115: Shimao – Key model assumptions

Unit 2016A 2017A 2018A 2019A 2020E 2021E 2022E Unrecognized sales Rmb MM 55,000 60,767 70,879 123,656 148,398 176,912 233,869 Contract sales forecasts Salable resources Rmb MM 111,720 133,280 271,000 400,102 498,432 636,080 715,439 Contract sales target 67,000 80,000 140,000 210,000 300,000

Contracted sales GFA MM sqm 4.9 6.1 10.7 14.7 17.2 22.5 26.2 Y/Y % chg -11% 23% 76% 37% 17% 31% 16% Contracted ASP (gross) Rmb/Sqm 13,851 16,623 16,483 17,745 17,745 17,745 18,100 Y/Y % chg 14% 20% -1% 8% 0% 0% 2% Contracted sales (gross) Rmb MM 68,120 100,773 176,150 260,066 304,811 399,883 473,569 Y/Y % chg 2% 48% 75% 48% 17% 31% 18%

Sell-through rate 59% 65% 65% 65% 61% 62% 64%

Development sales recognition 2016A 2017A 2018A 2019A 2020E 2021E 2022E GFA recgonized at Revenue MM sqm 4.9 4.9 5.9 7.0 8.6 10.1 12.8 Y/Y % chg -9% 1% 19% 20% 22% 17% 28% ASP recgonized at Revenue Rmb/Sqm 11,551 13,585 13,807 15,001 16,601 17,404 17,398 Y/Y % chg 2% 18% 2% 9% 11% 5% 0% Revenue Rmb MM 56,197 66,796 80,897 105,291 142,180 174,975 223,050 Y/Y % chg -8% 19% 21% 30% 35% 23% 27%

Gross margin at consol level % 27% 30% 30% 29% 29.0% 29.0% 29.0%

Landbank details 2016A 2017A 2018A 2019A 2020E 2021E 2022E Landbank as of year-end MM sqm 42.75 47.90 55.38 76.79 86.15 102.97 121.46 Avg costs of landbank Rmb/Sqm 3,547 5,108 5,386 5,303 5,299 5,340 5,399

Landbank as of year-end (attri) MM sqm 30.79 34.97 37.26 47.19 53.41 64.87 76.52 Attributable interest % 72% 73% 67% 61% 62% 63% 63%

GFA acquired during the year MM sqm 3.96 10.60 16.15 30.92 20.61 29.04 33.40 GFA acquired during the year (Attri) MM sqm 3.22 6.90 9.64 17.91 11.94 16.82 19.35 Avg cost of land acquisitions Rmb/Sqm 9,400 10,861 5,099 5,035 5,287 5,445 5,554 Land premium Rmb MM 37,225 115,150 82,337 155,660 108,976 158,146 185,499 Land premium (Attri) Rmb MM 30,250 67,949 51,884 90,171 63,128 91,611 107,456

GFA starts MM sqm 7.38 10.33 17.70 16.50 26.70 28.49 34.36 GFA under construction as of end MM sqm 12.35 14.98 24.67 42.79 58.24 74.50 96.97 GFA completed MM sqm 7.7 7.7 8.0 8.6 11.3 12.2 14.9 Source : company data, Deutsche Bank estimates

Figure 116: Shimao – Operating cashflow breakdown

Operating cashflow 2016A 2017A 2018A 2019A 2020E 1H20 Cash collection ratio % 88% 80% 78% 75% 80% 81% Sales proceeds collected Rmb Bn 60.0 80.7 137.4 195.0 243.8 89.0 Other income Rmb Bn 3.1 3.6 4.6 6.2 7.3 Total cash inflow 63.1 84.3 142.0 201.2 251.2 89.0

Attri Land premium paid Rmb Bn 30.3 67.6 64.0 96.9 120.0 44.5 Land capex as % contract sales 44% 67% 35% 37% 39% 40% Construction capex Rmb Bn 20.1 19.4 32.0 56.3 72.0 26.7 Tax, Interest, SG&A Rmb Bn 14.5 19.0 39.8 47.6 60 26.7 Dividends Rmb Bn 2.1 2.4 3.2 3.8 5.2 1.0 Total cash outflow 67 108 139 205 257 99

Net cash in/outflow Rmb Bn -3.9 -24.1 3.1 -3.4 -6.0 -9.9

Source : company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 77 16 October 2020 Property China Property

Model updated: 12 October 2020 Fiscal year end 31-Dec 2017 2018 2019 2020E 2021E 2022E Running the numbers Financial Summary Asia DB EPS (CNY) 1.96 2.48 3.09 3.35 4.40 5.53 Reported EPS (CNY) 2.23 2.56 3.22 3.42 4.40 5.53 China DPS (CNY) 0.82 1.04 1.35 1.46 1.80 2.24 Property BVPS (CNY) 18.3 19.5 21.5 24.0 27.0 30.6 Weighted average shares (m) 3,374 3,338 3,291 3,512 3,538 3,538 Average market cap (CNYm) 34,831 52,376 64,409 97,560 97,560 97,560 Shimao Group Enterprise value (CNYm) 108,226 134,753 151,790 194,680 208,428 260,638 Reuters: 0813.HK Bloomberg: 813 HK Valuation Metrics P/E (DB) (x) 5.3 6.3 6.3 8.2 6.3 5.0 Buy P/E (Reported) (x) 4.6 6.1 6.1 8.1 6.3 5.0 P/BV (x) 0.71 0.83 1.21 1.15 1.02 0.90 Price (15 Oct 20) HKD 31.50 FCF Yield (%) 26.3 nm 44.9 nm nm nm Target Price HKD 42.50 Dividend Yield (%) 8.0 6.6 6.9 5.3 6.5 8.1 EV/Sales (x) 1.5 1.6 1.4 1.3 1.1 1.1 52 Week range HKD 20.74 - 37.50 EV/EBITDA (x) 6.1 6.1 5.5 5.6 4.8 4.7 EV/EBIT (x) 6.4 6.3 5.6 5.7 4.9 4.8 Market cap (m) HKDm 112,676 USDm 14,539 Income Statement (CNYm) Sales revenue 70,426 85,513 111,517 149,483 185,139 235,204 Company Profile Gross profit 21,430 26,949 34,131 44,814 55,487 70,092 Shimao Group Holdings Ltd, formerly Shimao Property Holdings EBITDA 17,665 21,962 27,823 35,018 43,729 55,866 Ltd, is an investment holding company principally engaged Depreciation 665 664 955 1,050 1,155 1,271 in the sale of properties. The Company operates its business Amortisation 0 0 0 0 0 0 through four segments. The Sales of Properties segment is EBIT 16,999 21,298 26,868 33,968 42,574 54,595 mainly engaged in the development of residential real estate. Net interest income(expense) 1,328 -337 -285 -1,313 -1,278 -1,315 The Property Management Income and Others is mainly Associates/affiliates -315 -233 97 389 559 670 engaged in property management. The Hotel Operation Exceptionals/extraordinaries 679 1,910 2,335 309 0 0 Income segment is mainly engaged in hotel operations. The Other pre-tax income/(expense) 0 0 0 -52 0 0 Commercial Properties Operation Income segment is mainly Profit before tax 18,692 22,638 29,015 33,302 41,854 53,951 engagedPrice Performance in the development, investment and operation of Income tax expense 8,121 10,327 12,635 14,133 17,576 22,504 commercial,40 office and industrial park property projects. Minorities 2,730 3,476 5,482 7,139 8,706 11,857 Other post-tax income/(expense) -294 -262 -285 0 0 0 30 Net profit 7,547 8,573 10,613 12,030 15,572 19,589 DB adjustments (including dilution) -911 -284 -420 -232 0 0 20 DB Net profit 6,636 8,289 10,193 11,798 15,572 19,589

10 Jan '19 Jul '19 Jan '20 Jul '20 Cash Flow (CNYm)

Shimao Group HANG SENG INDEX (Rebased) Cash flow from operations 11,427 2,135 30,453 -4,494 -217 -34,547 Net Capex -2,251 -3,042 -1,552 -5,000 -3,000 -3,000 Margin Trends Free cash flow 9,177 -908 28,901 -9,494 -3,217 -37,547 Equity raised/(bought back) -659 -1,009 -720 6,260 0 0 26 Dividends paid -2,436 -3,161 -3,821 -5,181 -6,356 -7,927 25 Net inc/(dec) in borrowings 22,590 17,996 7,582 17,998 14,643 16,640 Other investing/financing cash flows -19,493 2,233 -23,273 4,225 3,573 4,050 24 Net cash flow 9,178 15,151 8,669 13,809 8,643 -24,783 23 Change in working capital 4,929 -7,724 16,889 -26,021 -26,886 -68,496 22 17 18 19 20E 21E 22E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 33,007 49,577 59,623 73,432 82,075 57,291 Tangible fixed assets 47,550 51,469 71,986 75,936 77,780 79,510 Growth & Profitibility Goodwill/intangible assets 1,841 1,841 2,009 2,009 2,009 2,009 40 20 Associates/investments 16,016 18,125 25,336 27,725 29,483 31,354 Other assets 209,146 256,586 312,500 367,078 436,711 546,971 30 17.5 Total assets 307,559 377,597 471,454 546,180 628,058 717,135 20 15 Interest bearing debt 87,505 109,132 126,555 144,554 159,197 175,837 Other liabilities 123,307 163,185 228,195 262,824 310,183 357,029 10 12.5 Total liabilities 210,812 272,317 354,750 407,378 469,379 532,866 0 10 Shareholders' equity 61,835 64,334 70,920 85,079 95,450 108,383 17 18 19 20E 21E 22E Minorities 34,912 40,946 45,784 53,723 63,229 75,886 Total shareholders' equity 96,747 105,280 116,704 138,802 158,679 184,269 Sales growth (LHS) ROE (RHS) Net debt 54,498 59,555 66,932 71,122 77,122 118,545

Solvency Key Company Metrics 100 100 Sales growth (%) 18.8 21.4 30.4 34.0 23.9 27.0 75 75 DB EPS growth (%) 9.6 26.2 24.8 8.5 31.0 25.8 50 50 EBITDA Margin (%) 25.1 25.7 24.9 23.4 23.6 23.8 EBIT Margin (%) 24.1 24.9 24.1 22.7 23.0 23.2 25 25 Payout ratio (%) 36.8 40.4 41.8 42.7 40.8 40.5 0 0 ROE (%) 12.7 13.6 15.7 15.4 17.3 19.2 17 18 19 20E 21E 22E Capex/sales (%) 3.2 3.6 1.4 3.3 1.6 1.3 Capex/depreciation (x) 3.4 4.6 1.6 4.8 2.6 2.4 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 56.3 56.6 57.4 51.2 48.6 64.3 Lucia Kwong, CFA Net interest cover (x) nm 63.2 94.3 25.9 33.3 41.5 +852 2203 6256 [email protected] Source: Company data, Deutsche Bank estimates

Page 78 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Model updated: 12 October 2020 Fiscal year end 31-Dec 2017 2018 2019 2020E 2021E 2022E Running the numbers Financial Summary Asia DB EPS (CNY) 2.36 2.78 3.11 3.25 3.74 4.47 Reported EPS (CNY) 2.84 3.50 4.12 3.25 3.74 4.47 China DPS (CNY) 0.82 1.06 1.06 1.20 1.38 1.66 Property BVPS (CNY) 17.3 20.7 25.7 27.7 30.0 32.9 Weighted average shares (m) 6,931 6,931 6,964 7,131 7,131 7,131 Average market cap (CNYm) 119,637 150,822 193,002 222,892 222,892 222,892 CR Land Enterprise value (CNYm) 182,391 215,779 270,918 342,203 366,940 375,956 Reuters: 1109.HK Bloomberg: 1109 HK Valuation Metrics P/E (DB) (x) 7.3 7.8 8.9 9.6 8.4 7.0 Buy P/E (Reported) (x) 6.1 6.2 6.7 9.6 8.4 7.0 P/BV (x) 1.04 1.14 1.29 1.13 1.04 0.95 Price (15 Oct 20) HKD 35.90 FCF Yield (%) nm 5.6 4.7 nm nm 5.2 Target Price HKD 43.50 Dividend Yield (%) 4.7 4.9 3.8 3.8 4.4 5.3 EV/Sales (x) 1.8 1.8 1.8 1.9 1.6 1.3 52 Week range HKD 27.11 - 38.15 EV/EBITDA (x) 5.2 4.9 5.8 6.7 6.3 5.3 EV/EBIT (x) 5.3 5.0 5.9 6.8 6.3 5.3 Market cap (m) HKDm 257,427 USDm 33,216 Income Statement (CNYm) Sales revenue 101,943 121,189 147,736 178,809 227,442 278,964 Company Profile Gross profit 40,962 52,582 56,000 62,267 72,752 89,099 China Resources Land Limited is an investment holding EBITDA 34,925 43,896 46,641 51,411 58,621 71,120 company mainly engaged in the development of properties Depreciation 508 608 761 776 792 808 for sale. Along with subsidiaries, the Company operates its Amortisation 0 0 0 0 0 0 business through four segments: The Development Properties EBIT 34,417 43,288 45,880 50,635 57,830 70,312 for Sale segment, the Property Investment and Management Net interest income(expense) -344 237 837 738 -35 -402 segment, the Hotel Operations segment, the Construction, Associates/affiliates 202 1,297 3,718 5,577 6,536 6,986 Decoration Service and Others segment. The Companyâs Exceptionals/extraordinaries 5,150 6,904 10,560 0 0 0 investment properties include commercial buildings, offices and Other pre-tax income/(expense) 0 0 0 0 0 0 hotels, among others. Its major investment properties include Profit before tax 39,425 51,726 60,994 56,949 64,331 76,896 ShenzhenPrice Performance MIXc, Hangzhou MIXc, Shenyang MIXc, Beijing CR Income tax expense 17,675 24,449 26,643 22,929 24,843 30,126 Building,40 Beijing Qinghe Hi5 Office, among others. Minorities 2,060 2,752 5,390 10,522 12,477 14,517 35 Other post-tax income/(expense) 0 -288 -289 -348 -348 -348 Net profit 19,690 24,238 28,672 23,150 26,663 31,905 30 25 DB adjustments (including dilution) -3,311 -4,942 -7,025 0 0 0 DB Net profit 16,379 19,296 21,647 23,150 26,663 31,905 20 15 Jan '19 Jul '19 Jan '20 Jul '20 Cash Flow (CNYm)

CR Land HANG SENG INDEX (Rebased) Cash flow from operations 5,802 23,030 26,810 1,218 19,447 40,062 Net Capex -7,397 -14,533 -17,780 -27,063 -27,025 -28,362 Margin Trends Free cash flow -1,595 8,497 9,030 -25,846 -7,578 11,700 Equity raised/(bought back) 0 0 6,051 0 0 0 40 Dividends paid -5,062 -6,417 -8,780 -8,566 -9,865 -11,805 35 Net inc/(dec) in borrowings 35,002 28,596 12,475 20,730 7,351 462 Other investing/financing cash flows -16,210 -14,237 -26,531 -5,425 -3,458 -3,380 30 Net cash flow 12,135 16,439 -7,755 -19,107 -13,550 -3,023 25 Change in working capital -12,308 6,244 4,405 -21,727 -7,434 6,491 20 17 18 19 20E 21E 22E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 53,774 70,969 63,699 44,593 31,043 28,020 Tangible fixed assets 107,554 137,637 167,594 193,859 220,069 247,624 Growth & Profitibility Goodwill/intangible assets 433 419 437 458 481 481 40 20 Associates/investments 13,550 33,614 42,828 53,505 53,332 45,566 Other assets 305,139 413,104 487,550 551,773 594,206 619,686 30 17.5 Total assets 480,451 655,743 762,108 844,188 899,132 941,377 20 15 Interest bearing debt 105,556 132,212 134,545 155,988 163,339 163,801 Other liabilities 230,654 342,827 394,091 429,335 456,466 480,383 10 12.5 Total liabilities 336,210 475,039 528,635 585,323 619,805 644,184 0 10 Shareholders' equity 119,718 143,376 183,574 197,445 214,243 234,343 17 18 19 20E 21E 22E Minorities 24,522 37,329 49,898 61,420 65,083 62,850 Total shareholders' equity 144,240 180,705 233,473 258,866 279,326 297,193 Sales growth (LHS) ROE (RHS) Net debt 51,782 61,242 70,845 111,395 132,296 135,781

Solvency Key Company Metrics 100 200 80 175 Sales growth (%) 9.0 18.9 21.9 21.0 27.2 22.7 DB EPS growth (%) 17.6 17.8 11.6 4.4 15.2 19.7 60 150 EBITDA Margin (%) 34.3 36.2 31.6 28.8 25.8 25.5 40 125 EBIT Margin (%) 33.8 35.7 31.1 28.3 25.4 25.2 20 100 Payout ratio (%) 28.7 30.3 25.8 37.0 37.0 37.0 0 75 ROE (%) 18.0 18.4 17.5 12.2 13.0 14.2 17 18 19 20E 21E 22E Capex/sales (%) 7.3 12.0 12.0 15.1 11.9 10.2 Capex/depreciation (x) 14.6 23.9 23.4 34.9 34.1 35.1 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 35.9 33.9 30.3 43.0 47.4 45.7 Lucia Kwong, CFA Net interest cover (x) 100.1 nm nm nm nm 175.1 +852 2203 6256 [email protected] Source: Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 79 16 October 2020 Property China Property

Model updated: 12 October 2020 Fiscal year end 31-Dec 2017 2018 2019 2020E 2021E 2022E Running the numbers Financial Summary Asia DB EPS (CNY) 0.53 0.56 0.63 0.68 0.81 1.13 Reported EPS (CNY) 0.78 0.86 0.83 0.68 0.82 1.14 China DPS (CNY) 0.16 0.18 0.21 0.24 0.29 0.40 Property BVPS (CNY) 3.4 4.0 4.2 4.6 5.2 5.9 Weighted average shares (m) 3,553 3,855 4,134 4,188 4,222 4,222 Average market cap (CNYm) 8,323 10,005 12,561 13,234 13,234 13,234 China SCE Group Enterprise value (CNYm) 19,835 22,284 32,167 39,000 40,931 39,644 Reuters: 1966.HK Bloomberg: 1966 HK Valuation Metrics P/E (DB) (x) 4.5 4.6 4.8 4.6 3.8 2.8 Buy P/E (Reported) (x) 3.0 3.0 3.6 4.6 3.8 2.8 P/BV (x) 0.72 0.55 0.92 0.68 0.61 0.53 Price (15 Oct 20) HKD 3.53 FCF Yield (%) 34.3 30.8 nm nm nm 25.1 Target Price HKD 5.50 Dividend Yield (%) 6.8 6.9 7.0 7.6 9.1 12.7 EV/Sales (x) 1.2 1.3 1.5 1.3 1.2 1.0 52 Week range HKD 3.01 - 4.63 EV/EBITDA (x) 5.2 4.7 6.8 7.0 6.0 4.5 EV/EBIT (x) 5.3 4.7 7.0 7.2 6.1 4.6 Market cap (m) HKDm 15,284 USDm 1,972.1 Income Statement (CNYm) Sales revenue 16,105 17,783 21,370 29,540 34,618 39,900 Company Profile Gross profit 5,485 6,147 5,892 7,549 9,203 11,623 CHINA SCE GROUP HOLDINGS LIMITED, formerly China EBITDA 3,779 4,790 4,713 5,548 6,778 8,757 SCE Property Holdings Limited, is an investment holding Depreciation 39 42 96 101 106 111 company principally engaged in property development, Amortisation 0 0 0 0 0 0 property investment and property management in China. EBIT 3,740 4,748 4,617 5,447 6,672 8,646 The Companyâs properties are distributed in many cities, Net interest income(expense) -351 -314 -322 -359 -383 -463 including Beijing, Shanghai, Shenzhen, Tianjin and Xiamen. Associates/affiliates 808 535 154 940 977 1,312 Product types include high-rise residential buildings, low-rise Exceptionals/extraordinaries 1,263 1,083 1,405 5 11 16 apartments, villas, commercial facilities and office buildings. Other pre-tax income/(expense) 0 0 0 0 0 0 The Companyâs subsidiaries include Nanâan Junjie Real Profit before tax 5,461 6,052 5,854 6,034 7,276 9,512 EstatePrice Development Performance Co., Ltd., Beijing Dushishengjing Real Income tax expense 2,012 2,376 1,831 1,937 2,322 2,954 Estate5 Development Co., Ltd. Minorities 557 233 478 1,183 1,449 1,677 Other post-tax income/(expense) -52 -58 -35 0 0 0 4 Net profit 2,840 3,385 3,510 2,913 3,505 4,881 3 DB adjustments (including dilution) -937 -1,185 -860 -4 -8 -12 2 DB Net profit 1,903 2,200 2,650 2,910 3,497 4,869 1 Jan '19 Jul '19 Jan '20 Jul '20 Cash Flow (CNYm)

China SCE Group HANG SENG INDEX (Rebased) Cash flow from operations 3,424 4,282 -7,088 -3,287 3,974 5,457 Net Capex -570 -1,201 -1,103 -3,130 -5,130 -2,130 Margin Trends Free cash flow 2,853 3,081 -8,192 -6,417 -1,156 3,327 Equity raised/(bought back) 1,223 521 225 0 0 0 27.5 Dividends paid -625 -592 -871 -1,001 -1,204 -1,676 25 Net inc/(dec) in borrowings 4,783 10,341 7,980 4,538 5,047 4,501 Other investing/financing cash flows -7,296 -6,143 4,448 2,001 -899 -1,500 22.5 Net cash flow 939 7,208 3,591 -879 1,788 4,653 20 Change in working capital 1,972 3,173 -7,581 -6,544 -109 100 17.5 17 18 19 20E 21E 22E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 9,642 19,973 23,899 23,020 24,808 29,461 Tangible fixed assets 10,357 20,951 23,459 26,488 31,512 33,531 Growth & Profitibility Goodwill/intangible assets 3 3 3 3 3 3 50 27.5 Associates/investments 3,769 7,043 11,279 12,219 14,496 17,008 Other assets 42,404 53,521 90,742 106,145 117,707 128,785 40 25 Total assets 66,175 101,491 149,382 167,876 188,526 208,788 30 22.5 Interest bearing debt 21,523 33,338 42,077 46,615 51,662 56,164 20 20 Other liabilities 28,094 46,014 77,019 87,380 99,733 110,911 10 17.5 Total liabilities 49,617 79,351 119,096 133,995 151,395 167,074 0 15 Shareholders' equity 13,158 16,182 17,579 19,491 21,793 24,998 17 18 19 20E 21E 22E Minorities 3,400 5,957 12,707 14,390 15,339 16,716 Total shareholders' equity 16,558 22,139 30,286 33,881 37,131 41,714 Sales growth (LHS) ROE (RHS) Net debt 11,881 13,365 18,178 23,596 26,854 26,703

Solvency Key Company Metrics 100 20 Sales growth (%) 29.0 10.4 20.2 38.2 17.2 15.3 75 17.5 DB EPS growth (%) 30.3 6.4 12.7 8.4 19.2 39.2 50 15 EBITDA Margin (%) 23.5 26.9 22.1 18.8 19.6 21.9 EBIT Margin (%) 23.2 26.7 21.6 18.4 19.3 21.7 25 12.5 Payout ratio (%) 19.9 20.4 25.0 34.1 34.3 34.3 0 10 ROE (%) 25.3 23.1 20.8 15.7 17.0 20.9 17 18 19 20E 21E 22E Capex/sales (%) 3.5 6.8 5.2 10.6 14.8 5.3 Capex/depreciation (x) 14.6 28.9 11.5 31.0 48.5 19.2 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 71.8 60.4 60.0 69.6 72.3 64.0 Lucia Kwong, CFA Net interest cover (x) 10.7 15.1 14.3 15.2 17.4 18.7 +852 2203 6256 [email protected] Source: Company data, Deutsche Bank estimates

Page 80 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Model updated: 12 October 2020 Fiscal year end 31-Dec 2017 2018 2019 2020E 2021E 2022E Running the numbers Financial Summary Asia DB EPS (CNY) 1.68 1.45 1.04 2.11 2.28 2.83 Reported EPS (CNY) 1.55 1.84 1.93 2.32 2.28 2.83 China DPS (CNY) 0.73 0.86 0.90 0.89 0.90 1.04 Property BVPS (CNY) 10.7 12.7 14.8 16.4 17.7 19.5 Weighted average shares (m) 3,883 3,883 3,883 3,883 3,883 3,883 Average market cap (CNYm) 21,217 33,902 32,476 37,036 37,036 37,036 Agile Group Enterprise value (CNYm) 46,722 71,818 78,406 88,902 79,523 70,691 Reuters: 3383.HK Bloomberg: 3383 HK Valuation Metrics P/E (DB) (x) 3.3 6.0 8.0 4.5 4.1 3.3 Buy P/E (Reported) (x) 3.5 4.8 4.3 4.1 4.1 3.3 P/BV (x) 0.76 0.53 0.67 0.58 0.53 0.49 Price (15 Oct 20) HKD 10.56 FCF Yield (%) 14.9 6.8 nm nm 39.1 39.8 Target Price HKD 13.50 Dividend Yield (%) 13.4 9.8 10.8 9.4 9.6 11.0 EV/Sales (x) 0.9 1.3 1.3 1.2 0.9 0.7 52 Week range HKD 7.31 - 11.69 EV/EBITDA (x) 2.8 3.6 4.7 4.0 3.4 2.6 EV/EBIT (x) 2.9 3.7 4.9 4.2 3.6 2.7 Market cap (m) HKDm 42,774 USDm 5,519.2 Income Statement (CNYm) Sales revenue 51,607 56,145 60,239 75,284 89,368 106,715 Company Profile Gross profit 20,687 24,674 18,358 24,705 29,228 33,993 AGILE GROUP HOLDINGS LIMITED, formerly Agile Property EBITDA 16,723 20,187 16,844 21,966 23,247 27,123 Holdings Limited, is an investment holding company principally Depreciation 585 603 866 953 1,048 1,153 engaged in property development in the Peopleâs Republic Amortisation 0 0 0 0 0 0 of China (the PRC). The Company operates its business EBIT 16,139 19,584 15,978 21,013 22,198 25,970 through four segments: Property Development, Property Net interest income(expense) -465 -2,040 -1,521 -1,542 -1,624 -1,673 Management, Hotel Operations and Property Investment. The Associates/affiliates 169 27 1,086 927 889 1,008 Companyâs subsidiaries include Agile Property Land Co., Exceptionals/extraordinaries 166 1,503 967 -7 0 0 Ltd., Zhongshan Agile Majestic Garden Real Estate Co., Ltd. Other pre-tax income/(expense) -141 327 86 86 86 86 and Guangzhou Panyu Agile Realty Development Co., Ltd.. Profit before tax 15,869 19,401 16,596 20,478 21,550 25,391 ThroughPrice Performance its subsidiaries, the Company is also engaged in Income tax expense 9,089 11,043 7,363 8,456 9,259 10,566 management12 consultantle. Minorities 282 556 871 1,902 2,311 2,727 Other post-tax income/(expense) -473 -677 -850 -1,125 -1,125 -1,125 10 Net profit 6,025 7,125 7,512 8,994 8,855 10,973 DB adjustments (including dilution) 492 -1,495 -3,458 -795 0 0 8 DB Net profit 6,518 5,630 4,054 8,200 8,855 10,973

6 Jan '19 Jul '19 Jan '20 Jul '20 Cash Flow (CNYm)

Agile Group HANG SENG INDEX (Rebased) Cash flow from operations 3,386 3,378 -13,753 -990 16,843 17,611 Net Capex -224 -1,066 -1,666 -1,000 -2,500 -3,000 Margin Trends Free cash flow 3,162 2,311 -15,419 -1,990 14,343 14,611 Equity raised/(bought back) 0 0 0 0 0 0 40 Dividends paid -2,284 -3,916 -3,772 -3,473 -3,542 -4,060 35 Net inc/(dec) in borrowings 17,492 27,333 9,546 3,822 3,981 5,199 Other investing/financing cash flows -11,620 -9,073 7,426 2,098 -811 -1,227 30 Net cash flow 6,751 16,655 -2,219 458 13,971 14,523 25 Change in working capital -4,029 -6,708 -12,592 -11,912 5,518 3,766 20 17 18 19 20E 21E 22E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 30,120 45,062 42,555 43,013 56,984 71,507 Tangible fixed assets 13,460 17,558 20,198 20,245 21,697 23,543 Growth & Profitibility Goodwill/intangible assets 1,458 2,101 5,475 5,475 5,475 5,475 30 16 Associates/investments 8,362 10,959 15,481 14,409 15,798 17,306 Other assets 109,958 154,767 189,522 215,020 223,742 230,661 20 15 Total assets 163,358 230,446 273,232 298,161 323,696 348,493 Interest bearing debt 61,675 88,529 96,670 99,992 103,973 109,172 10 14 Other liabilities 57,506 86,935 111,226 124,811 139,051 149,737 Total liabilities 119,181 175,465 207,895 224,803 243,025 258,909 0 13 Shareholders' equity 41,865 49,574 58,040 64,062 69,375 76,288 17 18 19 20E 21E 22E Minorities 2,312 5,407 7,296 9,296 11,296 13,296 Total shareholders' equity 44,176 54,981 65,336 73,358 80,671 89,584 Sales growth (LHS) ROE (RHS) Net debt 31,555 43,468 54,115 56,979 46,989 37,665

Solvency Key Company Metrics 100 40 Sales growth (%) 10.6 8.8 7.3 25.0 18.7 19.4 75 30 DB EPS growth (%) 137.5 -13.6 -28.0 102.3 8.0 23.9 50 20 EBITDA Margin (%) 32.4 36.0 28.0 29.2 26.0 25.4 EBIT Margin (%) 31.3 34.9 26.5 27.9 24.8 24.3 25 10 Payout ratio (%) 47.1 46.6 46.6 38.3 39.6 36.7 0 0 ROE (%) 14.6 15.6 14.0 14.7 13.3 15.1 17 18 19 20E 21E 22E Capex/sales (%) 0.4 1.9 2.8 1.3 2.8 2.8 Capex/depreciation (x) 0.4 1.8 1.9 1.0 2.4 2.6 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 71.4 79.1 82.8 77.7 58.2 42.0 Lucia Kwong, CFA Net interest cover (x) 34.7 9.6 10.5 13.6 13.7 15.5 +852 2203 6256 [email protected] Source: Company data, Deutsche Bank estimates

Deutsche Bank AG/Hong Kong Page 81 16 October 2020 Property China Property

Model updated: 12 October 2020 Fiscal year end 31-Dec 2017 2018 2019 2020E 2021E 2022E Running the numbers Financial Summary Asia DB EPS (CNY) 0.60 0.96 1.53 2.50 3.09 3.53 Reported EPS (CNY) 0.61 0.90 1.56 2.52 3.09 3.53 China DPS (CNY) 0.25 0.36 0.55 0.90 1.12 1.27 Property BVPS (CNY) 3.8 4.4 5.6 7.2 9.2 11.4 Weighted average shares (m) 2,673 2,679 2,685 2,698 2,703 2,703 Average market cap (CNYm) 5,900 11,410 20,174 18,956 18,956 18,956 China Aoyuan Enterprise value (CNYm) 36,287 47,236 64,110 69,320 82,354 87,837 Reuters: 3883.HK Bloomberg: 3883 HK Valuation Metrics P/E (DB) (x) 3.7 4.4 4.9 2.8 2.3 2.0 Buy P/E (Reported) (x) 3.6 4.7 4.8 2.8 2.3 2.0 P/BV (x) 0.83 0.84 1.88 0.98 0.76 0.61 Price (15 Oct 20) HKD 7.62 FCF Yield (%) nm 74.5 nm nm nm nm Target Price HKD 12.90 Dividend Yield (%) 11.3 8.5 7.3 12.9 15.9 18.1 EV/Sales (x) 1.9 1.5 1.3 0.9 0.8 0.8 52 Week range HKD 7.11 - 12.14 EV/EBITDA (x) 9.9 7.0 5.9 4.2 4.1 4.1 EV/EBIT (x) 10.1 7.2 6.0 4.3 4.2 4.2 Market cap (m) HKDm 21,893 USDm 2,824.9 Income Statement (CNYm) Sales revenue 19,115 31,006 50,531 77,456 97,507 104,960 Company Profile Gross profit 5,111 9,634 15,021 22,590 27,824 29,747 China Aoyuan Group Limited, formerly China Aoyuan Property EBITDA 3,652 6,726 10,944 16,616 20,098 21,420 Group Limited, is an investment holding company principally Depreciation 54 119 340 354 368 383 engaged in the sales of properties. The Company operates its Amortisation 0 0 0 0 0 0 business through three segments. The Property Development EBIT 3,598 6,606 10,604 16,262 19,730 21,037 segment is engaged in the development and sale of properties. Net interest income(expense) -193 -231 -358 -358 -375 -435 The Property Investment segment is engaged in the leasing Associates/affiliates -116 35 -51 204 196 419 of investment properties. The Others segment is engaged in Exceptionals/extraordinaries 337 544 394 79 0 0 hotel operation, the provision of consulting and management Other pre-tax income/(expense) 0 0 0 0 0 0 services. Through its subsidiaries, the Company is also Profit before tax 3,626 6,954 10,589 16,187 19,551 21,021 engagedPrice Performance in construction business. Income tax expense 1,674 4,015 5,368 7,811 9,201 9,584 15 Minorities 312 531 1,021 1,550 1,975 1,885 12.5 Other post-tax income/(expense) 0 0 0 0 0 0 Net profit 1,640 2,409 4,201 6,827 8,375 9,552 10 7.5 DB adjustments (including dilution) -27 165 -79 -59 0 0 DB Net profit 1,613 2,574 4,122 6,767 8,375 9,552 5 2.5 Jan '19 Jul '19 Jan '20 Jul '20 Cash Flow (CNYm)

China Aoyuan HANG SENG INDEX (Rebased) Cash flow from operations -6,670 8,815 -1,382 -3,928 -9,951 -3,091 Net Capex -983 -315 -1,918 -1,000 -800 -800 Margin Trends Free cash flow -7,653 8,500 -3,300 -4,928 -10,751 -3,891 Equity raised/(bought back) 7 -9 61 0 0 0 22 Dividends paid -812 -1,141 -1,844 -2,436 -3,015 -3,439 21 Net inc/(dec) in borrowings 20,726 14,854 35,954 7,723 10,348 12,633 Other investing/financing cash flows 2,071 -14,210 -17,817 2,207 767 1,426 20 Net cash flow 14,339 7,995 13,054 2,565 -2,651 6,729 19 Change in working capital -6,926 7,829 -2,447 -12,455 -20,473 -14,492 18 17 18 19 20E 21E 22E Balance Sheet (CNYm) EBITDA Margin EBIT Margin Cash and other liquid assets 26,540 38,294 67,355 69,921 67,270 73,999 Tangible fixed assets 7,079 10,891 12,759 13,405 13,837 14,254 Growth & Profitibility Goodwill/intangible assets 33 7 8 8 8 8 80 50 Associates/investments 414 2,463 6,439 7,143 7,839 8,758 Other assets 91,739 137,204 203,319 224,383 255,694 288,833 60 40 Total assets 125,806 188,858 289,880 314,860 344,648 385,851 40 30 Interest bearing debt 40,370 57,722 95,764 103,487 113,835 126,467 Other liabilities 58,310 100,403 157,120 168,011 181,360 203,321 20 20 Total liabilities 98,680 158,124 252,884 271,498 295,195 329,788 0 10 Shareholders' equity 10,155 11,872 15,030 19,420 24,780 30,893 17 18 19 20E 21E 22E Minorities 16,971 18,862 21,967 23,941 24,672 25,170 Total shareholders' equity 27,126 30,734 36,997 43,361 49,453 56,063 Sales growth (LHS) ROE (RHS) Net debt 13,830 19,428 28,409 33,566 46,565 52,469

Solvency Key Company Metrics 125 60 100 50 Sales growth (%) 61.6 62.2 63.0 53.3 25.9 7.6 DB EPS growth (%) 32.9 59.3 59.5 63.4 23.5 14.1 75 40 EBITDA Margin (%) 19.1 21.7 21.7 21.5 20.6 20.4 50 30 EBIT Margin (%) 18.8 21.3 21.0 21.0 20.2 20.0 25 20 Payout ratio (%) 40.8 40.0 35.1 35.6 36.0 36.0 0 10 ROE (%) 17.2 21.9 31.2 39.6 37.9 34.3 17 18 19 20E 21E 22E Capex/sales (%) 5.1 1.0 3.8 1.3 0.8 0.8 Capex/depreciation (x) 18.2 2.6 5.6 2.8 2.2 2.1 Net debt/equity (LHS) Net interest cover (RHS) Net debt/equity (%) 51.0 63.2 76.8 77.4 94.2 93.6 Lucia Kwong, CFA Net interest cover (x) 18.7 28.6 29.6 45.5 52.6 48.4 +852 2203 6256 [email protected] Source: Company data, Deutsche Bank estimates

Page 82 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property Appendix 1

Important Disclosures *Other information available upon request During the period November 2018 to March 2020 Deutsche Bank may have shown incomplete information regarding Disclosure 1 in some parts of the equity research and debt research coverage. If you require any further information please contact [email protected].

Disclosure checklist Company Ticker Recent price* Disclosure Agile Group 3383.HK 10.56 (HKD) 15 Oct 2020 NA China Aoyuan 3883.HK 7.62 (HKD) 15 Oct 2020 1, 7, 14 China Resources Land 1109.HK 35.9 (HKD) 15 Oct 2020 NA China SCE Group 1966.HK 3.53 (HKD) 15 Oct 2020 14, 15 Shimao Group 0813.HK 31.5 (HKD) 15 Oct 2020 7 *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 https://research.db.com/Research/Disclosures/ CompanySearch. Aside from within this report, important risk and conflict disclosures can also be found at https://research.db.com/Research/Topics/Equities?topicId=RB0002. 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. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services within the past year. 14. Deutsche Bank and/or its affiliate(s) has received non-investment banking related compensation from this company within the past year. 15. This company has been a client of Deutsche Bank Securities Inc. within the past year, during which time it received non-investment banking securities-related services.

Important Disclosures Required by Non-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. 1. Within the past year, Deutsche Bank and/or its affiliate(s) has managed or co-managed a public or private offering for this company, for which it received fees. 7. Deutsche Bank and/or its affiliate(s) has received compensation from this company for the provision of investment banking or financial advisory services 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 https://research.db.com/Research/Disclosures/CompanySearch Analyst Certification The views expressed in this report accurately reflect the personal views of the undersigned lead analyst about the subject issuers and the securities of those issuers. In addition, the undersigned lead analyst has not and will not receive any compensation for providing a specific recommendation or view in this report. Lucia Kwong.

Deutsche Bank AG/Hong Kong Page 83 16 October 2020 Property China Property

Historical recommendations and target price: Shimao Group (0813.HK) (as of 10/14/2020) 50.00 Current Recommendations Buy Hold 40.00 Sell Not Rated Suspended Rating

30.00 4 ** Analyst is no longer at Deutsche Bank 5 2 3 20.00 1 Security price

10.00

0.00 Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20 Date

1. 11/20/2018 Buy, Target Price Change HKD 22.56 Jeffrey Gao** 4. 04/10/2019 Downgraded to Hold, Target Price Change HKD 26.69 Jeffrey Gao** 2. 12/11/2018 Buy, Target Price Change HKD 23.21 Stephen Cheung, 5. 05/21/2019 Upgraded to Buy, Target Price Change HKD 26.69 CFA** Stephen Cheung, CFA** 3. 01/04/2019 Buy, Target Price Change HKD 23.40 Jeffrey Gao** §§§§$$$$$§§§§§

Historical recommendations and target price: China Resources Land (1109.HK) (as of 10/14/2020) 50.00 Current Recommendations Buy Hold 40.00 Sell Not Rated 4 3 Suspended Rating 1 2 30.00 ** Analyst is no longer at Deutsche Bank

20.00 Security price

10.00

0.00 Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20 Date

1. 11/20/2018 Buy, Target Price Change HKD 34.68 Jeffrey Gao** 3. 03/18/2019 Buy, Target Price Change HKD 35.84 Jeffrey Gao** 2. 01/04/2019 Buy, Target Price Change HKD 34.77 Jeffrey Gao** 4. 04/10/2019 Buy, Target Price Change HKD 41.24 Jeffrey Gao** §§§§$$$$$§§§§§

Page 84 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

Historical recommendations and target price: China SCE Group (1966.HK) (as of 10/14/2020) 6.00 Current Recommendations Buy Hold 5.00 Sell Not Rated Suspended Rating 4.00 3 ** Analyst is no longer at Deutsche Bank 3.00 1 2

Security price 2.00

1.00

0.00 Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20 Date

1. 11/20/2018 Buy, Target Price Change HKD 4.36 Jeffrey Gao** 3. 03/21/2019 Buy, Target Price Change HKD 5.60 Stephen Cheung, CFA** 2. 01/04/2019 Buy, Target Price Change HKD 3.77 Jeffrey Gao** §§§§$$$$$§§§§§

Historical recommendations and target price: Agile Group (3383.HK) (as of 10/14/2020) 15.00 Current Recommendations

3 Buy Hold Sell Not Rated 1 Suspended Rating 10.00 2 ** Analyst is no longer at Deutsche Bank

Security price 5.00

0.00 Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20 Date

1. 11/20/2018 Hold, Target Price Change HKD 11.30 Jeffrey Gao** 3. 04/10/2019 Hold, Target Price Change HKD 13.93 Jeffrey Gao** 2. 01/04/2019 Hold, Target Price Change HKD 10.47 Jeffrey Gao** §§§§$$$$$§§§§§

Deutsche Bank AG/Hong Kong Page 85 16 October 2020 Property China Property

Historical recommendations and target price: China Aoyuan (3883.HK) (as of 10/14/2020) 15.00 Current Recommendations Buy Hold Sell Not Rated 4 Suspended Rating 10.00 3 ** Analyst is no longer at Deutsche Bank

2 1 Security price 5.00

0.00 Jan '19 May '19 Sep '19 Jan '20 May '20 Sep '20 Date

1. 11/20/2018 Buy, Target Price Change HKD 7.53 Jeffrey Gao** 3. 03/18/2019 Buy, Target Price Change HKD 10.19 Jeffrey Gao** 2. 01/04/2019 Buy, Target Price Change HKD 7.99 Jeffrey Gao** 4. 04/10/2019 Buy, Target Price Change HKD 11.04 Jeffrey Gao** §§§§$$$$$§§§§§

Equity Rating Key Equity rating dispersion and banking relationships

Buy: Based on a current 12- month view of total share-holder return (TSR = percentage change in share price from current price to projected target price plus pro-jected dividend yield ) , we recommend that investors buy the stock. Sell: Based on a current 12-month view of total share-holder return, we recommend that investors sell the stock. Hold: We take a neutral view on the stock 12-months out and, based on this time horizon, do not recommend either a Buy or Sell.

Newly issued research recommendations and target prices supersede previously published research.

Page 86 Deutsche Bank AG/Hong Kong 16 October 2020 Property China Property

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. Hyperlinks to third-party websites in this report are provided for reader convenience only. Deutsche Bank neither endorses the content nor is responsible for the accuracy or security controls of those websites.

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