Asian Property Developers Focus on Market Leaders

Building on principles

One-Asia Research | August 12, 2020 Asian Property Developers Focus on market leaders

Yongdai Park Le Quang Minh Tran Tuan Long [email protected] [email protected] [email protected]

This publication was prepared by Mirae Asset Daewoo Co., Ltd. and/or its non-U.S. affiliates (“Mirae Asset Daewoo”). Information and opinions contained herein have been compiled in good faith from sources deemed to be reliable. However, the information has not been independently verified. Mirae Asset Daewoo makes no guarantee, representation, or warranty, express or implied, as to the fairness, accuracy, or completeness of the information and opinions contained in this document. Mirae Asset Daewoo accepts no responsibility or liability whatsoever for any loss arising from the use of this document or its contents or otherwise arising in connection therewith. Information and opinions contained herein are subject to change without notice. This document is for informational purposes only. It is not and should not be construed as an offer or solicitation of an offer to purchase or sell any securities or other financial instruments. This document may not be reproduced, further distributed, or published in whole or in part for any purpose. Please see important disclosures & disclaimers in Appendix 1 at the end of this report. August 7, 2020 Asian Property Developers

CONTENTS

I. Executive summary 3

II. Asian property developers: Peer comparison tables 5

III. Vietnamese housing market: Led by Vingroup 9 Strong demand growth 9 Rise of the mid-end housing segment 12 Stabilization of housing market via selective supply control 14 Low/mid-end housing affordable for Vietnam’s middle class 15 Middle-class homeownership scenarios 17

Vietnamese company analysis 19 Vinhomes (VHM VN) 20 Vingroup (VIC VN) 34

IV. China, still the land of opportunity 48 China’s residential property market has enjoyed a long-term boom 48 Market is stabilizing 49 Chinese housing market: Likelihood of hard landing is low 51 Short-term uncertainties linger 51 Market consolidation led by mid/large-sized developers 52 Additional growth through revenue diversification 53 Urban redevelopment projects to help prop up margins 55 Global X MSCI China Real Estate ETF 56

Chinese company analysis 58 Sunac China Holdings (1918 HK) 59 China Resources Land (1109 HK) 69 China Vanke (2202 HK) 80

Mirae Asset Daewoo Research 2 August 7, 2020 Asian Property Developers

I. Executive summary

When an economy is in the early stages of growth, real estate stocks tend to outperform the broader market amid a sharp pickup in development activities. With this in mind, it makes sense that investors are increasingly gravitating toward the underdeveloped but rapidly growing Asian real estate sector.

Within Asia, we believe that the Vietnamese residential property market has the greatest upside thanks to its strong prospects for recovery and sustained growth. Housing demand is rising sharply—due to the expansion of the middle class and urbanization driven by rapid economic development—while supply remains limited. In addition, foreign direct investment (FDI) is on the rise YoY. Meanwhile, the timely introduction of government restrictions on housing supply and loans has contributed to market stabilization.

We present Vinhomes (VHM VN/Buy/TP: VND112,000), Vietnam’s largest property developer, as our top pick. Boasting a dominant market share, the company has a broad residential housing portfolio with offerings in all price segments. Looking ahead, we also see increasing earnings visibility, as the developer has already secured a project pipeline extending through the coming decade thanks in large part to its massive land bank.

We also recommend Vingroup (VIC VN/Buy/TP: VND116,000), the holding company of Vinhomes and Vietnam’s largest private sector company, for those seeking a proxy on Vietnam’s broader economic growth. In our view, the COVID-19-driven correction offers a good buying opportunity.

China’s real estate sector also deserves attention. The housing market is bottoming, and we believe that a recovery is in the offing. We see limited downside risk given the government’s commitment to maintaining a balance between growth and regulatory discipline. Although the housing segment’s urbanization-driven growth will likely decelerate gradually, market expectations remain intact in light of increases in the middle-income population and aging homes.

We project that top-tiers will continue to enjoy earnings growth, as they are building stable revenue models through business diversification (beyond residential property development). Moreover, the growing focus on housing inventory sales (as opposed to land purchases) is enhancing their financial health.

We recommend Global X MSCI China Real Estate ETF (CHIR US) as a play on China’s potential housing market recovery and improvements in developers’ fundamentals. The ETF, which has a dividend yield of around 4%, comprises 50 real estate stocks included in the MSCI China Index, with the top 20 accounting for 83% of the fund’s value.

Figure 1. Major Asian countries’ property clock positioning

Source: Chan & Naylor, Mirae Asset Daewoo Research

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Figure 3. Relative performance of Global X MSCI China Real Figure 2. Global X MSCI China Real Estate ETF performance Estate ETF and HSI (since inception)

(US$) (12/11/18=100) 22 140 CHIR HSI

20 130

18 120

16 110

14 100

12 90

10 80 12/18 3/19 6/19 9/19 12/19 3/20 6/20 12/18 3/19 6/19 9/19 12/19 3/20 6/20

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Table 1. Top 20 constituents of Global X MSCI China Real Estate ETF Company Ticker Weight (%) Company Ticker Weight (%) 1 CR Land 1109 HK 9.1 11 Wharf Holdings 4 HK 2.7 2 Sunac 1918 HK 9.0 12 Logan. 3380 HK 2.7 3 Country Garden 2007 HK 8.6 13 KWG 1813 HK 2.4 4 Longfor 960 HK 8.3 14 Seazen 1030 HK 2.3 5 COLI 688 HK 7.9 15 Agile 3383 HK 1.9 6 Evergrande 3333 HK 4.9 16 China Aoyuan 3883 HK 1.9 7 Shimao 813 HK 4.1 17 Guangzhou R&F 2777 HK 1.8 8 Vanke-H 2202 HK 3.9 18 Yuexiu Property. 123 HK 1.6 9 Jinmao 817 HK 3.8 19 Kaisa Group 1638 HK 1.5 10 CIFI 884 HK 2.8 20 Poly Developments 600048 C1 1.5 Source: Bloomberg, Mirae Asset Daewoo Research

In selecting our top picks, we look for competitive development capabilities, solid earnings growth prospects, healthy financials, and business diversification. (Companies that satisfy these criteria are projected to gain market share going forward.) We present Sunac China Holdings (Sunac; 1918 HK/Buy/TP: HK$47.63), China Resources Land (CR Land; 1109 HK/Buy/TP: HK$40.88), and China Vanke (Vanke; 2202 HK/Buy/TP: HK$31.34) as our top picks.

Table 2. Top picks Mkt cap Price TP P/E (x) ROE (%) EPS growth (%) Dividend yield (%) Company Ticker Rating Upside (US$bn) (local) (local) 20F 21F 20F 21F 20F 21F 20F 21F Vinhomes VHM VN 11.2 Buy 79,000 112,000 42% 9.4 8.2 37.4 31.5 28.7 14.8 0.0 1.6 Vingroup VIC VN 12.7 Buy 88,000 116,000 32% 68.3 31.1 4.1 8.2 -47.1 119.3 0.0 0.0 Sunac 1918 HK 21.4 Buy 35.55 47.63 34% 4.7 4.0 31.5 29.0 14.7 16.4 4.7 5.5 CR Land 1109 HK 30.3 Buy 32.95 40.88 24% 8.6 7.7 13.9 14.6 11.4 10.8 3.6 3.9 Vanke 2202 HK 44.7 Buy 25.00 31.34 25% 6.0 5.4 21.5 21.8 5.2 11.0 5.0 5.8 Source: Bloomberg, Mirae Asset Daewoo Research

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II. Asian property developers: Peer comparison tables

Table 3. Asian property developers: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F Vanke-H 2202 HK 25.0 44.7 6.0 5.4 1.2 1.1 21.5 21.8 5.2 11.0 5.0 5.8 Evergrande 3333 HK 22.0 37.1 7.9 7.0 1.5 1.4 20.7 21.6 89.7 12.8 5.5 6.5 COLI 688 HK 23.5 33.15.9 5.1 0.8 0.7 13.4 13.8 (7.6) 15.3 4.9 5.6 CR Land 1109 HK 33.0 30.3 8.6 7.7 1.2 1.1 13.9 14.6 11.4 10.8 3.6 3.9

China Longfor 960 HK 38.0 29.4 10.6 9.0 1.9 1.7 18.7 19.4 2.8 18.6 4.1 5.0 Country Garden 2007 HK 10.1 28.4 4.3 3.9 1.1 0.9 26.2 24.5 13.1 11.8 7.1 7.8 Sunac 1918 HK 35.6 21.4 4.7 4.0 1.3 1.0 31.5 29.0 14.7 16.4 4.7 5.5 Avg. 6.9 6.0 1.3 1.1 20.8 20.7 18.5 13.8 5.0 5.7 CapitaLand CAPL SP 2.8 10.1 14.3 12.0 0.6 0.6 5.4 6.5 (58.6) 19.8 4.4 4.3 Keppel KEP SP 5.2 6.9 31.8 12.5 0.9 0.8 0.6 6.8 (57.8) 154.9 2.5 3.7 City Developments CIT SP 8.2 5.4 18.5 13.0 0.7 0.7 4.0 5.3 (27.6) 42.7 2.4 2.4 UOL Group UOL SP 6.5 4.0 18.1 13.7 0.5 0.5 2.9 3.7 (36.6) 31.7 2.8 2.8 Singapore Frasers Property FPL SP 1.2 2.5 9.7 9.7 0.4 0.4 5.3 5.1 (37.5) (0.8) 4.0 4.4 Avg. 18.5 12.2 0.6 0.6 3.6 5.5 (43.6) 49.6 3.2 3.5 KLCCP Stapled KSLCCSS MK 7.8 3.3 20.4 19.0 1.1 1.1 5.3 5.8 92.9 7.1 4.5 4.9 Sime Darby Property SDPR MK 0.6 1.0 10.0 17.5 0.4 0.4 5.3 2.6 (280.0) (42.9) 4.4 2.5 SP Setia SPSB MK 0.8 0.7 16.2 8.2 0.2 0.2 1.4 2.8 (45.1) 97.9 1.4 3.4 UOA Development UOAD MK 1.5 0.7 8.8 9.1 0.6 0.6 5.6 4.4 (19.3) (4.1) 8.1 7.5 Malaysia UEM Sunrise UEMS MK 0.4 0.4 21.6 17.1 0.3 0.3 1.2 1.6 (61.2) 26.3 1.0 1.2 Avg. 16.7 13.4 0.5 0.5 3.4 3.7 (8.2) 31.8 3.8 4.3 Land & Houses LH TB 7.5 2.9 13.6 11.8 1.7 1.6 12.5 14.3 (34.8) 15.3 6.3 7.3 WHA Corp. WHA TB 3.3 1.6 17.7 15.2 1.6 1.5 9.3 10.4 (15.3) 16.5 3.0 3.6 Supalai SPALI TB 17.0 1.1 8.2 7.1 0.9 0.8 11.2 12.3 (18.0) 16.1 4.7 5.4 Pruksa Holding PSH TB 11.2 0.8 7.2 6.6 0.6 0.5 7.9 8.5 (36.6) 9.9 8.1 9.0 Thailand Quality Houses QH TB 2.1 0.7 10.1 8.9 0.8 0.8 8.2 9.3 (21.9) 14.2 6.3 6.9 Avg. 11.4 9.9 1.1 1.1 9.8 11.0 (25.3) 14.4 5.7 6.4 SM Prime Holdings SMPH PM 28.5 16.7 30.5 21.7 2.6 2.3 8.4 11.1 (29.3) 40.5 1.2 1.2 Ayala Land ALI PM 32.2 9.7 21.0 14.6 2.1 1.9 10.1 13.3 (31.7) 43.8 1.8 1.6 Megaworld MEG PM 3.0 2.0 7.5 5.8 0.5 0.5 6.9 8.5 (26.7) 29.3 2.5 2.2 Robinsons Land RLB PM 14.2 1.5 9.1 7.4 0.7 0.7 7.8 8.8 (6.6) 22.6 3.3 3.5 Philippines Philippines Vista Land & Lifescapes VLL PM 2.9 0.8 5.1 3.7 0.3 0.3 7.2 9.2 (36.2) 40.6 6.5 6.0 Avg. 14.6 10.6 1.2 1.1 8.1 10.2 (26.1) 35.4 3.1 2.9 Pakuwon Jati PWON IJ 398.0 1.3 9.7 8.5 1.2 1.0 11.5 12.6 (27.4) 14.3 1.8 1.6 Bumi Serpong Damai BSDE IJ 665.0 1.0 9.2 7.6 0.4 0.4 4.8 5.6 (50.7) 20.1 1.2 0.9 Ciputra Development CTRA IJ 645.0 0.8 13.4 12.1 0.7 0.7 5.8 5.9 (22.4) 10.7 1.7 1.5 Lippo Karawaci LPKR IJ 140.0 0.7 26.5 0.4 0.3 0.5 1.4 (92.3) (257.8) 0.0 0.7 Indonesia Indonesia Summarecon Agung SMRA IJ 550.0 0.5 25.9 19.3 1.1 1.0 3.9 4.9 (40.4) 34.2 1.0 0.8 Avg. 14.5 11.9 0.8 0.8 6.5 7.2 (35.3) 19.8 1.4 1.2 Vinhomes VHM VN 79,000.0 11.2 9.4 8.2 2.9 2.3 37.4 31.5 28.7 14.8 0.0 1.6 Novaland Investment Group NVL VN 64,700.0 2.7 18.2 18.4 2.4 2.1 13.4 12.2 (0.5) (1.3) Khang Dien House Trading KDH VN 24,350.0 0.6 12.5 10.5 1.6 1.5 14.0 15.5 14.9 19.4 2.1 2.1 Dat Xanh Group DXG VN 9,600.0 0.2 4.8 4.3 0.6 0.6 12.3 14.3 (25.7) 13.7 5.2 Vietnam Vietnam Nam Long Investment NLG VN 25,300.0 0.3 7.7 6.3 1.1 1.0 14.3 16.8 (12.1) 20.8 2.7 3.2 Avg. 10.5 9.5 1.7 1.5 18.3 18.1 1.0 13.5 1.6 3.0 Notes: Based on Aug. 4 closing prices; Sime Darby Property and Lippo Karawaci are not included in avg. figures. Source: Bloomberg, Mirae Asset Daewoo Research

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Table 4. Asian property developers: Price performance

Price Mkt cap Price performance (%) Company Ticker (local) (US$bn) 1W 1M 3M YTD 1Y 2Y 3Y Vanke-H 2202 HK 25.1 44.0 2.5 (7.2) 1.0 (24.8) (9.3) 10.6 9.2 Evergrande 3333 HK 22.9 38.6 2.1 (14.7) 67.4 1.9 11.1 5.8 13.3 COLI 688 HK 23.9 33.8 0.6 (8.2) (12.8) (22.7) (5.8) (0.4) (11.2) CR Land 1109 HK 33.0 30.3 0.8 1.5 10.0 (15.1) 6.8 22.0 36.7

China China Longfor 960 HK 38.4 29.7 1.1 (1.8) 2.6 4.0 44.0 83.8 99.5 Country Garden 2007 HK 10.2 28.8 1.8 (3.1) 7.2 (19.4) 2.7 (7.5) 2.7 Sunac 1918 HK 37.1 22.3 (0.0) (7.3) 11.6 (23.6) 7.7 58.7 88.5

CapitaLand CAPL SP 2.8 10.2 (1.1) (9.5) (5.2) (26.7) (20.5) (11.9) (28.8) Keppel KEP SP 5.4 7.2 (7.3) (14.4) (10.6) (23.0) (13.2) (22.6) (18.0) City Developments CIT SP 8.2 5.4 (1.0) (6.2) 6.0 (25.0) (10.0) (12.7) (30.0) UOL Group UOL SP 6.6 4.1 (1.8) (7.0) (2.1) (21.9) (9.2) (7.1) (19.4) Singapore Frasers Property FPL SP 1.2 2.5 (0.9) (6.5) (3.3) (31.4) (36.3) (32.2) (39.4)

KLCCP Stapled KSLCCSS MK 7.8 3.3 0.1 (2.5) (1.1) (1.8) (2.1) 2.0 (0.6) Sime Darby Property SDPR MK 0.6 1.0 (0.0) (8.7) (4.5) (31.1) (33.0) (53.3) (47.5) SP Setia SPSB MK 0.8 0.7 (1.9) (11.1) (3.2) (52.5) (59.6) (74.4) (76.1) UOA Development UOAD MK 1.5 0.7 (6.9) (16.3) (11.8) (26.6) (27.7) (36.3) (42.7) Malaysia Malaysia UEM Sunrise UEMS MK 0.4 0.5 (4.7) (6.8) (3.5) (41.8) (46.8) (55.2) (64.3)

Land & Houses LH TB 7.4 2.8 (1.3) (6.3) 0.7 (24.0) (32.9) (38.9) (25.5) WHA Corp. WHA TB 3.2 1.6 0.6 (0.0) 21.2 (14.4) (27.8) (17.0) 10.7 Supalai SPALI TB 16.3 1.0 2.4 (1.7) 14.1 (5.0) (19.8) (28.9) (27.4) Pruksa Holding PSH TB 11.5 0.8 (4.3) (7.4) 2.8 (24.3) (47.7) (47.7) (51.1) Thailand Quality Houses QH TB 2.1 0.7 (0.9) (3.6) 2.9 (16.4) (28.2) (40.6) (13.0)

SM Prime Holdings SMPH PM 28.5 16.7 (8.5) (14.8) (6.4) (32.4) (21.0) (25.1) (16.2) Ayala Land ALI PM 32.2 9.7 0.3 (8.5) 1.3 (29.2) (34.5) (20.5) (23.2) Megaworld MEG PM 3.0 2.0 (0.7) (6.0) 18.7 (25.4) (50.0) (36.9) (37.8) Robinsons Land RLB PM 14.2 1.5 (6.2) (17.7) 1.0 (48.6) (45.3) (30.3) (40.1)

Philippines Vista Land & Lifescapes VLL PM 2.9 0.8 (5.2) (26.4) (27.5) (62.2) (62.4) (51.7) (50.9)

Pakuwon Jati PWON IJ 424.0 1.4 (6.6) (4.8) 13.1 (30.2) (41.5) (25.6) (43.1) Bumi Serpong Damai BSDE IJ 690.0 1.0 (8.3) (10.1) (2.2) (47.0) (48.8) (50.4) (62.8) Ciputra Development CTRA IJ 655.0 0.8 (3.0) 4.0 25.2 (38.0) (46.3) (33.8) (39.4) Lippo Karawaci LPKR IJ 138.0 0.7 (2.1) (16.7) (7.3) (42.1) (45.7) (51.8) (76.0) Indonesia Summarecon Agung SMRA IJ 600.0 0.6 (10.6) (10.6) 32.2 (45.3) (54.5) (28.1) (44.7)

Vinhomes VHM VN 76,600.0 10.9 4.2 1.5 21.7 (6.8) (7.3) (9.4) (13.9) Novaland Investment Group NVL VN 64,100.0 2.7 1.7 3.7 22.5 8.7 8.7 4.4 25.9 Khang Dien House Trading KDH VN 23,950.0 0.5 2.7 1.5 16.5 (9.5) 7.0 10.8 33.6 Dat Xanh Group DXG VN 8,880.0 0.2 5.1 (16.5) 2.7 (33.8) (28.0) (52.9) (24.9) Vietnam Nam Long Investment NLG VN 25,300.0 0.3 (1.2) (0.2) 12.4 (8.0) (10.8) (8.3) 1.6

Note: Based on Aug. 4 closing prices Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 6 August 7, 2020 Asian Property Developers

Figure 4. Business models for ASEAN property developers Singapore Malaysia Thailand Philippines Indonesia Vietnam

Business model focus Asset churn Land banking Asset churn Land banking Land banking Asset churn, land banking

Typical land holdings 1-2 years 15-25 years 3-5 years 10-20 years 15-35 years 5-15 years

Land acquisition Outright Outright Outright Joint development Focus on outright Payment for approach purchase purchase purchase with private land purchases, but some land use rights owners, joint reliance on joint at the time of ventures, and development and development outright purchase joint ventures

Typical down 20% 10% 10% 30% 20% 30% payment (up-front) (up-front) (can be stretched (stretched over (up-front in most (up-front, even up to requirement under some construction period) cases, but 70% under a arrangements) increasingly stretched mortgage) under some arrangements)

Mortgage Disbursement linked Disbursement linked Disbursement after Disbursement after Disbursement linked Up-front disbursement to construction to construction completion completion to construction disbursement rules Source: Vingroup, Mirae Asset Daewoo Research

Figure 5. GDP growth by country Figure 6. Urbanization rate by country

(% ) (% ) China India Indonesia Japan Malaysia Philippines 10 2015-19 2020F 2021F 120 Singapore Korea Thailand 8 Vietnam 100 6 4 80 2

0 60 -2 40 -4 -6 20 -8 -10 0 China Singapore Malaysia Thailand Philippines Indonesia Vietnam 1980 1985 1990 1995 2000 2005 2010 2015

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 7. Asian property developers: EPS growth Figure 8. Asian property developers: Dividend yield

(%) (%) 75 2020F 2021F 7 2020F 2021F 6.4

50 6 5.7 5.7 50 35 5.0 34 5 32 4.3 25 18 3.8 14 14 13 4 3.5 3.2 1 3.12.9 3.0 0 3

-8 2 1.6 -25 1.0 0.8 -25 -26 1

-50 -44 -40 0 China Singapore Malaysia Thailand Philippines Indonesia Vietnam China Singapore Malaysia Thailand Philippines Indonesia Vietnam

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 7 August 7, 2020 Asian Property Developers

Figure 9. Asian property developers: P/B vs. ROE Figure 10. Asian property developers: P/E vs. EPS growth

25 1.6 Vietnam

1.4 20 Indonesia 1.2 Philippines China Indonesia Thailand 1.0 15 Malaysia Singapore 0.8 10 Thailand 2021F P/B (x) Vietnam 0.6 Singapore 2021F P/E (x) Philippines

0.4 Malaysia China 5 0.2

0.0 0 0 5 10 15 20 25 0 102030405060 2021F ROE (%) 2021F EPS growth (%)

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 11. Chinese property developers: P/B vs. ROE Figure 12. Chinese property developers: P/E vs. EPS growth

2.0 10 Longfor Longfor 8 1.6 CR Land Evergrande Evergrande 1.2 6 CR Land Vanke Vanke Sunac COLI 0.8 4 Sunac COLI Country 2021F P/E (x) Country

2021F P/B (x) Garden Garden 0.4 2

0.0 0 10 15 20 25 30 5 101520 2021F ROE (%) 2021F EPS growth (%)

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 14. Vietnamese property developers: P/E vs. EPS Figure 13. Vietnamese property developers: P/B vs. ROE growth

2.5 20 Novaland Novaland Vinhomes 2.0 16

1.5 Khang Dien House Trading 12 Khang Dien House Trading

1.0 Nam Long Investment 8 Vinhomes 2021F P/B (x) 2021F P/E (x) Nam Long Dat Xanh Group Investment 0.5 4 Dat Xanh Group

0.0 0 10 15 20 25 30 35 -10 0 10 20 30 2021F ROE (%) 2021F EPS growth (%)

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 8 August 7, 2020 Asian Property Developers

III. Vietnamese housing market: Led by Vingroup

Vietnam has enjoyed rapid economic growth (6-7% CAGR) over the past decade, and the momentum is showing no signs of letting up. Indeed, the US-China trade war continues to benefit Vietnam by increasing its role in the global economy. Such strong economic growth is positive to the housing market, which should also benefit from robust demand growth and government restrictions on supply. Against this backdrop, we see the housing market continuing to grow/recover going forward. As overall market growth will likely be driven by mid-priced homes, we expect leading players Vinhomes and Vingroup to benefit.

Strong demand growth

We expect real (as opposed to speculative) housing demand to remain solid, supported by Vietnam’s rapid urbanization and middle class expansion. The country’s urbanization rate, which had remained at around 20% until the mid-1990s, increased steadily amid the shift to a market economy and industrialization (investments by foreign companies), reaching 35% as of end-2019. That said, the rate is still far lower than the levels of other Southeast Asian countries. Vietnam’s urbanization rate should rise further alongside economic growth, driving up housing demand in urban areas. Moreover, market growth is supported by the growing middle-income population.

Figure 15. Vietnam: Urban population growth outstripping Figure 16. Vietnam’s urbanization rate likely to accelerate total population growth

(YoY) 120% Vietnam Thailand Singapore 6% Total growth Urban growth Rural growth Philippines Malaysia Indonesia 5% 100%

4% 80%

3% 2.6% 60% 2% 40% 1%

20% 0%

-1% 0% 00 02 04 06 08 10 12 14 16 18 00 02 04 06 08 10 12 14 16 18

Source: CEIC, Mirae Asset Daewoo Research Source: CEIC, Mirae Asset Daewoo Research

Figure 17. Vietnam is home to Asia’s fastest-growing middle Figure 18. Vietnam has the highest economically active class thanks to rapid economic growth population (aged 25-44) proportion in Asia

20% Middle-class population CAGR (L) 6% 34% 33% Real GDP CAGR (R) 5% 32% 16% 4% 30% 12% 3% 28% 2% 8% 26% 1% 4% 0% 24%

0% -1% Vietnam Philippines Indonesia Thailand Malaysia Singapore

Note: 2019-21F CAGR Source: Euromonitor, Mirae Asset Daewoo Research Source: Euromonitor, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 9 August 7, 2020 Asian Property Developers

Top-down view (by Le Quang Minh)

Pandemic: Inevitable short-term impact The World Bank has projected that the EVFTA will boost Vietnam’s GDP and exports by 2.4% and 12%, respectively, by Until seven months ago, no one doubted the Vietnamese 2030. Vietnam’s Ministry of Industry and Trade (MOIT) stated economy would continue to grow rapidly this year. Then that it would become the most effective FTA (in terms of COVID-19 happened, wreaking havoc on the global export growth) the country has ever signed, adding that the economy; Vietnam has not been spared. apparel and F&B sectors stand to benefit significantly. In April, the International Monetary Fund (IMF) revised Furthermore, if the Regional Comprehensive Economic down its 2020 GDP growth outlook for Vietnam to 2.7% Partnership (RCEP) also goes into effect, the Vietnamese from 6.5%. The World Bank also cut its 2020 growth economy should pick up more rapidly than expected. outlook for Vietnam to 4.9%, the lowest level in 20 years. ❸ The growth of the domestic consumer market remains The Vietnamese economy grew only 0.36% YoY in 2Q20, intact. Consumption is solid thanks to steady economic bringing 1H20 growth to 1.81%. Although these readings growth and well-contained CPI growth (hovering at around are solid relative to those of neighboring countries, 1.8% 4% over the past several years). Demand for consumer goods represents a historic-low first-half figure. has been climbing amid the growth in middle-income consumers, supporting strong consumer market growth. Agriculture/forestry/fisheries Vietnam to recover rapidly 10% Manufacturing/construction Services Even as most economies grapple with the likelihood of 8% Overall GDP growth contraction this year due to the pandemic, Vietnam’s prime minister is presenting a confident 2020 growth target of 5%. 6% International institutions that sharply lowered their 2020 4% growth forecasts for Vietnam are nevertheless projecting growth to rebound to around 7% in 2021, aided by: 1) better 2% access to global markets (multilateral/bilateral trade agreements); and 2) improvement in the local business 0% 2Q10 2Q12 2Q14 2Q16 2Q18 2Q20 environment. We are also encouraged by the government’s Source: GSO, Mirae Asset Daewoo Research swift moves to stimulate an economic recovery, including efforts to expand FDI, exports, public/private investments, Growth momentum remains intact and domestic consumption. Nevertheless, we believe Vietnam’s economic growth Given the interconnectedness of the global economy, momentum remains intact. Once the pandemic subsides, external events could significantly affect Vietnam’s GDP we expect the Vietnamese economy to recover rapidly. growth. Even so, we expect Vietnam to recover rapidly.

❶ We expect to see an increase in FDI. In May, Prime Expectations for the real estate market to mount Minister Nguyen Xuan Phuc created a team under the central government dedicated to attracting FDI, As long as economic growth momentum remains intact, particularly in IT and other cutting-edge industries. The expectations for the Vietnamese real estate market should team will likely focus on creating incentives (such as tax mount. Rising home demand (amid urbanization and income cuts) to attract global companies relocating out of China. growth), muted CPI growth, and stabilized lending rates are all positive to market growth. And with Vietnam emerging as We think Vietnam stands to benefit the most from global an investment alternative to China amid the US-China trade companies’ focus on supply chain diversification. Given dispute, demand for commercial and industrial properties is the central role manufacturing FDI has played in also increasing. Vietnam’s remarkable economic growth, we believe the government will be committed to FDI expansion as a means of recovery. 25% Inflation Avg. lending rate

❷ We expect trade opportunities to expand via 19% 20% international cooperation. The EU-Vietnam free trade 18% 17% agreement (EVFTA), signed in 2019, took effect on Aug. 1. 15% 14% 15% The EU (Vietnam’s second largest export market after the 11% 10% 10% 10% 10% 10% 10% 10% US) will immediately remove tariffs on 70.3% of 10% Vietnamese products (99.7% within seven years), while Vietnam will immediately eliminate tariffs on 64.5% of EU 5% products (97.1% within seven years). These tariff eliminations will likely allow Vietnam to secure new 0% growth engines in global markets. 2008 2010 2012 2014 2016 2018 2020 Source: GSO, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 10 August 7, 2020 Asian Property Developers

Top-down view (by Le Quang Minh)

Vietnamese stock market status and outlook Stock valuations are also attractive. In the ASEAN region, Vietnamese stocks (the VN-Index) display the second highest The Vietnamese stock market surged 25% in 2Q20, posting ROE (13.6%) but trade at the second lowest P/E (13x). the strongest quarterly growth in recent years and outperforming both the S&P 500 (+20%) and the MSCI In 2H20, we expect corporate earnings to improve HoH as Emerging Markets Index (+17.3%). economic activity resumes (although EPS growth is forecast to decline 1% YoY). Based on our target P/E range of 13.5-15.5x, The robust performance was driven by: 1) retail investors; we expect the VN-Index to move between 800 and 930 2) aggressive stock buybacks; and 3) valuation merits. We through year-end. also believe that Vietnam’s efficient early response to COVID-19 and stringent measures to prevent further infections helped boost investor sentiment.

16 14 Vietnam Local Local Foreign Foreign Date Total individuals institutions individuals institutions 12 Philippines India

1/20 9,727 49 220 32 10,028 10 China Taiw an 8 Hong Kong 2/20 18,214 70 216 4 18,504 Indonesia

ROE (% ) Malaysia Thailand 6 Japan 3/20 31,832 117 167 24 32,140 4 4/20 36,652 69 130 16 36,867 Korea 2 5/20 33,953 84 172 15 34,224 9 1113151719212325272931 P/E (x) 6/20 34,965 81 173 11 35,230 Source: Bloomberg, Mirae Asset Daewoo Research

Source: FiinPro, VSD, Mirae Asset Daewoo Research

Target P/E (x)

(VNDbn) 13.0 13.5 14.0 14.5 15.0 15.5 16.0

3,500 Registered value (est.) Acquired value (est.) -9.0% 716 743 771 798 826 853 881 3,000 2,871 -7.0% 731 760 788 816 844 872 900 2,431 2,500 -5.0% 747 776 805 833 862 891 920 2,000 -3.0% 763 792 822 851 880 910 939

1,500 Projected -1.0% 779 809 839 868 898 928 958

EPS

1,000 growth 1.0% 794 825 855 886 917 947 978

469 3.0% 810 841 872 904 935 966 997 500 84 24 1 5.0% 826 858 889 921 953 985 1,016 0 Jan. Feb. Mar. Apr. May Jun. 7.0% 842 874 906 939 971 1,003 1,036 Source: FiinPro, VSD, Mirae Asset Daewoo Research 9.0% 857 890 923 956 989 1,022 1,055 Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 11 August 7, 2020 Asian Property Developers

Speculative home demand has also been robust in Vietnam. Foreign investments have been surging since 2015, when a housing law revision paved the way for foreign ownership of property in Vietnam. (For apartment buildings, foreigners are allowed to buy up to 30% of total presale units.) In the first few years after the ban on foreign property ownership was lifted, Koreans represented the largest proportion of foreign property investments. In 2018, however, Chinese investors overtook Koreans as the largest source of foreign property investments in Vietnam, accounting for 31% (vs. 2% in 2016 and 4% in 2017).

Over the past five years, prices of luxury/high-end homes in Ho Chi Minh City have risen sharply, as they are in high demand among foreign investors.

Figure 19. Ho Chi Minh City: Presale price trends by segment

(US$/m2) 8,000 Luxury High-end Mid-end Affordable 6,000 6,308

4,000

2,549

2,000

0 05 07 09 11 13 15 17 19

Source: CBRE, Mirae Asset Daewoo Research

Rise of the mid-end housing segment

Until a few years ago, Vietnam’s real estate market was led by high-end properties that only rich locals and foreigners could afford. However, amid accelerating urbanization and middle class expansion, the market is increasingly being driven by real demand for mid-end homes (as opposed to speculative demand). Notably, high-end developer Vingroup has launched several large-scale, mid-priced housing projects (additional details available on page 13).

The share of mid-priced homes in new housing supply has increased significantly, hitting 80% (of 29,000) in Hanoi in 2019 and 67% (of 18,000 new homes) in Ho Chi Minh City .

Figure 20. Vietnamese housing market by segment Luxury High-end Mid-end Affordable ASP (US$/m2) > 4,000 2,000–4,000 1,000–2,000 < 1,000 Unit size (m2) 80–150 80-150 50-100 50-80 ASP per unit (US$) Approx. 500,000 Approx. 300,000 Approx. 100,000 Approx. 50,000 Upgraders, First-home buyers, Entrepreneurs, Second-home buyers, Typical buyers newlyweds, Factory workers, students corporate executives middle-aged couples, single professionals foreign investors

Key developers

Note: Including VAT Source: CBRE, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 12 August 7, 2020 Asian Property Developers

Vingroup is at the forefront of the mid-end housing development rush

Vingroup expands into mid-end housing [Bird’s-eye view]

Vingroup, Vietnam’s undisputed leader in luxury/high-end residential property development, introduced the VinCity brand at end-2016 to expand into the mid-end segment (currently Vinhomes Sapphire). The group sought to capture rising demand for mid-priced homes amid urbanization and middle class expansion, while simultaneously contributing to Vietnam’s economic and social development, by supplying affordable homes to newlyweds, young adults, and families relocating to urban areas. Over the next two decades, Vingroup will supply 200,000-300,000 homes in seven provinces/cities, including Ho Chi Minh City, Hai Phong, Hung Yen, Thanh Hoa, and Khanh Hoa. Source: VIC, Mirae Asset Daewoo

Three projects have been launched so far—Vinhomes Grand Park in Ho Chi Minh City and Vinhomes Ocean Park and Vinhomes Smart All in all, Vinhomes Grand Park promises to offer an attractive City in Hanoi—each of which is slated to supply more than 40,000 opportunity to enjoy modern living near major educational units. institutions (Vietnam National University) and business complexes (Saigon Hi-Tech Park) in Vietnam’s largest city.

[VinCity development projects] Covering 360ha, the development will house 77 apartment buildings (45,000 households; 43-81m2 for 1-3BR units; 33-40m2 for studios), 1,500 detached homes and villas, and 500 shophouses. Apartments are selling for US$40,000-100,000 (US$1,200/m2).

[Location]

Source: VNK Investment Consultancy, Mirae Asset Daewoo

Source: VIC, Mirae Asset Daewoo Solid presales despite delayed launch

Following a year-long delay caused by permit/approval hold-ups, Vinhomes Grand Park Vinhomes Grand Park’s kick-off event was held on Jun. 22, 2019 (soft launch in Jul.). The company secured bookings for approx. 10,000 Expectations are running high for Vinhomes Grand Park (District 9, units through Jul. 21, 2019, which is equivalent to 100% of retail units Ho Chi Minh City), given Vingroup’s track record of delivering quality launched. At end-2Q20, the project’s sell-through stood at around homes and infrastructure/amenities (e.g., hospitals, schools, 84% (38,000 units), and we expect all remaining units to be sold in due shopping malls, parks, playgrounds, swimming pools, etc.). The time. residential development is 23km away from the CBD, but access should improve once Ho Chi Minh City’s first metro line begins operation.

Mirae Asset Daewoo Research 13 August 7, 2020 Asian Property Developers

Stabilization of housing market via selective supply control

The Vietnamese government has been selectively controlling housing supply. As a result, supply in the mid-end segment (which is driven by real demand) has increased, while supply in the luxury/high-end segment (which is plagued by speculative investing) has decreased. This divergence is evident in both Hanoi and Ho Chi Minh City.

The supply of luxury/high-end homes increased excessively after housing law revisions took effect in 2015. Housing prices also soared due to the influx of foreign investors. These signs of overheating prompted the government to take action to stabilize the market. For instance, in 2019, Ho Chi Minh City temporarily suspended project approvals, resulting in a 50% YoY decline in new projects last year. (Tighter regulations on real estate loans also played a role.)

In contrast, large-scale mid-end housing development projects—led by Vingroup—are proceeding smoothly thanks to relatively swift government approvals and favorable lending conditions. Ongoing development projects (two in Hanoi and one in Ho Chi Minh City) are expected to supply approximately 140,000 mid-end housing units.

The government’s selective supply control has been paying off, as evidenced by declining housing inventory and rising absorption rates. Since 2017, the absorption rate in Hanoi has remained at around 80%, while that in Ho Chi Minh City has remained at over 100%.

Figure 22. Ho Chi Minh City: Housing projects and supply Figure 21. Hanoi: Housing projects and supply volume volume

New supply New supply ('000 units) ('000 units) 36,356 units 40 100 50 100 Luxury (L) (+7% YoY) Luxury (L) High-end (L) High-end (L) Mid-end (L) Mid-end (L) 80 40 80 30 Affordable (L) Affordable (L) 26,692 units No. of projects (R) No. of projects (R) (-13% YoY) 60 30 60 20 40 20 40

10 20 10 20

0 0 0 0 10 11 12 13 14 15 16 17 18 19 09 10 11 12 13 14 15 16 17 18 19

Source: CBRE, Mirae Asset Daewoo Research Source: CBRE, Mirae Asset Daewoo Research

Figure 23. Ho Chi Minh City: Housing inventory Figure 24. Hanoi and Ho Chi Minh City absorption rates

('000 units) 25 Luxury High-end Mid-end Affordable 120% 112% 20 109% 98% 95% 93% 91% 88% 103% 13,656 units 80% 95% 80% 15 (-15% YoY) 90% 91% 89% 84% 80% 82% 65% 68% 10

5 Hanoi Ho Chi Minh City 0 16 17 18 19 10 11 12 13 14 15 16 17 18 19

Source: CBRE, Mirae Asset Daewoo Research Source: CBRE, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 14 August 7, 2020 Asian Property Developers

Low/mid-end housing affordable for Vietnam’s middle class

The sharp rise in housing prices in Hanoi and Ho Chi Minh City has raised questions about affordability. Our housing price estimates, based on 2019 presale price data from real estate advisory firm CBRE, are shown in

Considering Vietnam’s GDP per capita (less than US$3,000), housing prices in Hanoi and Ho Chi Minh City look expensive across all segments. However, we need to look at urban household income levels for accurate analysis. Based on monthly average income data published by the General Statistics Office of Vietnam (GSO), we estimate the top 20% of wage earners—who are the most likely to buy homes—have an average annual income of US$8,000 in Ho Chi Minh City and US$7,500 in Hanoi as of 2020

Assuming that the top 20% of wage earners belong to single- or double-income households, we estimate the housing price-to-income ratio (PIR), a widely used gauge of housing affordability, for different housing segments

. While the PIR of luxury/high-end housing exceeds 10x for both single- and double-income households, low/mid-end housing appears to be affordable.

Table 5. Hanoi and Ho Chi Minh City: Housing prices by segment (US$) Hanoi Ho Chi Minh City

Luxury High-end Mid-end Affordable Luxury High-end Mid-end Affordable Primary price per m2 3,500 2,378 1,304 782 6,308 2,549 1,442 898

1BR (49m2) 171,500 116,522 63,896 38,318 309,092 124,901 70,658 44,002 2BR (81m2) 283,500 192,618 105,624 63,342 510,948 206,469 116,802 72,738 3BR (108m2) 378,000 256,824 140,832 84,456 681,264 275,292 155,736 96,984 4BR (155m2) 542,500 368,590 202,120 121,210 977,740 395,095 223,510 139,190 Note: Due to underrepresentation of one-bedroom units in luxury/high-end segment and four-bedroom units in the mid-end/affordable segment, these fields are unshaded. Source: CBRE, Mirae Asset Daewoo Research

Table 6. Hanoi and Ho Chi Minh City: Avg. annual income of top 20% of wage earners Hanoi Ho Chi Minh City

2016 2018 2019F 2020F 2016 2018 2019F 2020F Monthly income (VND’000) 11,941 14,225 15,526 15,526 11,985 13,262 13,951 14,675 Annual income (VND’000) 143,292 170,700 186,311 186,311 143,820 159,144 167,408 176,101 USD/VND rate 23,280 23,280 Annual income (US$) 6,155 7,332 8,003 8,003 6,178 6,836 7,191 7,564 Note: Avg. annual income for 2019 and 2020 derived by applying 2016-18 CAGR of 5.2% and USD/VND rate of 23,280 Source: GSO, Mirae Asset Daewoo Research

Table 7. Hanoi and Ho Chi Minh City: PIR for top 20% of wage earners (x)

Home Household Hanoi Ho Chi Minh City size type Luxury High-end Mid-end Affordable Luxury High-end Mid-end Affordable Single income 21 15 8 5 41 17 9 6 1BR Double income 11 7 4 2 21 8 5 3 Single income 35 24 13 8 68 28 16 10 2BR Double income 18 12 7 4 34 14 8 5 Single income 47 32 18 11 91 37 21 13 3BR Double income 24 16 9 5 45 18 10 6 Single income 68 46 25 15 130 53 30 19 4BR Double income 34 23 13 8 65 26 15 9 Notes: Annual income of US$8,000 for single-income households and US$16,000 for double-income households in Hanoi; annual income of US$7,500 for single-income households and US$15,000 for double-income households in Ho Chi Minh City; Source: Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 15 August 7, 2020 Asian Property Developers

The luxury/high-end market targets foreign investors and wealthy Vietnamese. With a population of nearly 100mn, Vietnam has roughly 100,000 people in its top 0.1% income bracket and the world’s third fastest-growing population of superrich individuals. These individuals are free to purchase as many units as they want in major cities. Meanwhile, demand from foreign investors is healthy; indeed, we have seen many cases in which foreigners cannot purchase additional units due to the 30% foreign ownership cap.

In terms of real (non-speculative) demand, the low- and mid-end segments matter most. Our scenario analysis confirms that middle-class households have the financial resources to purchase low/mid-end homes, and we also believe the purchase timing can be accelerated depending on the length of the savings period and extent of leverage.

shows, there is already a sizable number of households with sufficient income to purchase low/mid-end homes. This bracket will expand as Vietnam’s economic growth continues. It should also be noted that Hanoi and Ho Chi Minh City have more residents than official statistics indicate, meaning demand for low/mid-end housing may be stronger than expected. Demand-driven market growth should present opportunities to companies focusing on low/mid-end housing projects.

Table 8. Hanoi and Ho Chi Minh City: Population in top 20% bracket (‘000 persons, ‘000 households) Top 20% No. of households Cumulative Population Productive Productive income in top 20% income Housing supply housing (official) population % population bracket bracket in 2019 supply since population (mid-end units) 1999 ① ② ③ = ① x ② ④ = ③ x 20% ⑤ = ④ / 2

70% 5,670 1,134 567 60% 4,860 972 486 37 Hanoi 8,100 304 50% 4,050 810 405 (2.9) 40% 3,240 648 324 70% 6,230 1,246 623 Ho Chi 60% 5,340 1,068 534 27 Minh 8,100 287 (1.8) City 50% 4,450 890 445 40% 3,560 712 306 Notes: Assumed two members per household; supply volumes based on luxury, high-end, mid-end, and low-end units combined Source: GSO, CBRE, Mirae Asset Daewoo Research

Vietnam’s UNHWI population showing the world’s third-fastest growth rate

The global population of ultra-high-net-worth individuals (UHNWIs)—those with a net worth of at least US$30mn—rose by 6.4% YoY to 510,000 in 2019, according to the 2020 Knight Frank Global Wealth Sizing Model. The US accounted for 50% (240,000 people) of all UHNWIs, with China (62,000) and Germany (23,000) making the second and third largest contributions. According to the model, Vietnam is home to 458 UHNWIs (+7% YoY).

Notably, Vietnam’s superrich population increased more than 320% between 2006 and 2016, marking the fastest growth in the world (outpacing even Indian and Chinese growth). In broader Asia, the number of UHNWIs is forecast to expand 44% between 2019 with 2024, with India displaying the strongest growth (+73%), followed by Vietnam (64%), China (58%), and Indonesia (57%).

Luxury/high-end housing prices in Hanoi and Ho Chi Minh City are high relative to overall income levels in Vietnam, but the number of Vietnamese who can afford them has been increasing over the years. In fact, wealthy Vietnamese have increasingly been making aggressive real estate investments.

Source: Knight Frank, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 16 August 7, 2020 Asian Property Developers

Middle-class homeownership scenarios: Low- and mid-end segments in Ho Chi Minh City

We modeled home-buying scenarios for dual-income households in three income brackets. We assumed annual income at US$15,000 for household A, US$20,000 for Mid-end Affordable household B, and US$30,000 for household C. Too high 62% In our analysis, we assumed the price of a two-bedroom apartment (81m2)—the most popular type of residence—at Too high

US$70,000 in the low-end segment and US$120,000 in the 46% mid-end segment (2019 presale prices). 36% PIR suggests that households A, B, and C will be able to 31% 27% purchase a mid-end house within 10 years and a low-end house within five years, assuming that they save all of their 18% income to purchase a home outright, which is a rather unlikely scenario.

Of course, taking out a mortgage can speed up the home- buying timeline. In Vietnam, 70% of a home purchase can be Household A Household B Household C leveraged, which means that it is possible to close on a home with a down payment of just 30%. Scenario 2: Saving 50% of income for seven years

Our second scenario assumes a savings rate of 50% over seven years. This is in line with the approach taken by a

Mid-end Affordable significant number of first-time home buyers. 8.0x With robust savings allowing for a higher down payment and lower debt-servicing burden, household B can reasonably 6.0x afford a mid-end home under this scenario. And even household A is not too far away from being able to purchase 4.7x a mid-end home without having to take out a crippling 4.0x mortgage. 3.5x Meanwhile, starter homes are within reach for all three

2.3x households. Households B and C can even purchase a low- end home without taking on leverage.

Household A Household B Household C Mid-end Affordable Too high

Scenario 1: Heavily leveraged purchase 50%

For this scenario, we assumed a 30% down payment and a mortgage loan at 11%.

These assumptions yield monthly interest expenses of 28% US$770 for a mid-end home and US$449 for a low-end home. According to conventional wisdom, interest expenses should 13% not exceed 30% of household income. As such, it appears that only household C (annual income of US$30,000) is well- 6% positioned to purchase a mid-end home. Meanwhile, low-end 0% 0% homes are within reach for all three households. Household A Household B Household C

Mirae Asset Daewoo Research 17 August 7, 2020 Asian Property Developers

Figure 25. Hanoi: Luxury housing prices Figure 26. Hanoi: Housing prices by segment

Note: No new supply in 2017-18 Source: CBRE, Mirae Asset Daewoo Research Source: CBRE, Mirae Asset Daewoo Research

Figure 27. Ho Chi Minh City: Luxury housing prices Figure 28. Ho Chi Minh City: Housing prices by segment

Source: CBRE, Mirae Asset Daewoo Research Source: CBRE, Mirae Asset Daewoo Research

Figure 29. Hanoi: Housing price appreciation vs. CPI. Figure 30. Ho Chi Minh City: Housing price appreciation vs. CPI

(YoY) (YoY) 12% High-end Mid-end Affordable CPI 20% Luxury High-end Mid-end Affordable CPI

16% 8% 7% 14% 12% 12% 5% 10% 4% 4% 8% 2% 8%

0% 4% 4%

-4% 0% 2017 2018 2019 2017 2018 2019

Source: CBRE, CEIC, Mirae Asset Daewoo Research Source: CBRE, CEIC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 18 August 7, 2020 Asian Property Developers

Vietnamese company analysis

Vinhomes (VHM VN/Buy) The undisputed champion

Vingroup (VIC VN/Buy) Now is an opportune time to buy

Mirae Asset Daewoo Research 19 [Vietnam] Property Developers

Vinhomes Buy (VHM VN) (Initiate)

The undisputed champion TP: VND112,000 Upside: 42.0%

Mirae Asset Daewoo Co., Ltd. Yongdai Park [email protected] Tran Tuan Long [email protected]

Investment points Massive land bank  As of 1Q20, Vinhomes boasts a land bank of 164mn m2 (around 20 times greater than the holdings of its closest competitor).  Vinhomes’ land bank is concentrated in large cities that yield high gross development value (GDV), such as Hanoi (32%) and Ho Chi Minh City (26%). In addition, management has confirmed that Vinhomes has already secured sufficient land for the next 15 years. Diversified housing portfolio  Vinhomes is the only residential property developer in Vietnam that caters to all income levels.

 Dominant M/S: 22% for broader market; 38% for premium market; 45% for mid-end market Efficient project management  Vinhomes is renowned for its ability to launch/execute projects in an efficient and timely manner (roughly one to two years faster than competitors). As a result, Vinhomes enjoys high profitability and rapid cash recovery and can quickly move on to new projects. Next-generation growth engine: Industrial parks  Vinhomes has been expanding its mix of industrial park projects (leasing/sales) to secure more diversified and stable revenue streams.

Valuation and Initiate coverage with a Buy rating and TP of VND112,000 recommendation  Our target price implies a P/E of 12.5x, which represents a 30% discount to the 2020-21F average P/E (17.8x) of Ayala Land, the largest property developer in the Philippines  Trading at a 2020F P/E of 9.4x and a 2021F P/E of 8.2x, Vinhomes is undervalued given its dominant market position, high margins, and increasing earnings visibility.  We forecast 2020F and 2021F net profit at VND27tr (+27% YoY) and VND32tr (+15% YoY), respectively. Handover of three major mid-end housing projects should drive earnings growth.

Risks  1) Stricter property lending regulations; 2) delays to government project approval; and 3) Vingroup’s manufacturing businesses

Key data Current price (8/4/20, VND) 79,000 Market cap (VNDbn) 259,871.60 120 VHM VN VN index Exchange HOSE Market cap (Wtr) 13.4

100 EPS growth (20F, %) 28.7 Shares outstanding (mn) 770.4 80 P/E (20F, x) 9.4 52-week low (VND) 52,000

60 Market P/E (20F, x) 15.1 52-week high (VND) 102,300

40 Dividend yield (%) 0.0 18.5 19.5 20.5

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 1.5 -8.1 -7.3 Net operating revenue (VNDbn) 15,297 38,664 51,627 89,427 107,766 118,142 Relative 4.0 2.8 9.0 OP (VNDbn) 3,128 7,617 23,219 30,405 38,796 42,531 OP margin (%) 20.5 19.7 45.0 34.0 36.0 36.0 NP (VNDbn) 1,410 14,284 21,747 27,521 31,599 34,559 EPS (VND) 5,638 4,503 6,502 8,366 9,606 10,506 ROE (%) 15.9% 50.7% 43.1% 37.4% 31.5% 27.9% P/E (x) - 16.1 13.0 9.4 8.2 7.5 P/B (x) - 5.3 5.1 2.9 2.3 1.9 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 7, 2020 Vinhomes

I. Investment thesis

1. Massive land bank

Vinhomes boasts unrivaled competitiveness in land procurement. As of 2Q20, the company boasts a land bank of 164mn m2 (around 20 times greater than the holdings of its closest competitor) and is conducting feasibility studies on 6mn m2 of additional land. Management has confirmed that Vinhomes has already secured sufficient land for the next 15 years.

Vinhomes’ land bank is concentrated in large cities that yield high GDV, such as Hanoi (32%) and Ho Chi Minh City (26%).

Figure 1. Vinhomes: Land bank overview Figure 2. Vinhomes: Unrivaled land bank

(mn m2) (mn m2) Equivalent to 164mn m2 of residential GFA 200 6 168 160 Around 20x the land bank of next largest competitor (sufficient for 15 years of development) 120

155 80

13 776 0 Vinhomes Novaland Nam Long Group Khang Dien House Launched Pipeline projects

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 3. Vinhomes: GDV breakdown (residential) Figure 4. Vinhomes: Land bank by region (residential)

60% of GDV 50% of residential GFA → Hanoi and Ho Chi Minh City → Ho Chi Minh City and Hanoi

14% 20% 19% (15mn m2) 32% Hanoi Hanoi (US$15.6bn) Ho Chi Minh City Ho Chi Minh City 19% Quang Ninh Quang Ninh 16% Hung Yen Hung Yen Other Other 31% 8% (22mn m2) 26% 14% (US$12.3bn)

Note: For projects to be launched through 2025 Note: For projects to be launched through 2025 Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 21 August 7, 2020 Vinhomes

2. Diversified housing portfolio

Vinhomes is the only residential property developer in Vietnam that caters to all income levels. Indeed, the company boasts a diversified portfolio that includes the Happy Town (affordable) and Vinhomes (mid-end to luxury) brands.

Until 2018, Vinhomes had been focused on the luxury/high-end segment (now controlling a 38% share of the premium housing market). However, with demand for mid-end homes surging amid rapid economic development, urbanization, and middle class expansion, the company began to launch large-scale mid-end housing development projects and reorganize its brands. Vinhomes is now the dominant player in the mid-end segment, with a 46% market share

One of the key factors that has allowed Vinhomes to extend its success to the mid-end segment is its ability to deliver homes in appealing locations with solid amenities and high- quality interiors. In particular, the on-site amenities/infrastructure operated by Vingroup— shopping malls (Vincom Retail), grocery/convenience stores (VinCommerce), hospitals (VinMec), and schools (VinSchool)—set Vinhomes apart from its competitors. Strong brand awareness has also contributed to mid-end market share gains.

Figure 5. Vinhomes: Brand reorganization

Source: Company materials, Mirae Asset Daewoo Research

Figure 6. Vietnam housing M/S (2Q20)

All segments Premium segment Mid-end segment

22%

38% 39% 46% 4% 47% 2% 2% 2% 68% 2% 5% 4% 3% 3% 4% 4% 5%

Vinhomes Developer A Developer B Vinhomes Developer A Developer B Vinhomes Developer A Developer B Developer C Developer D Other Developer C Developer D Other Developer C Developer D Other

Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 22 August 7, 2020 Vinhomes

3. Efficient project management

Vinhomes is renowned for its ability to launch/execute projects in an efficient and timely manner. For a high-rise project, the company generally progresses from land acquisition to handover in 18-24 months—roughly one to two years faster than competitors. For low-rise properties, development generally takes just 10-12 months.

Thanks to its large land bank and vast pool of experienced professionals, Vinhomes can quickly and efficiently complete the first and second stages of development: land acquisition and master planning/design

. However, the land clearance process (third stage) is where the company visibly outperforms competitors (nine to 12 months for Vinhomes vs. at least two to three years for most developers).

In addition, Vinhomes’ projects are generally characterized by high presale ratios and down payment rates. This allows the company to execute projects efficiently and without a heavy reliance on debt financing. As a result, Vinhomes enjoys high profitability and rapid cash recovery and can quickly move on to new projects.

Table 1. Vinhomes: Value chain - Unparalleled competitiveness and track record in land banking ① Land acquisition - Continuous efforts to find and acquire new sites

▼ Master ② - Master planning/design with a focus on ecosystem integration planning/design ▼ - Efforts to help Vietnamese state agencies identify rights holders and facilitate resettlement ③ Land clearance - Around two to three years per project  nine to 12 months ▼ Infrastructure/ ④ - Significant leveraging of Vingroup’s ecosystem of amenities/infrastructure (hospitals, schools, retailers) ecosystem ▼ Presale/sales - Average down payment of around 70%  lower reliance on debt financing ⑤ research/marketing - Cumulative take-up rate of 88% for three mega projects launched through 2019 ▼ Construction/ ⑥ - Ability to control costs and stay on schedule quality control ▼ Property - Broad maintenance services to help satisfy residents’ needs ⑦ management - On-site amenities such as gyms, pools, lounges, barbecue pits, parks, and waterways Source: Company data, Mirae Asset Daewoo Research

Figure 7. Case study: Vinhomes vs. competitors Construction Land acquisition/ Start of presales completion master planning (T) (T + 7 months) (T + 13 months) Vinhomes Golden River ▶ Subsequent project Unlevered IRR: 38% Vinhomes Start of construction Handover

(T + 6 months) (T + 21 months)

Construction Land acquisition/ Start of presales

completion master planning (T) (T + 13 months) (T + 34 months) Typical project

Unlevered IRR: 15-20% Handover Competitors Construction start

(T + 10 months) (T + 36 months) Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 23 August 7, 2020 Vinhomes

4. Next-generation growth engine: Industrial parks

Vinhomes has been expanding its mix of industrial park projects (leasing/sales) since its March acquisition of Vinhomes Industrial Park Investment from Vingroup. The company is seeking to capitalize on rising demand amid increasing FDI and relocation of global manufacturing facilities to Vietnam.

We expect lease income (sales proceeds) from industrial parks to help smooth out Vinhomes’ earnings, which can display volatility depending on changes in housing project schedules and delivery dates.

The company plans to initially focus on leasing parts of the Hai Phong industrial park to VinFast and VinFast’s vendors, and then gradually increase its revenue exposure to industrial park development projects over the next three years via the development/sale of 22mn m2.

In addition, Vinhomes’ commercial leasing activities should also expand going forward. By 2035, the company plans to increase its office net leasable area (NLA) to 5mn m2 (from 120,000m2) to secure more diversified and stable revenue streams.

Figure 8. Vinhomes: Industrial park projects to benefit from infrastructure development programs

Source: Company materials, Mirae Asset Daewoo Research

Table 2. Vinhomes: Industrial park pipeline

Delivery/ Delivery/ NSA1/NLA2 GDV3/TDC4 Location operation start operation end (‘000 m2) (US$mn) Hai Phong 2021-22 2022-25 4,550 560 Quang Ninh 2023 2024-26 2,550 330 Other 2022-23 2025-32 14,980 2,180 Total pipeline projects (sales) 22,080 3,070

Hai Phong 2020- 2,550 1,380 Quang Ninh 2023- 640 240 Other 2023- 3,750 1360 Total pipeline projects (leasing) 6,940 2,980

Total industrial projects 29,020 6,060 Notes: 1) Net saleable area over the project’s lifetime; 2) net leasable area; 3) gross development value (net saleable area x ASP) over the project’s lifetime (subject to adjustments depending on approvals to be received at later stages; based on for-sale components); 4) total development costs including construction and land costs (based on for-lease components) Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 24 August 7, 2020 Vinhomes

II. Earnings and forecasts

We forecast Vinhomes’ net profit to expand 27% YoY in 2020 and 15% YoY in 2021. Major assumptions underlying our earnings forecasts for 2020 and 2021 are: 1) property development revenue growth of 78% and 19%, respectively; 2) leasing revenue growth of -10% and 150%, respectively; 3) gross margin of 42% and 44%, respectively; and 4) SG&A ratio of 8% and 8%, respectively.

1) Vinhomes’ large-scale, mid-priced residential projects are expected to make a significant contribution to earnings in 2020-21. Vinhomes Ocean Park, Vinhomes Smart City, and Vinhomes Grand Park have initiated handover, with unbilled presales standing at VND25.6tr, VND16.2tr, and VND44.2tr, respectively. In addition, if presales for remaining units (38%, 51%, and 6%, respectively) take place, earnings visibility would improve.

We also see growth momentum continuing in 2021 due to: 1) the handover of the low-rise section of Vinhomes Wonder Park; and 2) the start of revenue recognition for an industrial park project.

2) Looking ahead, robust presales momentum is likely to be sustained. Despite the COVID-19 outbreak, 2Q20 presales soared 26% YoY (+257% QoQ) based on volume and 47% YoY (+386% QoQ) based on value, partially aided by online channels. At present, annual target achievement stands at 57% by volume and 45% by value. Moreover, the company is stepping up efforts to increase bulk sales (in addition to retail sales), which generate quick cash flows. In 2Q, Vinhomes signed two bulk sale agreements (VND15tr in total).

3) Two projects—Dream City and Vu Yen—are scheduled to break ground in 2021, and the Dai An project may also begin this year, as the land acquisition process (3mn m2) was completed in 2Q20. Furthermore, the Can Gio and Green Ha Long development projects may be launched in 2022, as significant progress has been made in obtaining permits.

During the 2Q20 earnings call, management confirmed their full-year guidance (revenue of VND97tr and after-tax profit of VND31tr), expressing confidence in the progress (presales/handover) of ongoing projects.

Table 3. Vinhomes: Project handover schedule and revenue recognition (VNDbn) GDV 2019 2020F 2021F 2022F 2023F 2024F Property sales 48,162 85,933 102,606 112,301 123,135 N/A Golden River Green Bay Smart City 76,966 Ocean Park 67,668 Grand Park 87,495 Marina (L) 7,855 Marina (H) 2,816 Symphony 4,188 West Point 5,868 Wonder Park (L) 24,015 Wonder Park (H) 1,775 Dream City (L) 91,848 Dream City (H) 42,777 Other projects (A – L) 546,096 Notes: H = high-rise; L = low-rise; USD/VND rate of 23,660 for calculating GDV Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 25 August 7, 2020 Vinhomes

Figure 9. Vinhomes: Property sales growth and forecasts Figure 10. Leasing revenue growth and forecasts (YoY) (YoY)

(VNDtr) Property sales (L) YoY (R) (VNDtr) Leasing activities (L) YoY (R) 120 200% 3.5 250% 180% 210% 100 3.0 200% 160% 2.5 150% 80 150% 120% 2.0 60 98% 100% 1.5 78% 80% 40 50% 1.0 36% 20%

37% 40% 0% 20 35% 0.5 -10% 19% 9% 0 0% 0.0 -50% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Table 4. Vinhomes: Major residential projects (end-2Q20)

Project name Vinhomes Ocean Park Vinhomes Smart City Vinhomes Grand Park Others Total NSA (mn m2) 3.5 2.6 3.2 4.1

Cumulative units sold/delivered/to be delivered (as of end-2Q20)

Unbilled presales (VNDtr) 25.6 16.2 44.2 7.0 Construction progress 38% 32% 45% Source: Company data, Mirae Asset Daewoo Research

Figure 11. Vinhomes: Annual presales Figure 12. Vinhomes: Quarterly unbilled presales

(VNDtr) (VNDtr) 120 100

100 80

80 60

60 40 40

20 20

0 0 2016 2017 2018 2019 2020F 2021F 2022F 1Q18 2Q18 3Q18 4Q18 1Q19 2Q19 3Q19 4Q19 1Q20 2Q20

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 26 August 7, 2020 Vinhomes

Table 5. Vinhomes: Annual earnings forecasts and key assumptions (VNDbn) 2017 2018 2019 2020F 2021F 2022F Revenue 15,297 38,664 51,627 89,427 107,766 118,142 Property sales 12,780 35,769 48,162 85,933 102,606 112,301 Real estate management/related services 0 961 1,483 1,631 1,794 1,974 Leasing activities/related services 263 816 1,114 1,002 2,506 3,007 General contractor/construction consulting 0 986 708 700 700 700 Other 2,254 132 160 160 160 160 Cost of revenue (10,131) (28,603) (24,171) (51,867) (60,349) (66,160) Gross profit 5,167 10,061 27,456 37,559 47,417 51,983 SG&A (2,038) (2,444) (4,237) (7,154) (8,621) (9,451) OP 3,128 7,617 23,219 30,405 38,796 42,531 Net finance income/expenses (376) (845) (170) (200) 91 468 Share in profits/losses of JVs and associates (88) 0 0 0 0 0 Net other income/expenses (555) 12,946 6,698 9,509 5,000 5,000 Income from BCC 0 9,513 5,175 2,000 2,000 2,000 Gains from disposal of investments 422 3,508 1,493 7,509 3,000 3,000 Profit before tax 2,109 19,719 29,746 39,713 43,887 47,999 Tax (543) (4,942) (5,427) (9,134) (8,777) (9,600) Profit after tax 1,565 14,776 24,319 30,579 35,110 38,399 Minority interests 156 492 2,572 3,058 3,511 3,840 NP attributable to owners 1,410 14,284 21,747 27,521 31,599 34,559

YoY growth Revenue 36.4% 152.8% 33.5% 73.2% 20.5% 9.6% Property sales 36.8% 179.9% 34.6% 78.4% 19.4% 9.4% Real estate management/related services 54.4% 10.0% 10.0% 10.0% Leasing activities/related services 98.2% 210.0% 36.4% -10.0% 150.0% 20.0% General contractor/construction consulting -28.1% -1.2% 0.0% 0.0% Other 29.1% -94.1% 21.3% 0.0% 0.0% 0.0% Gross profit 16.0% 94.7% 172.9% 36.8% 26.2% 9.6% OP 37.7% 143.5% 204.8% 31.0% 27.6% 9.6% Profit before tax -24.5% 835.1% 50.8% 33.5% 10.5% 9.4% NP attributable to owners -14.5% 913.3% 52.2% 26.6% 14.8% 9.4%

Gross margin 33.8% 26.0% 53.2% 42.0% 44.0% 44.0% SG&A/revenue 13.3% 6.3% 8.2% 8.0% 8.0% 8.0% OP margin 20.5% 19.7% 45.0% 34.0% 36.0% 36.0% Tax rate 25.8% 25.1% 18.2% 23.0% 20.0% 20.0% Net margin 9.2% 36.9% 42.1% 30.8% 29.3% 29.3% Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 27 August 7, 2020 Vinhomes

III. Valuation

We initiate our coverage on Vinhomes with a Buy rating and target price of VND112,000 (42% upside. Our target price implies a P/E of 12.5x (vs. ASEAN property developers’ average P/E of 13.3x), which represents a 30% discount to Ayala Land’s 2020-21F average P/E of 17.8x.

We used Ayala Land, the largest property developer in the Philippines, as a reference point, for our valuation of Vinhomes, given: 1) similarities between Vietnam and the Philippines in terms of robust economic growth and structural real estate market expansion (driven by urbanization and middle class gains); and 2) similarities between the two companies in terms of market cap, revenue, land bank size, and market standing. We applied a 30% discount to Vinhomes to reflect its heavy revenue exposure to housing development.

While its ASEAN peers are trading at 2020F and 2021F P/Es of 15.1x and 11.5x, respectively, Vinhomes is trading at 9.4x and 8.2x. We believe Vinhomes is undervalued, in light of its dominant market position, high margins, and increasing earnings visibility.

Figure 13. Vinhomes: 12-month forward P/E band chart Figure 14. Vinhomes: 12-month forward P/B band chart

(VND) (VND) 14x 120,000 120,000 4x

12x 3.5x

100,000 100,000 10x 3x

80,000 80,000 2.5x 8x

2x 60,000 60,000 6x

40,000 40,000 2018 2019 2020 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 15. Vinhomes: 12-month forward P/E ±2 SD Figure 16. Vinhomes: 12-month forward P/B ±2 SD

(x ) (x ) 20 7.0

+2 SD 18 6.0 +2 SD 16 5.0 +1 SD 14 +1 SD 4.0 Av g. 12 Av g. 3.0 -1 SD 10 -1 SD 2.0 8 -2 SD -2 SD 6 1.0 2018 2019 2020 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 28 August 7, 2020 Vinhomes

Table 6. Asian property developers: Valuation table

Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth(%) Dividend yield(%) Company Ticker (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CapitaLand CAPL SP 2.8 10.1 14.3 12.0 0.6 0.6 5.4 6.5 (58.6) 19.8 4.4 4.3 Keppel KEP SP 5.2 6.9 31.8 12.5 0.9 0.8 0.6 6.8 (57.8) 154.9 2.5 3.7 City Developments CIT SP 8.2 5.4 18.5 13.0 0.7 0.7 4.0 5.3 (27.6) 42.7 2.4 2.4 UOL Group UOL SP 6.5 4.0 18.1 13.7 0.5 0.5 2.9 3.7 (36.6) 31.7 2.8 2.8 Singapore Frasers Property FPL SP 1.2 2.5 9.7 9.7 0.4 0.4 5.3 5.1 (37.5) (0.8) 4.0 4.4 Avg. 18.5 12.2 0.6 0.6 3.6 5.5 (43.6) 49.6 3.2 3.5 KLCCP Stapled KSLCCSS MK 7.8 3.3 20.4 19.0 1.1 1.1 5.3 5.8 92.9 7.1 4.5 4.9 Sime Darby Property SDPR MK 0.6 1.0 10.0 17.5 0.4 0.4 5.3 2.6 (280.0) (42.9) 4.4 2.5 SP Setia SPSB MK 0.8 0.7 16.2 8.2 0.2 0.2 1.4 2.8 (45.1) 97.9 1.4 3.4 UOA Development UOAD MK 1.5 0.7 8.8 9.1 0.6 0.6 5.6 4.4 (19.3) (4.1) 8.1 7.5 Malaysia Malaysia UEM Sunrise UEMS MK 0.4 0.4 21.6 17.1 0.3 0.3 1.2 1.6 (61.2) 26.3 1.0 1.2 Avg. 16.7 13.4 0.5 0.5 3.4 3.7 (8.2) 31.8 3.8 4.3 Land & Houses LH TB 7.5 2.9 13.6 11.8 1.7 1.6 12.5 14.3 (34.8) 15.3 6.3 7.3 WHA Corp. WHA TB 3.3 1.6 17.7 15.2 1.6 1.5 9.3 10.4 (15.3) 16.5 3.0 3.6 Supalai SPALI TB 17.0 1.1 8.2 7.1 0.9 0.8 11.2 12.3 (18.0) 16.1 4.7 5.4 Pruksa Holding PSH TB 11.2 0.8 7.2 6.6 0.6 0.5 7.9 8.5 (36.6) 9.9 8.1 9.0 Thailand Quality Houses QH TB 2.1 0.7 10.1 8.9 0.8 0.8 8.2 9.3 (21.9) 14.2 6.3 6.9 Avg. 11.4 9.9 1.1 1.1 9.8 11.0 (25.3) 14.4 5.7 6.4 SM Prime Holdings SMPH PM 28.5 16.7 30.5 21.7 2.6 2.3 8.4 11.1 (29.3) 40.5 1.2 1.2 Ayala Land ALI PM 32.2 9.7 21.0 14.6 2.1 1.9 10.1 13.3 (31.7) 43.8 1.8 1.6 Megaworld MEG PM 3.0 2.0 7.5 5.8 0.5 0.5 6.9 8.5 (26.7) 29.3 2.5 2.2 Robinsons Land RLB PM 14.2 1.5 9.1 7.4 0.7 0.7 7.8 8.8 (6.6) 22.6 3.3 3.5

Philippines Vista Land & Lifescapes VLL PM 2.9 0.8 5.1 3.7 0.3 0.3 7.2 9.2 (36.2) 40.6 6.5 6.0 Avg. 14.6 10.6 1.2 1.1 8.1 10.2 (26.1) 35.4 3.1 2.9 Pakuwon Jati PWON IJ 398.0 1.3 9.7 8.5 1.2 1.0 11.5 12.6 (27.4) 14.3 1.8 1.6 Bumi Serpong Damai BSDE IJ 665.0 1.0 9.2 7.6 0.4 0.4 4.8 5.6 (50.7) 20.1 1.2 0.9 Ciputra Development CTRA IJ 645.0 0.8 13.4 12.1 0.7 0.7 5.8 5.9 (22.4) 10.7 1.7 1.5 Lippo Karawaci LPKR IJ 140.0 0.7 26.5 0.4 0.3 0.5 1.4 (92.3) (257.8) 0.0 0.7 Indonesia Summarecon Agung SMRA IJ 550.0 0.5 25.9 19.3 1.1 1.0 3.9 4.9 (40.4) 34.2 1.0 0.8 Avg. 14.5 11.9 0.8 0.8 6.5 7.2 (35.3) 19.8 1.4 1.2 Vinhomes VHM VN 79,000.0 11.2 9.4 8.2 2.9 2.3 37.4 31.5 28.7 14.8 0.0 1.6 Novaland Investment Group NVL VN 64,700.0 2.7 18.2 18.4 2.4 2.1 13.4 12.2 (0.5) (1.3) Khang Dien House Trading KDH VN 24,350.0 0.6 12.5 10.5 1.6 1.5 14.0 15.5 14.9 19.4 2.1 2.1 Dat Xanh Group DXG VN 9,600.0 0.2 4.8 4.3 0.6 0.6 12.3 14.3 (25.7) 13.7 5.2 Vietnam Nam Long Investment NLG VN 25,300.0 0.3 7.7 6.3 1.1 1.0 14.3 16.8 (12.1) 20.8 2.7 3.2 Avg. 10.5 9.5 1.7 1.5 18.3 18.1 1.0 13.5 1.6 3.0

Vinhomes VHM VN 79,000.0 11.2 9.4 8.2 2.9 2.3 37.4 31.5 28.7 14.8 0.0 1.6 Local peer avg. 10.5 9.5 1.7 1.5 18.3 18.1 1.0 13.5 1.6 3.0 Local peer median 9.4 8.2 1.6 1.5 14.0 15.5 (0.5) 14.8 2.1 2.6 Regional peer avg. 15.1 11.5 0.9 0.8 6.4 7.7 (28.2) 30.6 3.5 3.7 Regional peer median 13.6 11.8 0.7 0.7 5.8 6.8 (31.7) 20.1 2.8 3.5 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 29 August 7, 2020 Vinhomes

We also conducted a realizable net asset value (RNAV) analysis for Vinhomes. We acknowledge that this approach has limitations, given: 1) the difficulty of validating GDV due to the paucity of land transaction data in Vietnam; and 2) the plethora of assumptions required to estimate cash flow for each project. And given that Vinhomes has already secured enough land for the next 15 years, we believe its ability to generate earnings from developing that land—rather than the size and value of the land itself—is the key to its valuation. Accordingly, we prefer a relative valuation method (P/E).

That said, the fair price derived via our RNAV analysis does not look demanding. We calculated the net present value of eight ongoing projects and 16 future projects (to be launched between 2020 and 2024) based on a DCF model (11.9% WACC assumption) and deducted net debt (total liabilities minus cash holdings). The RNAV-based target price came in at VND110,000. We could revisit our model after factoring in pipeline projects due to kick off in 2025 and beyond (housing/offices/industrial parks; excluded from the analysis for ease of calculation).

Table 7. Vinhomes: RNAV estimate US$mn VNDbn VND/share Total residential projects 16,557 391,747 119,090 Launched projects 2,646 62,596 19,029 Pipeline projects (10% discount) 13,912 329,151 100,061 Cash & equivalents 12,077 3,671 GAV 403,824 122,761 Debt 41,382 12,580 RNAV 362,442 110,181 Source: Company data, Mirae Asset Daewoo Research

Table 8. Vinhomes: DCF assumptions Adjusted beta 1.0 Market risk premium 10.0% Risk-free rate 5.0% COE 15.0% Cost of debt 9.4% Debt weight 40% Equity weight 60% WACC 11.9% Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 30 August 7, 2020 Vinhomes

Table 9. Peer valuation table

Current price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (local) (US$bn) 20E 21E 20E 21E 20E 21E 20E 21E Vietnam Vinhomes VHM VN 79,000 11.2 9.7 8.7 3.1 2.4 38.2 30.4 24.9 11.5 Novaland Investment Group NVL VN 62,400 2.6 20.0 21.6 2.4 2.2 12.4 11.5 (12.8) (7.6) Khang Dien House Trading KDH VN 24,200 0.5 11.7 10.4 1.6 1.5 14.3 14.7 22.3 12.3 Dat Xanh Group DXG VN 11,400 0.3 5.8 5.1 0.7 0.7 12.0 14.3 (26.0) 13.5 Nam Long Investment NLG VN 25,500 0.3 7.7 6.3 1.1 1.0 15.4 16.8 (11.3) 22.0 Philippines SM Prime Holdings SMPH PM 31.6 18.4 33.7 24.0 2.8 2.6 8.4 11.2 (29.2) 40.4 Ayala Land ALI PM 33.2 9.8 18.9 14.5 2.1 1.9 11.0 13.7 (22.2) 31.0 Megaworld. MEG PM 3.0 2.0 7.3 5.7 0.5 0.5 7.2 8.8 (24.2) 28.7 Robinsons Land. RLC PM 16.0 1.7 10.2 8.3 0.8 0.7 7.8 8.8 (6.6) 22.6 Malaysia KLCCP Stapled Group KLCCSS MK 8.0 3.4 21.0 19.7 1.1 1.1 5.5 5.8 93.9 6.5 SP Setia SPSB MK 0.8 0.8 17.1 8.7 0.2 0.2 1.5 2.8 (45.1) 97.9 Sime Darby Property SDPR MK 0.7 1.1 10.7 18.8 0.5 0.5 5.3 2.6 (280.0) (42.9) UOA Development UOAD MK 1.8 0.8 10.8 11.3 0.7 0.7 5.6 4.4 (19.3) (4.1) UEM Sunrise UEMS MK 0.4 0.5 22.6 17.9 0.3 0.3 1.2 1.6 (61.2) 26.3 Thailand Land & Houses LH TB 7.6 2.9 14.1 12.1 1.7 1.6 12.4 14.0 (36.2) 16.0 WHA Corp. WHA TB 3.1 1.5 16.7 14.0 1.4 1.4 9.2 10.4 (16.2) 18.8 Pruksa Holding PSH TB 11.4 0.8 7.3 6.6 0.6 0.5 7.9 8.6 (36.2) 10.1 Supalai SPALI TB 16.5 1.0 8.0 6.9 0.9 0.8 11.2 12.2 (17.9) 15.2 Quality Houses QH TB 2.2 0.7 10.2 9.0 0.8 0.8 8.1 9.1 (21.9) 14.2 Indonesia Pakuwon Jati PWON IJ 414 1.4 10.2 9.0 1.2 1.1 11.1 12.2 (28.3) 13.5 Bumi Serpong Damai BSDE IJ 745 1.1 9.4 8.3 0.5 0.4 5.0 5.7 (46.4) 14.4 Ciputra Development CTRA IJ 650 0.8 13.6 12.2 0.7 0.7 5.7 5.8 (22.9) 11.0 Summarecon Agung SMRA IJ 590 0.6 27.3 19.7 1.1 1.1 4.0 5.2 (39.5) 38.8 Singapore CapitaLand CAPL SP 2.8 10.3 14.3 12.2 0.6 0.6 5.6 6.7 (57.1) 16.6 Keppel. KEP SP 6.0 7.8 15.6 13.4 0.9 0.9 6.1 7.0 (1.0) 16.4 City Developments CIT SP 8.3 5.4 17.5 13.1 0.7 0.7 4.0 5.3 (21.7) 33.2 UOL Group UOL SP 6.8 4.1 18.5 14.2 0.6 0.5 2.9 3.7 (35.9) 30.5 Frasers Property FPL SP 1.2 2.6 10.2 10.3 0.5 0.5 5.3 5.1 (37.5) (0.8)

Vinhomes VHM VN 79,000 11.2 9.7 8.7 3.1 2.4 38.2 30.4 24.9 11.5 Local peer avg. 11.3 10.9 1.5 1.3 13.5 14.3 (7.0) 10.0 Local peer median 9.7 8.4 1.4 1.2 13.4 14.5 (12.1) 12.9 Regional peer avg. 14.5 12.3 1.0 0.9 7.6 8.4 (31.1) 18.3 Regional peer median 13.6 12.1 0.8 0.7 7.2 8.6 (24.2) 16.0 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 31 August 7, 2020 Vinhomes

IV. Company overview

Vietnam’s leading property developer

Vinhomes is the property development arm of Vingroup, Vietnam’s largest private sector company. The developer has been working to build a stable revenue model through business diversification, including expansion into mid-end residential housing development (previously having focused on the luxury/high-end segment) as well as office/industrial park leasing and development. In 2019, revenue broke down as follows: 93% from residential housing development/sales, 2% from leasing, and 5% from other sources.

Vinhomes was listed on the HOSE in May 2018. With a market cap of US$11.2bn, it is the third largest HOSE-listed stock. It is 69.66% owned by Vingroup and 5.78% by Singapore's sovereign wealth fund GIC.

Figure 17. Vinhomes: Revenue by business unit Figure 18. Vinhomes: Ownership structure

(VNDtr) 60 Property sales Leasing Other 2.73% 0.76% 5.65% 50 (Free float: 20.69%) 5.89% 40 Vingroup GIC 30 Viking Asia Holdings II P&S Trade and Investment 20 70.93% Korea Investment Management

0 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 19. ROA comparison: Vinhomes vs. local competitors Figure 20. ROE comparison: Vinhomes vs. local competitors

Vinhomes 12.3% Vinhomes 38.8%

Land & Houses 8.9% Land & Houses 19.1%

BSD 5.7% Ayala Land 15.7%

Ayala Land 5.4% Novaland 15.4%

Novaland 4.0% BSD 9.6%

Note: Based on the figures reported in IR materials Note: Based on the figures reported in IR materials Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 32 August 7, 2020 Vinhomes

Vinhomes (VHM VN)

Income statement (summarized) Balance sheet (summarized) (VNDbn) 2019 2020F 2021F 2022F (VNDbn) 2019 2020F 2021F 2022F Revenue 51,627 89,427 107,766 118,142 Current assets 144,555 158,251 182,705 184,159 Cost of sales -24,171 -51,867 -60,349 -66,160 Cash & cash equivalents 13,332 21,065 20,995 20,750 Gross profit 27,456 37,559 47,417 51,983 Current receivables 361 287 287 287 SG&A -4,237 -7,154 -8,621 -9,451 Completed properties for sale 47,468 51,965 59,995 60,473 Operating profit 23,219 30,405 38,796 42,531 Properties under development 65,297 71,483 82,529 83,186 EBIT 32,123 42,410 46,416 50,283 Non-current assets 52,686 89,016 102,771 103,589 EBITDA 32,475 42,797 46,842 50,751 Long-term receivables 8,115 10,173 11,745 11,839 Net finance income/(expenses) 6,497 9,308 5,091 5,468 Fixed assets 690 2,603 3,005 3,029 Share in P/L of associates & JV 0 0 0 0 Investment properties 6,627 6,958 8,033 8,097 Net other income/(expense) 30 0 0 0 Investments in associates/JV 13,268 30,961 36,202 36,513 Pretax profit 29,746 39,713 43,887 47,999 Other non-current assets 23,986 38,321 43,786 44,111 Income tax -5,427 -9,134 -8,777 -9,600 Total assets 197,241 247,267 285,476 287,749 Profit after tax 24,319 30,579 35,110 38,399 Minority interests 2,572 3,058 3,511 3,840 Current liabilities 121,557 124,098 137,882 114,708 Net profit 21,747 27,521 31,599 34,559 Contract liabilities 40,246 41,087 45,651 37,978 Trade and other payables 6,078 10,941 12,156 10,113 Growth/margins (%) ST bank & other borrowings 18,162 8,987 8,432 7,613 Revenue growth 33.5% 73.2% 20.5% 9.6% Other payables 57,070 63,082 71,643 59,004 Gross profit growth 172.9% 36.8% 26.2% 9.6% Non-current liabilities 10,969 24,262 23,475 21,594 Operating profit growth 204.8% 31.0% 27.6% 9.6% LT bank & other borrowings 8,343 20,970 19,674 17,763 Net profit growth 52.2% 26.6% 14.8% 9.4% Other liabilities 2,626 3,292 3,801 3,831 EPS growth 44.4% 28.7% 14.8% 9.4% Total liabilities 132,526 148,360 161,356 136,302 Gross margin 53.2% 42.0% 44.0% 44.0% Attributable to owners 56,096 89,167 111,898 136,534 OP margin 45.0% 34.0% 36.0% 36.0% Minority interests 8,619 9,739 12,222 14,913 Net margin 42.1% 30.8% 29.3% 29.3% Total equity 64,715 98,907 124,120 151,447

Cash flow statement (summarized) Forecasts/valuations (summarized) (VNDbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Profit before tax 29,746 39,713 43,887 47,999 P/E (x) 13.0 9.4 8.2 7.5 Depreciation & amortization 352 387 426 468 P/B (x) 5.1 2.9 2.3 1.9 Non-cash Items -6,936 -5,000 -5,000 -5,000 EV/EBITDA (x) 16.6 11.4 9.1 8.9 Changes in working capital 28,767 0 0 0 EPS (VND) 6,502 8,366 9,606 10,506 Cash from operating activities 51,928 35,100 39,313 43,467 BPS (VND) 16,771 27,107 34,017 41,506 Capital expenditures -3,847 -5,000 -5,000 -5,000 DPS (VND) 1,000 - 1,255 1,441 Others -23,473 -25,820 -28,402 -31,242 Payout ratio (%) 15.4% 0.0% 15.0% 15.0% Cash from investing activities -27,320 -30,820 -33,402 -36,242 Dividend yield (%) 1.3% 0.0% 1.6% 1.8% Dividends -3,687 0 -4,128 -4,740 ROAA 13.7% 12.4% 11.9% 12.1% Increase in equity -5,550 0 0 0 ROAE 43.1% 37.4% 31.5% 27.9% Increase in debt -5,555 3,452 -1,852 -2,730 Current ratio (x) 1.2 1.3 1.3 1.6 Cash from financing activities -14,792 3,452 -5,981 -7,469 Quick ratio (x) 0.7 0.7 0.7 0.9 Net change in cash 9,817 7,732 -70 -244 Interest coverage ratio 13.7 15.9 18.5 22.2 Beginning cash 3,515 13,332 21,065 20,995 Net debt/equity (net gearing ratio) 20.4% 9.0% 5.7% 3.1% Ending cash 13,332 21,065 20,995 20,750 Net debt/EBITDA (x) 0.4 0.2 0.1 0.1 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 33 [Vietnam] Property Developers

Vingroup Buy (VIC VN) (Initiate)

Now is an opportune time to buy TP: VND116,000 Upside: 32.0%

Mirae Asset Daewoo Co., Ltd. Yongdai Park [email protected] Tran Tuan Long [email protected]

Investment points Vinhomes: Major earnings contributor  Property development revenue to expand at a CAGR of 39% in 2020-22, driving top-line growth  Key points: 1) Handover in progress for large-scale, mid-priced residential development projects; 2) robust presales momentum likely to be sustained (annual target achievement: 57% by volume and 45% by value); and 3) new projects scheduled to break ground (Dream City, Vu Yen, etc.) Vincom Retail: Unrivaled mall operator  Property leasing revenue to grow at a CAGR of 14% in 2020-22; demand for shopping mall space to grow as the consumer market expands  A market leader operating 79 malls nationwide (vs. 14 malls run by Lotte Mart); planning to increase its mall count to 158 by 2026  Efforts to increase in-store traffic—renovation/repairs, promotional events, and tenant mix improvements—to eventually lead to increases in leasing net operating income (NOI) margin (70%) and mall occupancy (85%) rates Vinpearl: Worst appears to be over  Hospitality/entertainment revenue (Vinpearl) to expand at a CAGR of 8% in 2020-22; revenue to inevitably fall this year, but domestic travel demand growth to limit the extent of erosion; Jun. domestic tourists: +133% MoM (flat YoY)  Strong recovery expected in 2021, assuming the COVID-19 pandemic eases

Valuation and Initiate coverage with Buy rating and TP of VND116,000 (SOTP) recommendation  Stock catalysts: 1) residential presale boom; 2) sharp recovery in hospitality/entertainment and rental property businesses; and 3) robust vehicle sales  We believe Vingroup’s lofty valuations—68x 2020F P/E and 31x 2021F P/E—are justified given the firm’s dominance across several promising industries in a rapidly growing economy.

Risks  1) Low presale rates (Vinhomes projects); 2) stricter social distancing rules; and 3) deterioration in manufacturing businesses

Key data Current price (8/4/20, VND) 88,000 Market cap (VNDbn) 297,653.89 500 VIC VN VN index

400 Exchange HOSE Market cap (Wtr) 15.3 EPS growth (20F, %) -47.1 Shares outstanding (mn) 786.2 300 P/E (20F, x) 68.3 52-week low (VND) 68,000 200 Market P/E (20F, x) 15.1 52-week high (VND) 126,500 100 Dividend yield (%) 0.0 0 16.1 17.1 18.1 19.1 20.1

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -2.4 -23.1 -25.4 Net operating revenue (VNDbn) 89,350 121,894 130,036 142,374 187,327 239,530 Relative -0.1 -14.0 -12.3 OP (VNDbn) 11,551 11,471 10,625 4,572 19,682 33,934 OP margin (%) 12.9 9.4 8.2 3.2 10.5 14.2 NP (VNDbn) 4,462 3,824 7,546 4,144 9,091 13,921 EPS (VND) 1,501 1,286 2,433 1,288 2,825 4,326 ROE (%) 11.2 8.2 7.0 4.1 8.2 11.1 P/E (x) 42.6 74.1 47.3 68.3 31.1 20.3 P/B (x) 6.0 5.3 4.7 3.5 3.2 2.7 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 7, 2020 Vingroup

I. Investment thesis

1. Vinhomes: Major earnings contributor

Vinhomes is a key subsidiary of Vingroup that mainly engages in property development. In 2020-22, we expect property development revenue to expand at a CAGR of 39%, driving Vingroup’s top-line growth.

Figure 1. Vingroup: Property development revenue trend

(VNDtr) 300 Property sales (L) Total revenue (L) % of total (R) 100%

250 80%

200 60% 150 40% 100

20% 50

0 0% 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research

Table 1. Vinhomes: Major residential projects (end-2Q20)

Project name Vinhomes Ocean Park Vinhomes Smart City Vinhomes Grand Park Other Total NSA (mn m2) 3.5 2.6 3.2 4.1

Cumulative units sold/delivered/to be delivered (as of end-2Q20)

Unbilled presales (VNDtr) 25.6 16.2 44.2 7.0 Construction in progress 38% 32% 45% Source: Vinhomes, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 35 August 7, 2020 Vingroup

2) Robust presales momentum is likely to be sustained. Despite the COVID-19 outbreak, 2Q20 presales soared 26% YoY (+257% QoQ) based on volume and 47% YoY (+386% QoQ) based on value, aided by online channels. At present, annual target achievement stands at 57% by volume and 45% by value. Moreover, the company is stepping up efforts to increase bulk sales (in addition to retail sales), which generate quick cash flows. In 2Q, Vinhomes signed two bulk sale agreements (VND15tr in total).

3) The company has already secured a pipeline sufficient for the next 15 years. Two projects— Dream City and Vu Yen—are scheduled to break ground in 2021, and the Dai An project may also begin this year, as the land acquisition process (3mn m2) was completed in 2Q20. Furthermore, the Can Gio and Green Ha Long development projects may be launched in 2022, as significant progress has been made obtaining permits.

Figure 2. Vinhomes: Presales trend Figure 3. Vinhomes: Unbilled presales trend

(VNDtr) (VNDtr) 120 120

100 100

80 80

60 60

40 40

20 20

0 0 2016 2017 2018 2019 2020F 2021F 2022F 2016 2017 2018 2019 2020F 2021F 2022F

Source: Vinhomes, Mirae Asset Daewoo Research Source: Vinhomes, Mirae Asset Daewoo Research

Figure 4. Vinhomes: Dream City (Ocean Park 2) Figure 5. Vinhomes: Vu Yen (Hai Phong)

Source: Vinhomes, Mirae Asset Daewoo Research Source: Vinhomes, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 36 August 7, 2020 Vingroup

2. Vincom Retail: Unrivaled mall operator

For 2020-22, we forecast Vingroup’s property leasing revenue (mostly from malls) to grow at a CAGR of 14%. We expect revenue to decrease 5% YoY this year amid the COVID-19 pandemic, but surge 30% in 2021 and 20% in 2022.

In Vietnam, demand for shopping mall space is projected to grow as the consumer market expands. Given the country’s small per-capita retail area (compared to that of neighboring countries), we believe the retail market has ample room for growth. Vincom Retail, has already established a dominant position with 79 malls nationwide (vs. 14 malls run by Lotte Mart and six by Aeon). Given its plans to increase its mall count to at least 158 by 2026, top line should continue expanding.

Vincom Retail’s efforts to increase in-store traffic—via renovation/repairs, promotional events, and tenant mix improvements—should eventually lead to increases in the firm’s leasing NOI margin and mall occupancy rates.

Moreover, Vincom Retail has promptly and effectively responded to the COVID-19 outbreak, announcing a VND675bn relief package for its tenants. Its lease revenue declined as a result, but foot traffic has been recovering quickly amid easing social distancing rules (Mar. 28-Apr. 22) and store reopenings.

Figure 6. Vingroup: Lease revenue trend Figure 7. Modern retail underdeveloped in Vietnam

(VNDtr) (mn m2 NLA) (m2) 12 12 Current supply (L) 1.4 Supply per capita (R) 10 1.2 10 1.1 1.0 8 0.9 8 0.8 6 0.6 6 4 0.5 0.4 0.4 0.4 0.4 2 0.1 4 0.1 0.2 0 0.0 2

0 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 9. Vincom Retail: Avg. occupancy rate (malls) and Figure 8. Vincom Retail: Malls currently in operation leasing NOI margin

(% ) 95 Occupancy rate Leasing NOI margin

60 2016 2017 2018 2019 1H20

Source: Vincom Retail, Mirae Asset Daewoo Research Source: Vincom Retail, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 37 August 7, 2020 Vingroup

Table 2. Vincom Retail: Store reopenings and in-store traffic have increased as social distancing rules have been eased

Hanoi malls Ho Chi Minh City malls

Footfall as % of % of full Footfall as % of % of full operation pre-COVID-19 level operation pre-COVID-19 level Phase 1 Easing of social distancing rules Apr. 23–May 8 87% 60% 85% 45%

Phase 2 Entertainment business reopenings May 9–31 98% 85% 95% 65%

Phase 3 Comprehensive reopening Jun. 1–30 100% 95% 100% 75%

Source: Vincom Retail, Mirae Asset Daewoo Research

Figure 10. Vincom Retail: Tenant revenue by segment (compared to 2019)

Source: Vincom Retail, Mirae Asset Daewoo Research

3. Vinpearl: Worst appears to be over

For 2020-22, we expect revenue from Vingroup’s hospitality/entertainment arm (Vinpearl) to expand at a CAGR of 8%. We forecast revenue to plunge 30% YoY in 2020 due to COVID-19, but surge 50% in 2021 and 20% in 2022 amid the release of pent-up demand for travel.

Revenue tanked 65% YoY in 2Q20, as Vietnam closed its borders to foreign visitors (-7% in 1Q20). Starting in May, however, domestic travel increased as the coronavirus came under control, with the number of domestic tourists spiking 133% MoM (flat YoY) to 7mn in June.

Against this backdrop, Vinpearl plans to overcome the crisis by offering various package tours and promotional events. Monthly room sales and the number of visitors to VinWonders declined YoY in February-July, but have been recovering rapidly since May .

In 3Q-4Q20, we expect Vinpearl’s revenue to improve QoQ (with the recovery likely to accelerate if the pandemic eases). We think the company is well positioned to benefit strongly from a potential recovery in the country’s tourism industry.

Mirae Asset Daewoo Research 38 August 7, 2020 Vingroup

Figure 11. Vingroup: Hospitality/entertainment (Vinpearl) Figure 12. Local and inbound tourist traffic in Vietnam (2Q19 revenue trend vs. 2Q20)

(VNDtr) (mn) 12 Local International

10 4

21 4 0

2 10

0 2015 2016 2017 2018 2019 2020F 2021F 2022F 2Q19 2Q20

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 13. Robust recovery in domestic travel Figure 14. Vinpearl: COVID-19 response

(mn) 12 2019 2020

10 10 8.3 8 7.3 777 6.6 6.6

6 4.4 4 3

2 1.3

0 0 Jan. Feb. Mar. Apr. May Jun.

Source: Company materials, Mirae Asset Daewoo Research

Figure 15. Vinpearl: Recovery to be led by domestic travel demand

Source: Company materials, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 39 August 7, 2020 Vingroup

Figure 16. Vinpearl: Hotel room sales trend Figure 17. Vinpearl: Monthly hotel room sales trends

('000) ('000) 2,000 200 2019 2020 1,745

1,600 160

1,187 1,200 120

838 800 717 80

387 400 40

0 0 2017 2018 2019 1H19 1H20 Jan. Feb. Mar. Apr. May Jun. Jul.

Source: Company data, Mirae Asset Daewoo Research Note: As of Jul. 24, 2020 Source: Company data, Mirae Asset Daewoo Research

Figure 18. VinWonders: No. of visitors Figure 19. VinWonders: No. of monthly visitors

('000) ('000) 6,000 5,803 700 2019 2020

4,873 600 5,000

500 4,000 400 3,081 2,985 3,000 300 2,000 1,325 200

1,000 100

0 0 2017 2018 2019 1H19 1H20 Jan. Feb. Mar. Apr. May Jun. Jul.

Source: Company data, Mirae Asset Daewoo Research Note: As of Jul. 22, 2020 Source: Company data, Mirae Asset Daewoo Research

Figure 20. Vinpearl: 45 facilities (hotels, golf courses, and Figure 21. Vinpearl: Broad hotel portfolio (including five-star amusement parks) in 17 major tourist destinations hotels)

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 40 August 7, 2020 Vingroup

II. Earnings and forecasts

In 2020, we expect Vingroup’s net profit to decline 45% YoY, as: 1) losses at the hospitality/entertainment unit will likely widen amid a 30% fall in revenue; 2) the manufacturing unit, which is in the early stages of growth, should continue to record gross losses (despite YoY revenue growth of 70%) due to its market share-oriented strategy; and 3) other units, including leasing, are likely to see top-line contraction.

Although net financial income will likely surge 144% YoY—thanks to massive bulk sales related to mega-city projects and the disposal of shares in Crown X (created via the merger of VinCommerce and Masan Consumer Holdings)— we expect after-tax profit to decrease YoY to VND5.2tr due to a high effective tax rate (assumption: 70%).

In 2021, we expect net profit to soar 119% YoY, as: 1) earnings should start to recover in 2H20 after bottoming in 2Q20; and 2) most businesses will likely normalize next year. We expect property development and leasing revenue to grow 30% YoY each (with respective gross margins of 44% and 50%), while hospitality/entertainment and manufacturing revenue will likely grow 50% YoY each (with respective gross margins of -10% and -40%).

Figure 22. Vingroup: NP and YoY growth

(VNDtr) 16 NP (L) YoY (R) 200%

14 150% 12 100% 10

8 50%

6 0% 4 -50% 2

0 -100% 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research

Figure 23. Vingroup: Property development revenue, YoY Figure 24. Vingroup: Leasing revenue, YoY growth, and gross growth, and gross margin margin

(VNDtr) (VNDtr) 200 Property sales (L) 100% 12 Leasing (L) 100% YoY (R) YoY (R) Gross margin (R) 80% Gross margin (R) 80% 160 9 60% 60%

120 40% 40% 6 20% 20% 80

0% 0% 3 40 -20% -20%

0 -40% 0 -40% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 41 August 7, 2020 Vingroup

Figure 25. Vingroup: Hospitality/entertainment revenue, YoY Figure 26. Vingroup: Manufacturing revenue, YoY growth, and growth, and gross margin gross margin

(VNDtr) (VNDtr) 12 Hospitality/entertainment (L) 100% 35 Manufacturing (L) 100% YoY (R) YoY (R) 80% 75% Gross margin (R) 30 Gross margin (R) 60% 9 50% 40% 25 25% 20% 20 6 0% 0% 15 -20% -25% -40% 10 3 -50% -60% 5 -80% -75% 0 -100% 0 -100% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

While manufacturing losses are likely to continue, we are not overly concerned due to the following:

1) During 2020-22, we expect manufacturing revenue to grow at a CAGR of 49%. In particular, VinFast (auto) and VinSmart (smartphone) are faring well. In 1H20, 9,900 cars and 21,400 electric scooters were delivered to consumers. During the May-July period, VinFast’s Fadil (hatchback), Lux A2.0 (luxury sedan), and Lux SA2.0 (SUV) became the best-selling models in their respective segments, and VinSmart sold 867,000 smartphones, ranking third in market share.

2) The flagship property development business will likely continue to deliver robust growth. During 2020-22, we expect revenue to grow 39% CAGR and gross margin to hover above 40%, offsetting manufacturing losses.

3) We believe manufacturing capex will continue as long as group financials remain healthy. Vingroup’s leverage and interest coverage ratios have deteriorated since its advance into the manufacturing business, but only to a modest degree. .

Figure 27. Vingroup: Leverage trend Figure 28. Vingroup: EBITDA-to-interest coverage ratio

(x) (x) 5.0 Total debt/EBITDA Net debt/EBITDA 8.0

6.5 4.0 3.8 3.5 6.0 5.7 3.3 5.0 2.9 3.0 3.0 2.7 2.4 3.8 4.0 2.0 2.0

2.0 1.0

0.0 0.0 2017 2018 2019 1H20 2017 2018 2019 1H20

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 42 August 7, 2020 Vingroup

Table 3. Annual earnings forecasts and assumptions (VNDbn) 2017 2018 2019 2020F 2021F 2022F Net revenue 89,350 121,894 130,036 142,374 187,327 239,530 Property sales 62,482 83,272 64,505 103,208 134,170 174,421 Leasing 4,410 5,559 6,792 6,452 8,388 10,065 Retail 13,053 19,326 29,702 0 0 0 Hospitality/entertainment 5,455 7,366 8,549 5,984 8,976 10,772 Healthcare/related 1,852 2,631 3,025 2,723 3,267 3,921 Education/related 1,013 1,450 2,063 1,857 2,228 2,674 Manufacturing 0 556 9,201 15,642 23,463 30,501 Other 1,086 1,735 6,199 6,509 6,834 7,176 Cost of revenue (62,796) (92,944) (92,485) (109,327) (133,926) (164,876) Gross profit 26,554 28,951 37,551 33,047 53,401 74,654 SG&A (15,003) (17,480) (26,926) (28,475) (33,719) (40,720) OP 11,551 11,471 10,625 4,572 19,682 33,934 Net financial income/expenses (2,150) 2,570 5,820 14,217 3,345 1,168 Share in profits/losses of joint ventures/associates 44 (425) (688) (300) (300) (300) Net other income/expenses (331) 285 (119) (1,220) 0 0 Pretax profit 9,114 13,901 15,637 17,268 22,727 34,802 Tax (3,459) (7,663) (7,921) (12,088) (11,363) (17,401) After-tax profit 5,655 6,238 7,717 5,181 11,363 17,401 Minority interests 1,193 2,414 171 1,036 2,273 3,480 NP 4,462 3,824 7,546 4,144 9,091 13,921

YoY growth Revenue 55.1% 36.4% 6.7% 9.5% 31.6% 27.9% Property sales 67.5% 33.3% -22.5% 60.0% 30.0% 30.0% Leasing 32.7% 26.1% 22.2% -5.0% 30.0% 20.0% Retail 41.1% 48.1% 53.7% Hospitality/entertainment 28.2% 35.0% 16.1% -30.0% 50.0% 20.0% Healthcare/related 69.5% 42.0% 15.0% -10.0% 20.0% 20.0% Education/related 42.1% 43.2% 42.3% -10.0% 20.0% 20.0% Manufacturing 1553.5% 70.0% 50.0% 30.0% Other -35.7% 59.8% 257.3% 5.0% 5.0% 5.0% Gross profit 52.3% 9.0% 29.7% -12.0% 61.6% 39.8% OP 119.0% -0.7% -7.4% -57.0% 330.5% 72.4% Pretax profit 35.3% 52.5% 12.5% 10.4% 31.6% 53.1% NP 31.8% -14.3% 97.3% -45.1% 119.3% 53.1%

Gross margin 29.7% 23.8% 28.9% 23.2% 28.5% 31.2% Property sales 38.3% 30.2% 53.5% 44.0% 44.0% 43.0% Leasing 52.4% 51.1% 53.8% 45.0% 50.0% 50.0% Retail 6.4% 10.6% 14.1% Hospitality/entertainment -23.8% -16.7% -4.2% -90.0% -10.0% 0.0% Healthcare/related 5.8% -2.6% 2.0% -20.0% 3.0% 5.0% Education/related 20.2% 5.6% 14.9% -10.0% 5.0% 10.0% Manufacturing -44.1% -54.8% -60.0% -40.0% -20.0% Other 28.0% 21.7% 3.6% 3.6% 3.6% 3.6% SG&A/revenue 16.8% 14.3% 20.7% 20.0% 18.0% 17.0% OP margin 12.9% 9.4% 8.2% 3.2% 10.5% 14.2% Tax rate 38.0% 55.1% 50.7% 70.0% 50.0% 50.0% Net margin 5.0% 3.1% 5.8% 2.9% 4.9% 5.8% Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 43 August 7, 2020 Vingroup

III. Valuation

We initiate our coverage on Vingroup with a Buy rating and target price of VND116,000 (32% upside). Looking ahead, we expect shares to be driven by: 1) the continued success of Vinhomes’ large-scale, mid-priced residential projects; 2) a rapid recovery in the hospitality/entertainment business; and 3) robust vehicle sales.

The stock is currently trading at a 2020F P/E of 68x and a 2021F P/E of 31x. On a 12-month forward basis, it is trading at a P/E of 40x, similar to the five-year average P/E. (Although the stock advanced to a P/E of 90x in 2019, it has corrected sharply amid the COVID-19 pandemic.) We believe that Vingroup deserves a high valuation given its dominance across several promising industries in a rapidly growing economy.

For our valuation, we used a SOTP methodology.

1) Residential business (Vinhomes): We applied a P/E of 12.5x (vs. ASEAN property developers’ average P/E of 13.3x)—a 30% discount to Ayala Land’s (ALI PM) 2020-21F average P/E of 17.8x (Ayala Land is the largest property developer in the Philippines).

2) Retail leasing business (Vincom Retail): Our valuation is based on the market cap of Vincom Retail (as of Aug. 4). 3) Consumer retail business: As of end-2Q20, Vingroup owns a 15% stake in Crown X (privately held), which was formed via a merger between VinCommerce and Masan Consumer (MCH VN), a consumer goods subsidiary of Masan Group (MSN VN). Our valuation is based on the market cap of Masan Consumer (taking a conservative approach).

4) Industrial (VinFast), hospitality/entertainment (Vinpearl), and healthcare/education businesses: Our valuation is based on end-2Q20 book value.

Table 4. Vingroup: SOTP valuation (VNDbn) Business Methodology Total value Stake (%) Value % of total NAV Residential (Vinhomes) P/E 369,500 73.66% 272,173 66% Retail leasing (Vincom Retail) Market value 59,876 60.33% 36,123 9% Industrial (VinFast) Book value 90,055 51.50% 46,378 11% Hospitality/entertainment (Vinpearl) Book value 38,757 100.00% 38,757 9% Healthcare/education Book value 14,136 100.00% 14,136 3% Consumer retail (Crown X) Market value 51,741 15.00% 7,761 2%

Total NAV 415,330 Group-level net debt/cash (24,560) NAV 390,769

No. of shares 3,382 Target price (VND) 115,529 Source: Bloomberg, company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 44 August 7, 2020 Vingroup

Figure 29. Vingroup: 12-month forward P/E band chart Figure 30. Vingroup: 12-month forward P/B band chart

(VND) 75x (VND) 150,000 150,000

60x 5x

120,000 120,000

45x 4x 90,000 90,000 3x 30x 60,000 60,000 2x

15x 30,000 30,000 1x

0 0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 31. Vingroup: 12-month forward P/E ±2 SD Figure 32. Vingroup: 12-month forward P/B ±2 SD

(x ) (x ) 90 6.0

+2 SD 75 +2 SD 5.0 +1 SD 60 +1 SD

45 4.0 5Y av g. 5Y av g.

30 -1 SD 3.0 -1 SD 15 -2 SD -2 SD 0 2.0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 45 August 7, 2020 Vingroup

IV. Company overview

Vingroup, Vietnam’s largest listed company, traces its roots to Technocom, a food processing company founded by Pham Nhat Vuong in Ukraine in 1993. After starting its property development business in Vietnam in 2000, the firm launched a variety of leading brands, including Vinpearl (hospitality/entertainment; 2001), Vincom (shopping malls; 2002), and Vinhomes (residential property; 2008). In 2012, the firm expanded into consumer-facing businesses such as healthcare, education, and retail; in particular, the retail business (e.g., supermarkets, convenience stores, and online stores) grew rapidly via M&As. Since 2016, Vingroup has been advancing into high value-added areas such as autos (VinFast) and smartphones (VinSmart). As part of its strategy to promote the manufacturing business, the firm sold its retail unit to Masan Group in 2019.

In 2019, revenue broke down as follows: 1) 50% from property development; 2) 23% from retail; 3) 7% from hospitality/entertainment; 4) 7% from manufacturing; 5) 5% from leasing; and 6) 8% from other sources. From 2020, retail earnings are no longer consolidated into Vingroup’s financial statements.

Vingroup was listed on the HOSE in May 2007. With a market cap of US$12.7bn, the firm accounts for roughly 10% of the total value of the HOSE. The company is 67% owned by its founder and related parties.

Figure 33. Vingroup: Revenue breakdown by business Figure 34. Vingroup: Corporate structure

(VNDtr) Property sales Retail

150 Hospitality/entertainment Manufacturing Leasing Healthcare/related Education/related Other 120

0 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 35. Vingroup: Constant changes are ongoing to Figure 36. Vingroup: Ownership structure support sustainable growth ❶ ❷ ❸

(% ) (Free float: 27.39% )

27.45 33.12

2.98

25.90 4.47 6.08

Vietnam Investment Group Pham Nhat Vuong SK Investment Vina II Pham Thu Huong

Pham Thuy Hang Other

Source: Company materials, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 46 August 7, 2020 Vingroup

Vingroup (VIC VN)

Income statement (summarized) Balance sheet (summarized) (VNDbn) 2019 2020F 2021F 2022F (VNDbn) 2019 2020F 2021F 2022F Revenue 130,036 142,374 187,327 239,530 Current assets 197,393 204,821 222,120 246,223 Cost of sales -92,485 -109,327 -133,926 -164,876 Cash & cash equivalents 18,447 29,774 29,396 55,733 Gross profit 37,551 33,047 53,401 74,654 ST investments 11,173 11,593 12,572 13,937 SG&A -26,926 -28,475 -33,719 -40,720 Current receivables 63,872 66,275 71,873 79,672 Operating profit 10,625 4,572 19,682 33,934 Inventories 83,809 86,963 94,307 104,541 EBIT 22,096 25,651 32,111 46,500 Non-current assets 206,348 214,113 232,197 257,393 EBITDA 30,434 35,657 44,117 59,707 Long-term receivables 1,464 1,520 1,648 1,827 Net financial income/(expenses) 5,820 14,217 3,345 1,168 Fixed assets 108,269 112,343 121,832 135,052 Share in P/L of associates & JVs -688 -300 -300 -300 Investment properties 33,872 35,147 38,115 42,251 Net other income/(expenses) -119 -1,220 0 0 Investments in associates/JVs 10,734 11,138 12,078 13,389 Pretax profit 15,637 17,268 22,727 34,802 Other non-current assets 52,009 53,966 58,524 64,874 Income tax -7,921 -12,088 -11,363 -17,401 Total assets 403,741 418,934 454,317 503,616 Profit after tax 7,717 5,181 11,363 17,401 Minority interest 171 1,036 2,273 3,480 Current liabilities 181,293 169,758 175,638 172,161 Net profit 7,546 4,144 9,091 13,921 Contract liabilities 51,470 53,407 57,918 64,203 Trade and other payables 17,564 18,225 19,764 21,909 Growth/margins (%) ST bank & other borrowings 32,996 38,937 43,588 54,333 Revenue growth 6.7% 9.5% 31.6% 27.9% Other payables 79,264 59,189 54,368 31,716 Gross profit growth 29.7% -12.0% 61.6% 39.8% Non-current liabilities 101,859 118,260 132,125 163,583 Operating profit growth -7.4% -57.0% 330.5% 72.4% LT bank & other borrowings 94,690 110,820 124,058 154,641 Net profit growth 97.3% -45.1% 119.3% 53.1% Other liabilities 7,169 7,439 8,067 8,943 EPS growth 89.2% -47.1% 119.3% 53.1% Total liabilities 283,152 288,017 307,763 335,744 Gross margin 28.9% 23.2% 28.5% 31.2% Attributable to owners 76,417 80,562 89,653 103,574 OP margin 8.2% 3.2% 10.5% 14.2% Minority interests 44,171 50,355 56,901 64,298 Net margin 5.8% 2.9% 4.9% 5.8% Total equity 120,589 130,917 146,554 167,872

Cash flow statement (summarized) Forecasts/valuations (summarized) (VNDbn) 2019 2020F 2021F 2022F 2019 2020F 2021F 2022F Profit before tax 15,637 17,268 22,727 34,802 P/E (x) 47.3 68.3 31.1 20.3 Depreciation & amortization 8,338 10,005 12,006 13,207 P/B (x) 4.7 3.5 3.2 2.7 Non-cash Items -2,693 -10,000 -3,000 -3,000 EV/EBITDA (x) 17.4 13.1 11.1 8.6 Changes in working capital -5,315 -15,000 -30,000 -30,000 EPS (VND) 2,433 1,288 2,825 4,326 Cash from operating activities 15,967 2,274 1,733 15,009 BPS (VND) 24,641 25,036 27,861 32,188 Capital expenditures -55,176 -35,000 -40,000 -50,000 DPS (VND) - - - - Others -4,691 20,000 20,000 20,000 Payout ratio (%) - - - - Cash from investing activities -59,866 -15,000 -20,000 -30,000 Dividend yield (%) - - - - Dividends -2,189 0 0 0 ROAA 2.2% 1.0% 2.1% 2.9% Increase in equity 13,453 1,982 0 0 ROAE 7.0% 4.1% 8.2% 11.1% Increase in debt 37,525 22,072 17,889 41,328 Current ratio (x) 1.1 1.2 1.3 1.4 Cash from financing activities 48,789 24,054 17,889 41,328 Quick ratio (x) 0.6 0.7 0.7 0.8 Net change in cash 4,890 11,328 -378 26,337 Interest coverage ratio 4.3 4.3 4.7 5.1 Beginning cash 13,557 18,447 29,774 29,396 Net debt/equity (net gearing ratio) 90.6% 91.6% 94.3% 91.3% Ending cash 18,447 29,774 29,396 55,733 Net debt/EBITDA (x) 3.2 3.0 2.8 2.3 Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 47 August 7, 2020 Asian Property Developers

IV. China, still the land of opportunity

We believe that now is an opportune time to invest in the Chinese housing sector. Despite the increased short-term uncertainty arising from COVID-19, we believe the country’s residential property market will continue to display stable growth over the long term under the government’s watchful eye. And with China seeking to strike a balance between regulatory discipline and growth, we believe downside risk is limited.

Despite relatively unfavorable market conditions, mid/large-sized developers have fared well. In fact, it appears that many competitive players have sufficient unbooked revenue and accumulated land reserves to sustain top-line growth over the next two to three years. As market consolidation continues, leading developers have gained market share, and we believe that they will continue to enjoy top-line growth. In addition, expanding non-core businesses (investment properties, property management, etc.) help generate stable revenue streams.

We recommend the Global X MSCI China Real Estate ETF (CHIR US), which allows investors to capitalize on: 1) steady growth in the Chinese residential market; 2) potential improvements in the fundamentals of mid/large-sized property developers; and 3) high dividend yields (around 4%). Among individual stocks, we recommend Sunac (1918 HK/Buy/TP HK$47.63), CR Land (1109 HK/Buy/TP: HK$40.88), and Vanke (2202 HK/Buy/TP: HK$31.34).

China’s residential property market has enjoyed a long-term boom

Over the past two decades, China’s residential property market has grown rapidly, as housing demand from the expanding middle class has surged amid rising urbanization and rapid economic development. Investment-driven demand has also been solid, as other options, including bank deposits and stocks, have yielded far lower returns than residential properties.

In 2000-19, the sales value of residential properties steadily climbed (except for in 2008 and 2014), with CAGR coming in at 12% for 2017-19. Although sales volume (in m2) recently softened to single-digit growth, the average sales price rose by around 10% in 2019, driving overall sales value growth.

In 1H20, however, sales value shrank 3% YoY amid the COVID-19 pandemic despite a 5% price increase, hurt by an 8% fall in volume arising from a presale suspension.

Figure 31. China residential property: Sales value

(CNYbn) 16,000 Sales value (L) YoY (R) 100% 81% 80% 12,000 58% 60% 48% 41% 8,000 34% 36% 40% 27% 32% 25% 23% 15% 15% 20% 17% 4,000 19% 11% 11% 9% 10% 0% -8% -3% -17% 0 -20%

Source: CEIC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 48 August 7, 2020 Asian Property Developers

Figure 32. China residential property: Avg. sales price

(CNY/m2) 12,000 ASP (L) YoY (R) 30% 25% 10,000 25%

19% 20% 8,000 17% 15% 13% 12% 6,000 11% 9% 9% 9% 8% 10% 4,000 5% 6% 4% 4% 5% 6% 6% 5% 6% 5% 2,000 1% 0% -2% 0 -5%

Source: CEIC, Mirae Asset Daewoo Research

Figure 33. China residential property: Sales volume

(mn m2) 1,600 Sales volume (L) YoY (R) 45% 50%

40% 33% 1,200 27% 26% 27% 30% 25% 22% 18% 20% 20% 800 19% 8% 10% 12% 3% 7% 5% 2% 1% 0% 400 2% -10% -8% -15% -9% 0 -20%

Source: CEIC, Mirae Asset Daewoo Research

Market is stabilizing

Over the next three years, we expect China’s residential property market to see low single- digit growth in sales value (2-3%) amid rising prices, despite a modest decline in sales volume.

We believe sales volume will stabilize at lower levels, given that the Chinese government has tightened its regulatory stance since end-2016. Although the central government has recently given local governments more leeway to ease property market restrictions, we view this as a measure to prevent market shocks, rather than a departure from Xi Jinping’s anti-speculation stance. Therefore, we do not expect to see a strong rally (as seen in 2013 or 2016) in the near future.

In addition, we see only modest room for large-scale development projects in light of limited land supply in major cities. Progress in shantytown redevelopment projects is losing steam due to deteriorating financial conditions. With the urbanization rate standing at around 60% and population growth slowing sharply, housing demand will likely soften at a modest rate unless a redevelopment project boom emerges.

Mirae Asset Daewoo Research 49 August 7, 2020 Asian Property Developers

We forecast average housing price growth to remain in the 5% range. Since 2000, there have been only five periods of negative housing price growth; these slumps were driven by either financial crises (2002-03, 2008-09) or soft demand caused by tight government regulations (2012, 2014-15, 2017).

We note that the COVID-19 outbreak has been less devastating for the Chinese economy than previous financial crises. In addition, with regard to property market oversight, the government has been seeking a greater balance between regulations and growth; this suggests that we are unlikely to see spiking market volatility driven by drastic policy shifts going forward. We also believe there is little possibility of further deterioration in consumer sentiment and significant increases in household loan defaults.

Against this backdrop, average housing price growth has begun to recover following the lifting of lockdown measures; after falling to 3% in April (from 7% in January), growth recovered to 5% in June.

Figure 34. Avg. YoY housing price growth trend

25%

20%

15%

10%

0% ⑤ -5% ② ④ ① Global Asian -10% financial crisis financial crisis ③ -15%

Source: CEIC, Mirae Asset Daewoo Research

Figure 35. Avg. price growth for new homes

40% Tier 1 Tier 2 Tier 3

30%

20%

10%

-10% 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020

Source: CEIC, Mirae Asset Daewoo Research

Table 9. China housing market overview 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Total sales (CNYbn) 4,412 4,820 5,347 6,769 6,241 7,277 9,906 11,024 12,637 13,944 14,223 14,507 14,943 YoY (%) 14.8 9.2 10.9 26.6 -7.8 16.6 36.1 11.3 14.6 10.3 2.0 2.0 3.0 Sales volume (mn m2) 934 965 985 1,157 1,052 1,124 1,375 1,448 1,478 1,501 1,456 1,413 1,384 YoY (%) 8.3 3.4 2.0 17.5 -9.1 6.9 22.4 5.3 2.1 1.5 -3.0 -3.0 -2.0 ASP (CNY/m2) 4,725 4,993 5,430 5,850 5,933 6,472 7,203 7,614 8,553 9,287 9,751 10,239 10,751 YoY (%) 6.0 5.7 8.7 7.7 1.4 9.1 11.3 5.7 12.3 8.6 5.0 5.0 5.0 Source: CEIC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 50 August 7, 2020 Asian Property Developers

Chinese housing market: Likelihood of hard landing is low

Property market conditions have a significant impact on China’s real economy, as real estate accounts for nearly 75% of total household assets. Indeed, any potential property slowdown could give rise to a negative wealth effect, leading to a decline in overall consumption. For reference, mortgage loans represent 76% of total household loans.

As nearly 40% of China’s total debt is directly or indirectly tied to the property market, any prolonged housing market slump has the potential to trigger a broader financial crisis. In addition, if land sales revenue—which makes up over 50% of provincial governments’ fiscal budgets—declines, overall investments could shrink. With this in mind, we believe that housing market stabilization will be necessary to ensure continued growth for the Chinese economy.

Although the Chinese government declared that it would not lean directly on real estate policies to boost the economy, we believe that it remains willing to take measures to help stabilize the market in the event of an emergency (e.g., COVID-19). As such, we believe a hard landing remains unlikely for China’s property market.

Short-term uncertainties linger

We expect China’s housing market to remain steady over the longer term; however, market uncertainties are likely to linger in the near term.

We do not foresee any major changes to the overall regulatory environment in 3Q20. The physical property market has shown signs of a recovery, as: 1) major developers’ contracted sales returned to positive growth from May; and 2) land sales revenue has also remained robust, in line with the government’s full-year target. Nevertheless, if the market suffers a correction in 3Q20, we expect to see more policy easing in 4Q20.

Although overall credit conditions have been improving, we believe that the government’s easing policy has thus far been aimed at limiting downside risks to the physical property market rather than creating upside, given the following:

1) Since late 2019, the central bank has cut the five-year loan prime rate (LPR; pricing index for mortgages) less aggressively than the one-year LPR (-20bps vs. -40bps). 2) First- and second-home mortgage rates have fallen 20bps and 21bps, respectively, from the late-2019 levels. 3) While the approval time for onshore/offshore bond issuance has been shortened (one month  two weeks), this applies only to the refinancing of existing loans.

For 2020, we expect new home supply to be further concentrated in 2H (vs. 1H), due to COVID- 19. Given that previous cases of oversupply (i.e., 1H/2H inventory imbalance) have prompted significant price cuts by developers, we think modest price cuts are likely in 2H20.

We believe the recovery in home sell-through will be only modest in 2H20, in light of the prospects for oversupply and absence of demand-side deregulation. Since the peak of the COVID-19 outbreak, the sell-through rate in China’s top 10 cities has already recovered to 65%—but this figure is still lower than normal levels.

Mirae Asset Daewoo Research 51 August 7, 2020 Asian Property Developers

Market consolidation led by mid/large-sized developers

In our view, concerns over housing market fundamentals are overblown given that: 1) the residential segment is cyclical in nature; and 2) the market environment can change at any time depending on policy shifts. Moreover, large developers have historically weathered periods of sluggishness relatively well, and their combined annual sales growth has consistently outpaced China’s residential sales growth

The relative outperformance of large developers is attributable to their: 1) ability to secure funding (for land acquisitions); 2) significant saleable resources; 3) accumulated know-how; and 4) diverse residential portfolios.

The top five developers are unlikely to grow as rapidly as in the past given their already broad presence nationwide, but we think mid-sized players will be able to achieve top-line growth by advancing into new cities. Meanwhile, small companies with questionable financial health and shallow pockets may have difficulty staying solvent, especially during times of uncertainty. Accordingly, we expect mid/large-sized developers to drive market consolidation going forward.

Figure 36. YoY residential sales growth: Major developers vs. nationwide

(% ) 50 Nationwide residential sales growth Major developers' contracted sales growth 40

-10 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019

Source: NBS, companies, Mirae Asset Daewoo Research

Figure 37. M/S of top 50 developers

(% ) 70 1-5 6-10 11-20 21-50 61 60

50 19 18 40 13 32 12 11 30 10 8 9 8 21 9 7 7 9 20 7 6 6 7 6 5 5 6 4 66 4 5 10 4 17 18 20 11 11 13 7 8 9 0 2011 2012 2013 2014 2015 2016 2017 2018 2019

Note: 2019 data are based on Jan.-Nov. Source: CRIC, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 52 August 7, 2020 Asian Property Developers

Additional growth through revenue diversification

Chinese property developers are increasingly diversifying their business portfolios by advancing into areas such as investment properties, property management, and hotels. We believe this trend is positive, as these businesses can enhance earnings stability by generating recurring revenue streams. While the revenue contribution of non-development operations remains small for most players, it has been showing steady YoY growth.

Figure 38. Revenue contribution of non-development businesses by company (2019)

(%) Total revenue (R) (CNYbn) 20 Non-development revenue (R) 600 Non-development revenue contribution (L) 500 16 14 400 12 12 300 8 7 7 200 6 4 4 3 3 100 2 2 0 0 CRL GZ R&F Longfor Agile Sunac Vanke Evergrande COLI Country Shimao Garden

Source: Company data, Mirae Asset Daewoo Research

In particular, developers are acquiring commercial properties such as shopping malls and offices that can contribute to cash flow improvements and balance sheet health by generating steady lease income. In addition, developers may benefit from price appreciation (which translates into higher corporate value and/or disposal proceeds). Amid the slowdown in housing market growth, we believe developers with meaningful exposure to lease income warrant a valuation premium.

CR Land and Longfor are taking the lead in this area. Looking ahead, we expect these firms to benefit from secular growth in China’s shopping mall market. And notably, we believe that they are relatively shielded from growing e-commerce penetration thanks to their positioning in the luxury/high-end market, which mainly attracts consumers that value the overall shopping experience rather than pure convenience.

Figure 39. CR Land and Longfor: YoY investment property Figure 40. CR Land: MixC Shenzhen Bay (luxury shopping revenue growth mall)

CR Land investment property revenue (L) (CNYbn) Longfor investment proprerty revenue (L) CR Land YoY growth (R) 12 70% Longfor YoY growth (R)

10 60%

50% 8 40% 6 30% 4 20%

2 10%

0 0% 2012 2013 2014 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Architecture.com, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 53 August 7, 2020 Asian Property Developers

In recent years, some spin-offs/listings of property management units have garnered lofty valuations (20-30x P/E in 2017-19) thanks to expectations for business stability and robust growth potential. In addition, parent stocks received boosts around the time of listing. In light of this, expectations on property management services are mounting.

We advise investors to closely monitor Sunac, CR Land, Shimao, and Jinmao, as they have plans to spin off and list their own property management units. These IPOs could potentially help enhance financial health and send share prices higher. Meanwhile, Vanke, the market leader in property management (in terms of revenue), has no plans to list its property management subsidiary.

Table 10. Listed property management businesses P/E (x) Revenue (CNYbn) YoY (%) Developer Property management subsidiary Listing date 2017 2018 2019 2017 2018 2019 2017 2018 2019 Country Garden CG Services (6098 HK) 6/19/18 29.6 37.4 3.1 4.7 9.6 32.4 49.8 106.3 Agile A-Living Services (3319 HK) 2/9/18 15.0 26.1 1.8 3.4 5.1 41.5 91.8 51.8 Poly Real Estate Poly Property Services (6049 HK) 12/20/19 34.5 3.2 4.2 6.0 26.4 30.5 41.1 Greentown Greentown Service (2869 HK) 7/12/16 36.4 31.0 44.8 5.1 6.7 8.6 38.1 30.5 27.9 COLI China Overseas Property (2669 HK) 10/23/15 22.7 18.7 30.0 2.8 3.7 4.9 -5.3 31.2 33.2 CIFI Ever Sunshine Lifestyle Services (1995 HK) 12/17/18 17.7 32.4 0.7 1.1 1.9 51.1 48.3 74.5 Future Land S-Enjoy Service (1755 HK) 11/6/18 14.1 32.0 0.9 1.2 2.0 51.1 35.4 72.5 Avg. 29.6 21.0 33.9 33.6 45.4 58.2 Source: Bloomberg, Mirae Asset Daewoo Research

Table 11. Valuations of Chinese property management companies Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CG Services 6098 HK 48.0 17.1 51.8 38.0 16.1 12.0 34.0 35.1 32.8 36.4 0.5 0.6 A-Living Services 3319 HK 45.9 7.9 31.9 24.4 7.5 6.4 25.1 27.7 40.8 30.6 1.3 1.6 Poly Property Services 6049 HK 84.9 6.1 57.4 41.9 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Greentown Service 2869 HK 10.7 4.4 44.4 34.3 6.6 5.8 16.5 17.7 27.1 29.6 0.9 1.2 China Overseas Property 2669 HK 8.2 3.5 39.0 30.3 13.2 10.0 36.7 35.2 28.4 28.6 0.8 1.0 Ever Sunshine Lifestyle Services 1995 HK 15.6 3.4 59.8 38.9 11.7 9.7 22.4 27.0 61.2 53.6 0.6 0.9 S-Enjoy Service 1755 HK 24.9 2.6 43.4 29.3 15.2 11.4 37.0 41.9 51.5 48.0 1.2 1.8 Avg. 46.8 33.9 11.1 8.8 26.4 28.6 35.9 37.7 0.8 1.1 Note: Based on Aug. 4 closing prices Source: Bloomberg, Mirae Asset Daewoo Research

Figure 41. Top 10 property management service providers in Figure 42. Vanke: YoY property management revenue growth China (2019) (CNYbn) 1 6 30 Property management revenue (L) 100% Vanke Service Evergrande Jinbi Property YoY growth (R) 25 2 7 80% 78% Greentown Service A-Living Services 20

3 8 15 60%

CG Services Gemdale Property Management 49% 10 45% 40% 4 9 36%

5 30% 30% 30% Poly Property Services Longfor Smart Service 31% 30%

0 20% 5 10 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Changcheng Property Jinke Property Service Source: CREIS, Mirae Asset Daewoo Research Source: Vanke, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 54 August 7, 2020 Asian Property Developers

Urban redevelopment projects to help prop up margins

Urban redevelopment projects are taking on increasing importance for many property developers, due to the high population density of major Chinese cities and restrictions on prime land supply. Redevelopment projects also provide a good opportunity to buy land at low prices (compared to open bidding), allowing developers to prop up narrowing margins to some extent.

Companies generating a meaningful share of revenue from redevelopment projects include CR Land, Guangzhou R&F, Logan, and KWG. As they own large swaths of land in the rapidly growing Greater Bay Area (GBA), these firms will likely enjoy accelerating growth going forward.

Figure 43. GBA: Economic zone connecting nine major cities in Figure 44. GBA boasts the largest population and strongest

Guangdong to Hong Kong and Macau GDP growth in China

Source: South China Morning Post, Fung Business Intelligence, Pharma Boardroom, Source: CGTN, Pharma Boardroom, Mirae Asset Daewoo Research Mirae Asset Daewoo Research

Figure 45. CR Land: Urban redevelopment project pipeline

Source: Company materials, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 55 August 7, 2020 Asian Property Developers

Global X MSCI China Real Estate ETF

We recommend the Global X MSCI China Real Estate ETF (CHIR US), as it provides exposure to: 1) the steady growth of the Chinese real estate market; 2) potential improvements in the fundamentals of medium/large-sized property developers; and 3) dividend income.

The fund comprises 50 property developers (92.3%), comprehensive real estate firms (5.83%), and property management service providers (1.88%) included in the MSCI China Index.

Its benchmark, the MSCI China Real Estate 10/50 Index, utilizes a 10/50 concentration constraint whereby 1) the weight of each entity is capped at 10% of the index and 2) the cumulative weight of all entities with a weight in excess of 5% does not exceed 50%. The index undergoes rebalancing on a quarterly basis.

Global X MSCI China Real Estate ETF has smaller upside than ETFs that track high-growth sectors such as biotech and cloud computing, but it provides stable dividend income. In 2019, the fund paid dividends on two occasions (US$0.69 per share), with a yield of 4.3%.

Figure 46. Relative performance of Global X MSCI China Real Estate ETF vs. HSI (since inception)

(12/11/18=100) 140 CHIR HSI

130

120

110

100

80 12/18 3/19 6/19 9/19 12/19 3/20 6/20

Source: Bloomberg, Mirae Asset Daewoo Research

Figure 47. Global X MSCI China Real Estate ETF: Top 10 Figure 48. Global X MSCI China Real Estate ETF: Top 30 constituents (in terms of NAV) represent 62% of the fund constituents are highly likely to dictate returns

9.1 9.0 (% ) (% ) 8.6 8.3 120 1-10 11-20 21-30 31-40 41-50 7.9 99 100 100 93 83 4.9 80 4.1 3.9 3.8 62 2.8 60

0 Top 10 Top 20 Top 30 Top 40 Top 50

Source: Global X, Mirae Asset Daewoo Research Source: Global X, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 56 August 7, 2020 Asian Property Developers

Table 12. Valuations of top 30 constituents of the Global X China MSCI Real Estate ETF Dividend yield Price Market P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (local cap (%) currency) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CR Land 1109 HK 33.0 30.3 8.6 7.7 1.2 1.1 13.9 14.6 11.4 10.8 3.6 3.9 Sunac 1918 HK 35.6 21.4 4.7 4.0 1.3 1.0 31.5 29.0 14.7 16.4 4.7 5.5 Country Garden 2007 HK 10.1 28.4 4.3 3.9 1.1 0.9 26.2 24.5 13.1 11.8 7.1 7.8 Longfor 960 HK 38.0 29.4 10.6 9.0 1.9 1.7 18.7 19.4 2.8 18.6 4.1 5.0 COLI 688 HK 23.5 33.1 5.9 5.1 0.8 0.7 13.4 13.8 (7.6) 15.3 4.9 5.6 Evergrande 3333 HK 22.0 37.1 7.9 7.0 1.5 1.4 20.7 21.6 89.7 12.8 5.5 6.5 Shimao 813 HK 33.0 15.0 8.0 6.7 1.3 1.1 17.5 18.4 11.9 20.3 5.0 6.0 Vanke-H 2202 HK 25.0 44.7 6.0 5.4 1.2 1.1 21.5 21.8 5.2 11.0 5.0 5.8 Jinmao 817 HK 5.3 8.5 7.6 6.2 1.2 1.1 17.4 19.0 13.4 23.4 5.2 6.5 CIFI 884 HK 6.9 7.3 5.9 4.9 1.3 1.1 22.5 23.0 27.4 20.8 6.0 7.3 Top 10 avg. 7.0 6.0 1.3 1.1 20.3 20.5 18.2 16.1 5.1 6.0 Top 10 median 6.8 5.8 1.3 1.1 19.7 20.5 12.5 15.8 5.0 5.9 Wharf Holdings 4 HK 14.2 5.6 11.2 7.7 0.3 0.3 2.7 3.9 14.5 45.9 3.1 3.7 Logan 3380 HK 13.6 9.7 5.5 4.6 1.6 1.3 30.7 30.3 10.4 19.7 7.1 8.6 KWG 1813 HK 13.8 5.7 6.2 5.0 1.0 0.9 17.1 18.8 (34.4) 23.4 7.1 8.3 Seazen 1030 HK 7.4 5.9 4.7 4.1 1.2 1.0 30.8 27.1 8.3 14.6 6.5 7.6 Agile 3383 HK 10.0 5.0 4.4 4.0 0.7 0.7 14.8 15.0 4.9 10.8 10.4 11.3 China Aoyuan 3883 HK 9.6 3.3 3.7 2.9 1.2 0.9 35.5 34.7 48.3 27.8 9.8 12.5 Guangzhou R&F-H 2777 HK 9.2 4.2 2.8 2.3 0.3 0.3 13.0 14.1 0.1 17.9 15.1 16.8 Yuexiu Property 123 HK 1.5 2.9 4.8 4.1 0.5 0.4 9.7 10.4 12.0 17.0 8.1 9.6 Kaisa 1638 HK 3.5 2.7 3.6 2.8 0.5 0.4 19.2 20.0 14.7 26.5 5.1 6.6 Poly Developments-A 600048 C1 16.2 27.7 5.9 5.1 1.1 1.0 18.3 18.8 - 15.6 5.4 6.3 Top 20 avg. 6.1 5.1 1.1 0.9 19.8 19.9 13.7 19.0 6.4 7.6 Top 20 median 5.9 4.9 1.2 1.0 18.5 19.2 11.9 17.5 5.5 6.6 Shenzhen Investment 604 HK 2.7 3.1 6.5 6.4 0.5 0.5 8.3 8.1 (12.9) 1.4 6.6 6.6 Shanghai Lujiazui-B 900932 CH 0.8 6.4 9.5 8.3 1.0 0.9 11.3 11.7 (32.0) 13.4 7.7 8.4 Yuzhou Group 1628 HK 3.6 2.4 3.7 3.2 0.6 0.6 18.5 19.1 22.8 17.8 9.9 11.6 SOHO China 410 HK 3.0 2.0 31.3 25.6 0.4 0.4 1.2 1.6 (67.3) 22.4 1.1 1.4 China Merchants Shekou Industrial-A 001979 C2 17.5 19.9 7.5 6.4 1.4 1.2 18.4 19.8 - 17.2 5.0 6.0 Sino-Ocean 3377 HK 1.9 1.9 5.0 4.3 0.3 0.2 5.2 5.8 (0.6) 16.7 8.6 10.0 Poly Property Services 6049 HK 84.9 6.1 57.5 42.0 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Shui On Land 272 HK 1.2 1.2 ------Zhenro Properties Group 6158 HK 4.8 2.7 6.0 4.8 1.0 0.9 13.8 16.0 21.5 25.9 2.7 3.9 Gemdale-A 600383 C1 14.4 9.3 5.5 4.7 1.0 0.9 19.0 18.8 16.2 5.1 5.8 Top 30 avg. 6.2 5.2 1.0 0.9 18.1 18.4 10.8 18.1 6.5 7.5 Top 30 median 5.9 5.0 1.1 0.9 17.5 18.8 10.9 17.2 5.4 6.5 Note: Based on Aug. 4 closing prices Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 57 August 7, 2020 Asian Property Developers

Chinese company analysis

Sunac China Holdings (1918 HK/Buy) Fundamentals to improve

China Resources Land (1109 HK/Buy) Safest play in the Chinese property sector

China Vanke (2202 HK/Buy) Remaining resilient

Mirae Asset Daewoo Research 58 [China] Property Developers

Sunac China Holdings Buy (1918 HK) (Initiate)

Fundamentals to improve TP: HK$47.63 Upside: 34.0%

Mirae Asset Daewoo Co., Ltd. Yongdai Park [email protected]

Investment points Deleveraging in progress  We expect Sunac China Holdings’ (Sunac) net gearing ratio to gradually decline to 146% in 2020, 113% in 2021, and 95% in 2022.  Sunac’s disciplined land purchases, divestment of non-core assets (e.g., hotels and investment securities), and cost savings will likely lead to ample cash holdings, which should help the company keep debt levels stable.  With Sunac’s momentum continuing, balance sheet improvements are likely to drive a re-rating. Continued growth  In 2020-22, we forecast Sunac’s contracted sales to expand at a CAGR of 24%—slower than the historical level but faster than peers.  Of note, the firm’s saleable resources (CNY820bn) exceed its 2020 contracted sales target (CNY600bn).  Unbooked revenue (CNY800bn in 2019; CNY950bn for 2020F)  High visibility on earnings growth Hidden gem: Sunac Service Group  Sunac proposed a spin-off and separate listing for its property management subsidiary Sunac Service Group.  We estimate Sunac Service Group’s value at HK$7-10bn (4-6% of Sunac’s market cap). The spin- off of the subsidiary is likely to act as a share price catalyst.

Valuation and Initiate coverage with a Buy rating and TP of HK$47.63 recommendation  Our target price is based on 5.9x our 12-month forward EPS of HK$8.07.  Our target P/E is based on the average multiple during 2014-15, a period of relatively weak growth, as we expect deleveraging to cause growth to slow down from the levels seen over the past three years.  Sunac shares are currently trading at a 2020F P/E of 4.8x and a 2021F P/E of 4.1x. Catalysts for share prices include: 1) net gearing ratio improvements resulting from deleveraging; and 2) the spin-off of the property management business

Risks  1) Marginal deleveraging effects; 2) weaker-than-expected contracted sales; and 3) delays to the IPO of the property management subsidiary

Key data

1000 1918 HK HSI Index Current price (8/4/20, HK$) 35.55 Market cap (HK$bn) 165.63

800 Exchange HKEX Market cap (Wtr) 25.5

600 EPS growth (20F, %) 10.7 Shares outstanding (mn) 2,522.8 P/E (20F, x) 4.8 52-week low (HK$) 28.70 400 Market P/E (20F, x) 11.6 52-week high (HK$) 49.55 200 Dividend yield (%) 4.6 0 16.1 17.1 18.1 19.1 20.1

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -7.3 -10.2 7.7 Revenue (CNYmn) 65,874 124,746 169,316 215,554 270,361 315,781 Relative -5.7 -3.6 12.9 OP (CNYmn) 4,649 19,419 26,953 33,957 43,911 51,435

OP margin (%) 7.1 15.6 15.9 15.8 16.2 16.3 NP (CNYmn) 11,004 16,567 26,028 29,851 34,761 40,054 EPS (CNY) 2.76 3.79 5.99 6.63 7.72 8.90 ROE (%) 32.8 32.9 37.2 31.5 29.0 26.9 P/E (x) 9.8 5.9 6.9 4.8 4.1 3.6 P/B (x) 2.5 1.7 2.2 1.4 1.1 0.9 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 7, 2020 Sunac China Holdings

I. Investment thesis

1. Deleveraging in progress

Sunac’s revenue and net profit have expanded at respective five-year CAGRs of 47% and 52%. Such rapid growth resulted in a relatively high debt burden, which has been exacerbated by the recent slowdown of the Chinese housing market. Against this backdrop, management has set deleveraging as a top priority for 2020. Given the firm’s continuing growth momentum, balance sheet improvements are likely to drive a share price re-rating.

We expect Sunac to gradually reduce its net gearing ratio to 146% in 2020, 113% in 2021, and 95% in 2022. In addition, Sunac’s disciplined land purchases, divestment of non-core assets (e.g., hotels and investment securities), and cost savings will likely lead to ample cash holdings, which should help the company keep debt levels stable.

Sunac’s disciplined approach to land purchases should allow it to accumulate cash. With land prices currently high in China, there is little incentive to purchase land. Moreover, Sunac has already secured a sufficient land bank (equivalent to five times its 2019 contracted sales). Through May, Sunac’s cumulative land purchases amounted to CNY24bn, down 70% YoY.

Figure 1. Top seven developers: Five-year revenue and net profit CAGRs

60% Revenue NP 52% 50% 47% 42% 40% 34% 34%* 30% 24% 22% 19% 20% 20% 18%* 17% 14% 16% 9% 10%

0% Vanke Evergrande Country Garden COLI CR Land Longfor Sunac

Note: For Evergrande and Country Garden, we used core NP instead of NP. Source: Company data, Mirae Asset Daewoo Research

Figure 2. Top seven developers: Net gearing ratio trends Figure 3. Sunac: Net gearing ratio trend

300% Vanke Evergrande 300% Country Garden COLI CR Land Longfor 250% 257% Sunac 250%

200% 208% 200% 175% 150% 170% 150% 145% 100% 113% 100% 50% 76% 95%

0% 50% 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 60 August 7, 2020 Sunac China Holdings

Meanwhile, the divestment of non-core assets (theme parks, hotels, and investment securities) is set to accelerate. In 1H20, Sunac disposed of half of its stake in Jinke, a mid-sized property developer, for CNY10bn (after-tax gain of CNY2bn). In 2H20, we expect Sunac to dispose of: 1) its remaining stake in Jinke; and 2) hotels (CNY5-10bn).

To achieve cost savings in 2020-21, Sunac announced a plan to reduce new funding costs as a percentage of revenue by 2%p and selling/administrative expenses by 1%p each (the “2-1- 1” plan). If the plan is a success, we estimate the SG&A ratio to come in at 7.5-8%.

2. Continued growth momentum

While Sunac’s growth is likely to slow down compared to the past, it is still likely to outpace peers. In 2020-22, we forecast Sunac’s revenue to expand at a CAGR of 24%.

For the full year, management is conservatively targeting contracted sales of CNY600bn (+8% YoY), reflecting the impact of COVID-19 and an unfavorable comparison. The conservative target also reflects management’s commitment to defend margins rather than engage in excessive price competition to drive growth. Contracted sales declined 9% YoY in 1H20 but should grow by double digits beginning in July, given the concentration of new project launches in 2H20. We estimate 2020 saleable resources at CNY820bn, which seems more than sufficient for Sunac to achieve its contracted sales target of CNY600bn (+8% YoY; sell-through ratio of 73%).

We think there is little urgency to aggressively focus on growth, given Sunac’s unbooked revenue of CNY800bn at end-2019. We estimate end-2020 unbooked revenue at CNY950bn, factoring in estimated full-year contracted sales (CNY600bn) less booked revenue (CNY450bn). We see high earnings visibility for 2021-22.

Figure 4. Sunac: Total revenue and YoY growth Figure 5. Sunac: Unbooked revenue at end-2019/2020F

(CNYbn) (CNYbn) 350 Total revenue YoY (R) 160%

300 130%

250 89% 100% 86% 950 800 200 600 70% 150 54% 36% 27% 40% -450 100 25% 17% 50 10% -8% Gross unbooked Contracted Booked revenue Gross unbooked 0 -20% sales sales sales 2015 2016 2017 2018 2019 2020F 2021F 2022F (end-2019) (end-2020)

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 61 August 7, 2020 Sunac China Holdings

3. Hidden gem: Sunac Service Group

On Aug. 6, Sunac proposed a spin-off and listing for Sunac Service Group, its property management subsidiary. We expect the IPO to be successful, considering: 1) the market’s favorable response to the property management sector; and 2) the business’s high earnings growth visibility.

Sunac Service Group’s managed gross floor area (GFA) has doubled from 50mn m2 at end- 2019 to 100mn m2 currently with the recent acquisition of New Century Property Management. Management plans to continue to expand managed GFA and announced that contracted GFA has exceeded 350mn m2.

We estimate the value of Sunac Service Group at HK$7-10bn (4-6% of Sunac’s current market cap). We expect the spin-off of the subsidiary to cause Sunac’s net gearing ratio to decline, acting as a share price catalyst.

Table 1. Sunac Service Group: Valuation analysis Potential market cap of % of Sunac’s market cap the property management business (CNYmn) (HK$mn) (%) 35.0 9,450 10,395 6% 32.5 8,775 9,653 6%

(x) 30.0 8,100 8,910 5% cap avg. P/E - 27.5 7,425 8,168 5%

Large 25.0 6,750 7,425 4% Note: Reported annual profit of CNY269.9mn, CNY/HKD rate: 1.1; Sunac’s market cap: HK$171bn Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 62 August 7, 2020 Sunac China Holdings

II. Earnings and forecasts

In 1H20, Sunac posted a 9% YoY decline in cumulative contracted sales due to COVID-19, achieving only 33% of its annual target. However, with new contracted volume likely to be concentrated in 2H20, we believe the annual target is within reach.

Notably, contracted sales began to recover with the lifting of lockdown measures; after falling sharply from January to April, sales bounced back in May and expanded 8% YoY in June.

We forecast Sunac’s net profit to grow 15% in 2020 and 16% in 2021, assuming: 1) property development revenue growth of 28% in 2020 and 25% in 2021 (gross margin of 23% in each year); 2) property management/other revenue growth of 30% in 2020 and 30% in 2021 (gross margin of 35% in each year); and 3) SG&A ratio of 8% in 2020 and 7.5% in 2021.

Figure 6. Sunac: NP and YoY growth Figure 7. Sunac: Contracted sales and YoY growth

(CNYbn) (CNYbn) 50 NP (L) YoY (R) 400% 700 Contracted sales (L) YoY (R) 160% 140% 344% 600 130% 40 121% 300% 500 100% 30 400 200% 70% 300 20 27% 40% 200 21% 100% 10% 10 100 4% 8% 57% 51% -9% 15% 16% 15% 0 -20% 0 0% 2015 2016 2017 2018 2019 6M20 2020 2017 2018 2019 2020F 2021F 2022F target

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 8. Sunac: Property development revenue, YoY growth, Figure 9. Sunac: Property management revenue, YoY growth, and gross margin and gross margin

(CNYbn) Development revenue (L) (CNYbn) 350 YoY (R) 100% 20 Property management/other (L) 80% 88% YoY (R) Gross margin (R) 300 81% Gross margin (R) 80% 16 60% 250 51% 60% 12 200 44% 40% 40% 35% 35% 35% 150 35% 40% 8 37% 30% 30% 28% 30% 100 25% 24% 23% 18% 20% 24% 4 19% 23% 23% 20% 50 16% 0 0% 0 0% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 63 August 7, 2020 Sunac China Holdings

Table 2. Sunac: Annual earnings forecasts and key assumptions (CNYmn) 2017 2018 2019 2020F 2021F 2022F Earnings drivers Contracted sales (CNYmn) 362,010 460,830 556,210 600,000 652,680 709,985 YoY growth 140% 27% 21% 8% 9% 9% Contracted GFA (mn m2) 22.0 30.6 38.3 42.6 47.3 52.5 YoY growth 191% 39% 25% 11% 11% 11% Contracted ASP (CNY/m2) 16,430 15,210 14,528 14,092 13,810 13,534 YoY growth -20% -7% -4% -3% -2% -2%

Revenue 65,874 124,746 169,316 215,554 270,361 315,781 Property sales 62,569 117,714 159,470 203,325 255,091 296,620 Property management/other 3,304 5,003 6,993 9,091 11,818 15,364 Cultural/tourism business 2,028 2,853 3,138 3,452 3,797 Cost of revenue (52,246) (93,610) (127,910) (164,352) (206,173) (240,662) Gross profit 13,628 31,136 41,406 51,202 64,188 75,119 SG&A (8,979) (11,717) (14,453) (17,244) (20,277) (23,684) EBIT 4,649 19,419 26,953 33,957 43,911 51,435 EBITDA 4,988 20,411 28,774 35,870 45,919 53,543 Net financial income/expenses (2,491) 847 1,210 1,652 2,030 2,396 Share in profits/losses of joint ventures/associates (1,994) 4,956 8,146 5,000 5,500 6,050 Net other income/expenses 15,195 3,443 6,237 7,000 4,000 4,000 Profit before tax 15,359 28,664 42,546 47,609 55,441 63,881 Tax (3,695) (11,219) (14,390) (16,187) (18,850) (21,720) Profit after tax 11,664 17,445 28,156 31,422 36,591 42,162 Perpetual capital securities 679 591 319 0 0 0 Minority interests (19) 287 1,810 1,571 1,830 2,108 NP 11,004 16,567 26,028 29,851 34,761 40,054

YoY growth Revenue 86.4% 89.4% 35.7% 27.3% 25.4% 16.8% Property sales 80.8% 88.1% 35.5% 27.5% 25.5% 16.3% Property management/other 351.1% 51.4% 39.8% 30.0% 30.0% 30.0% Cultural/tourism business 40.7% 10.0% 10.0% 10.0% Gross profit 181.1% 128.5% 33.0% 23.7% 25.4% 17.0% EBIT 79.3% 317.7% 38.8% 26.0% 29.3% 17.1% Profit before tax 248.4% 86.6% 48.4% 11.9% 16.4% 15.2% NP 344.0% 50.6% 57.1% 14.7% 16.4% 15.2%

Gross margin 20.7% 25.0% 24.5% 23.8% 23.7% 23.8% Property sales 19.4% 23.8% 24.3% 23.0% 23.0% 23.0% Property management/other 44.3% 18.3% 36.5% 35.0% 35.0% 35.0% Cultural/tourism business 143.6% 42.6% 40.0% 40.0% 40.0% SG&A/revenue 13.6% 9.4% 8.5% 8.0% 7.5% 7.5% EBIT margin 7.1% 15.6% 15.9% 15.8% 16.2% 16.3% Tax rate 24.1% 39.1% 33.8% 34.0% 34.0% 34.0% Net margin 16.7% 13.3% 15.4% 13.8% 12.9% 12.7% Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 64 August 7, 2020 Sunac China Holdings

III. Valuation

We initiate our coverage of Sunac with a Buy recommendation and target price of HK$47.63 (34% upside). Our target price is equivalent to 5.9x our 12-month forward EPS of HK$8.07. Our target P/E is based on the average multiple in 2014-15, a period of relatively weak growth, as we expect deleveraging to cause growth to slow down from the levels seen over the past three years.

Sunac shares are currently trading at a 2020F P/E of 4.8x and a 2021F P/E of 4.1x. Catalysts for share prices include: 1) net gearing ratio improvements resulting from deleveraging; and 2) the spin-off of the property management business.

Table 3. Sunac: P/E valuation table (CNYmn) 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F NP 3,222 3,298 2,478 11,004 16,567 26,028 29,851 34,761 40,054 YoY growth 1.4% 2.4% -24.8% 344.0% 50.6% 57.1% 14.7% 16.4% 15.2% EPS 0.96 0.97 0.71 2.76 3.79 5.99 6.87 8.00 9.22 YoY growth -0.1% 1.0% -26.4% 285.7% 37.3% 58.2% 10.7% 16.4% 15.2% P/E (x) 6.6 5.2 8.1 9.8 5.9 6.9 4.8 4.1 3.6 12MF EPS (HK$) 8.07 (CNY7.27 x 1.11 HKD/CNY) Target P/E 5.9 Target price (HK$) 47.63 Source: Company data, Mirae Asset Daewoo Research

Table 4. Chinese property developers: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F Vanke-H 2202 HK 25.0 44.76.0 5.4 1.2 1.1 21.5 21.8 5.2 11.05.0 5.8 Evergrande 3333 HK 22.0 37.1 7.9 7.0 1.5 1.4 20.7 21.6 89.7 12.8 5.5 6.5 COLI 688 HK 23.5 33.1 5.9 5.1 0.8 0.7 13.4 13.8 (7.6) 15.3 4.9 5.6 CR Land 1109 HK 33.0 30.3 8.6 7.7 1.2 1.1 13.9 14.6 11.4 10.8 3.6 3.9 Longfor 960 HK 38.0 29.4 10.6 9.0 1.9 1.7 18.7 19.4 2.8 18.6 4.1 5.0 Country Garden 2007 HK 10.1 28.4 4.3 3.9 1.1 0.9 26.2 24.5 13.1 11.8 7.1 7.8 Sunac 1918 HK 35.6 21.44.8 4.1 1.4 1.1 31.5 29.0 10.7 16.44.6 5.3 Shimao 813 HK 33.0 15.0 8.0 6.7 1.3 1.1 17.5 18.4 11.9 20.3 5.0 6.0 Logan 3380 HK 13.6 9.7 5.5 4.6 1.6 1.3 30.7 30.3 10.4 19.7 7.1 8.6 Jinmao 817 HK 5.3 8.5 7.6 6.2 1.2 1.1 17.4 19.0 13.4 23.4 5.2 6.5 Source: Bloomberg, Mirae Asset Daewoo Research

Table 5. Chinese property management companies: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F Country Garden Services 6098 HK 48.0 17.1 51.8 38.0 16.1 12.0 34.0 35.1 32.8 36.4 0.5 0.6 A-Living Services 3319 HK 45.9 7.9 31.9 24.4 7.5 6.4 25.1 27.7 40.8 30.6 1.3 1.6 Poly Property Services 6049 HK 84.9 6.1 57.4 41.9 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Greentown Service 2869 HK 10.7 4.4 44.4 34.3 6.6 5.8 16.5 17.7 27.1 29.6 0.9 1.2 China Overseas Property 2669 HK 8.2 3.5 39.0 30.3 13.2 10.0 36.7 35.2 28.4 28.6 0.8 1.0 Ever Sunshine Lifestyle Services 1995 HK 15.6 3.4 59.8 38.9 11.7 9.7 22.4 27.0 61.2 53.6 0.6 0.9 S-Enjoy Service 1755 HK 24.9 2.6 43.4 29.3 15.2 11.4 37.0 41.9 51.5 48.0 1.2 1.8 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 65 August 7, 2020 Sunac China Holdings

We believe a P/E valuation is most appropriate for Chinese property developers. Indeed, given their business models (buying land and developing/selling property), high asset turnover ratios, and sufficient land banks, we believe P/E and earnings growth are the most important indicators for valuing major Chinese developers.

Figure 10. Sunac: 12-month forward P/E band chart Figure 11. Sunac: 12-month forward P/B band chart

(HK$) (HK$) 11x 9x 3x 2.5x 60 60 2.0x

50 7x 50

1.5x 40 40 5x

30 30 1x

20 3x 20

10 10

0 0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 12. Sunac: 12-month forward P/E ±2 SD Figure 13. Sunac: 12-month forward P/B ±2 SD

(x) (x) 12 3.0

10 2.5 +2 SD 8 2.0 +2 SD +1 SD 6 +1 SD 1.5

5Y avg. 5Y avg. 4 1.0

-1 SD -1 SD 2 0.5 -2 SD -2 SD 0 0.0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 66 August 7, 2020 Sunac China Holdings

IV. Company overview

Sunac China Holdings is a major property developer headquartered in Beijing. Founded in 2003, the firm was listed on the SEHK in 2010. Founder Sun Hongbin, who serves as chairman and CEO, is the largest shareholder with a 45.2% stake.

Sunac’s businesses are: 1) property development (residential and commercial buildings; 94% of total revenue); 2) cultural and tourism projects (creation/operation of “cultural tourism cities”); and 3) property management/other. For the property development business, the firm has been expanding its footprint to prospective third-tier cities (in addition to first- and second–tier cities), focusing on the development of large-scale properties in the mid/high- end segment.

Sunac has achieved rapid top-line growth, supported by quick inventory turnover and sufficient saleable resources. In terms of contracted sales, the firm has climbed from ninth place in 2015 to fourth in 2019, when contracted sales reached CNY556bn.

Figure 14. Sunac: Revenue trend Figure 15. Sunac: Contracted sales trend

(CNYbn) (CNYbn) 200 Cultural and tourism project construction/operation 600 4th place Property management/other Property sales 160 500 4th place

400 4th place 120

300 556 80 461 200 7th place 362 40 100 9th place 151 68 0 0 2012 2013 2014 2015 2016 2017 2018 2019 2015 2016 2017 2018 2019

Source: Sunac, Mirae Asset Daewoo Research Source: Sunac, Mirae Asset Daewoo Research

Figure 16. ROEs of major Chinese property developers Figure 17. Sunac: Ownership structure

(Free float: 53.92%) 50% 2019 2018 (%)

40% 45.18% 30% 50.80%

20%

10% 1.88% 0% 0.61% 0.89% 0.64% Sun Hongbin The Vanguard Group BlackRock Inst. Trust Co. Norges Bank Inv. Management APG Asset Management Other

Source: Refinitiv, Mirae Asset Daewoo Research Source: Refinitiv, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 67 August 7, 2020 Sunac China Holdings

Sunac (1918 HK)

Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNYmn) 2019 2020F 2021F 2022F Revenue 169,316 215,554 270,361 315,781 Current assets 724,680 801,398 870,754 995,094 Cost of sales -127,910 -164,352 -206,173 -240,662 Cash & cash equivalents 77,944 71,800 72,706 63,830 Gross Profit 41,406 51,202 64,188 75,119 Current receivables 49,214 54,424 59,134 67,578 SG&A -14,453 -17,244 -20,277 -23,684 Completed properties for sale 55,189 61,032 66,314 75,783 EBIT 26,953 33,957 43,911 51,435 Properties under development 426,783 471,965 512,810 586,037 EBITDA 28,774 35,870 45,919 53,543 Other current assets 67,763 94,391 112,003 154,078 Net finance income/(expenses) 1,210 1,652 2,030 2,396 Non-current assets 235,969 260,950 283,533 324,020 Share of P/L of asso. & JV 8,146 5,000 5,500 6,050 Property, plant & equipment 70,102 77,523 84,232 96,260 Other income/(expense) 6,237 7,000 4,000 4,000 Investment properties 26,846 29,687 32,257 36,863 Profit before tax 42,546 47,609 55,441 63,881 Investments in associates/JV 88,994 98,416 106,933 122,202 Income tax -14,390 -16,187 -18,850 -21,720 Other non-current assets 50,027 55,323 60,111 68,695 Profit after tax 28,156 31,422 36,591 42,162 Total assets 960,649 1,062,348 1,154,287 1,319,114 Perpetual capital securities 319 0 0 0 Minority interests 1,810 1,571 1,830 2,108 Current liabilities 620,881 684,215 721,280 821,246 Net profit 26,028 29,851 34,761 40,054 Contract liabilities 240,818 259,778 282,586 307,397 Trade and other payables 147,134 162,710 176,792 202,037 Growth/margins ST bank & other borrowings 135,733 129,130 112,501 96,378 Revenue growth 35.7% 27.3% 25.4% 16.8% Other payables 97,196 132,596 149,401 215,434 Gross profit growth 33.0% 23.7% 25.4% 17.0% Non-current liabilities 225,674 236,487 255,425 278,015 EBIT growth 38.8% 26.0% 29.3% 17.1% LT bank & other borrowings 186,979 193,696 208,930 224,882 Net profit growth 57.1% 14.7% 16.4% 15.2% Other liabilities 38,695 42,791 46,495 53,134 EPS growth 58.2% 10.7% 16.4% 15.2% Total liabilities 846,555 920,702 976,704 1,099,262 Gross margin 24.5% 23.8% 23.7% 23.8% Attributable to owners 83,073 106,357 133,471 164,713 EBIT margin 15.9% 15.8% 16.2% 16.3% Minority interests 28,231 35,289 44,112 55,140 Net margin 15.4% 13.8% 12.9% 12.7% Total equity 114,094 141,646 177,583 219,852

Cash flow statement (summarized) Key valuation metrics/ratios (CNYmn) 2019 2020F 2021F 2022F (CNY) 2019 2020F 2021F 2022F Profit before tax 42,546 47,609 55,441 63,881 P/E (x) 6.9 4.8 4.1 3.6 Depreciation & amortization 1,821 1,912 2,008 2,108 P/B (x) 2.2 1.4 1.1 0.9 Non-cash Items 9,494 10,000 10,000 10,000 EV/EBITDA (x) 16.4 12.7 9.9 8.9 Changes in working capital -26,607 -15,000 -15,000 -15,000 EPS (CNY) 5.99 6.63 7.72 8.90 Cash from operating activities 27,254 44,521 52,449 60,990 BVPS (CNY) 19.1 23.6 29.6 36.6 Capital expenditures -18,575 -10,000 -10,000 -20,000 DPS (CNY) 1.23 1.46 1.70 1.96 Others -43,426 -10,000 -10,000 -20,000 Payout ratio (%) 22.0% 22.0% 22.0% 22.0% Cash from investing activities -62,001 -20,000 -20,000 -40,000 Dividend yield (%) 3.8% 4.6% 5.3% 6.1% Dividends paid -4,817 -6,567 -7,647 -8,812 ROAA 3.1% 3.0% 3.1% 3.2% Equity issued/(repurchased) -250 0 0 0 ROAE 37.2% 31.5% 29.0% 26.9% Debt raised/(repaid) 76,412 114 -1,395 -171 Current ratio (x) 1.2 1.2 1.2 1.2 Cash fromfinancing activities 36,393 -30,665 -31,543 -29,865 Quick ratio (x) 0.4 0.4 0.4 0.4 Effect of forex rate changes 116 0 0 0 Interest coverage ratio (x) 1.1 1.5 2.0 2.6 Net change in cash 1,763 -6,144 906 -8,876 Net debt/equity (net gearing ratio) 175.1% 145.5% 113.2% 95.4% Beginning cash 76,181 77,944 71,800 72,706 Net debt/EBITDA (x) 6.9 5.7 4.4 3.9 Ending cash 77,944 71,800 72,706 63,830 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 68 [China] Property Developers

China Resources Land Buy (1109 HK) (Initiate)

Safest play in the Chinese property sector TP: HK$40.88 Upside: 24.0%

Mirae Asset Daewoo Co., Ltd. Yongdai Park [email protected]

Investment points Strong balance sheet  Management’s efforts to manage debt have led to: 1) one of the lowest net gearing ratios (30%) in the industry; 2) a decline in the percentage of foreign currency debt (-8%p YoY); and 3) a rise in the average debt tenor (+1.7 years YoY).  Having one of the industry’s highest credit ratings, China Resources Land (CR Land) enjoys low funding costs and high margins. The company’s stable balance sheet allows for more flexible land banking, which should lay the foundation for growth in the development business. Luxury shopping malls relatively immune to e-commerce threat  In 2020-22, we forecast investment property revenue to expand at a CAGR of 16%. Growth will likely be driven by the shopping mall segment, which should recover on: 1) the launch of new malls; and 2) improvements in existing malls’ operating indicators.  We believe the structural growth story of China’s shopping malls remains intact. CR Land is relatively immune to the threat of e-commerce because its shopping malls: 1) mainly target consumers that value the experience of shopping; and 2) sell luxury/high-end goods.  In addition, China’s recent advisory against travel abroad has led to a sharp rise in spending on luxury goods at local shopping malls. Expectations on high-margin redevelopment projects  CR Land aims to secure 2mn m2 of land this year for six redevelopment projects and a total of 9mn m2 of land over the next three years.  This should sustain the growth momentum of contracted sales while also providing some support to gross margin, which has been on the decline.

Valuation and Initiate coverage with Buy and TP of HK$40.88 recommendation  Our target price is based on our 12-month forward CEPS estimate (HK$4.09) and a multiple of 10x, which represents a 10% discount to 2019 P/CE (reflecting the COVID-19 impact). In our view, only a modest discount is warranted due to the firm’s solid profit growth in 2020 and stable position (as a state-owned developer).  Shares are currently trading at 8.6x 2020F P/E and 7.7x 2021F P/E. Catalysts for share prices include: 1) a recovery in rental income (shopping malls) in 2H20; 2) additional land acquisition for redevelopment projects; and 3) a potential spin-off of the property management business.

Risks  1) Weakening of contracted sales momentum; 2) lower-than-expected margins; and 3) stalled recovery of the shopping mall business

Key data

200 1109 HK HSI Index Current price (8/4/20, HK$) 32.95 Market cap (HK$bn) 234.96 Exchange HKEX Market cap (Wtr) 36.1 150 EPS growth (20F, %) 11.4 Shares outstanding (mn) 2,880.7 100 P/E (20F, x) 8.6 52-week low (HK$) 27.05

50 Market P/E (20F, x) 11.6 52-week high (HK$) 40.45 Dividend yield (%) 3.6 0 16.1 17.1 18.1 19.1 20.1

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute 1.5 -3.1 6.8 Revenue (CNYmn) 101,943 121,189 147,736 162,338 190,852 224,185 Relative 3.3 4.1 12.0 OP (CNYmn) 33,925 44,245 45,185 42,864 48,991 55,845

OP margin (%) 33.3 36.5 30.6 26.4 25.7 24.9 NP (CNYmn) 16,379 19,296 21,647 24,697 27,355 30,284 EPS (CNY) 2.36 2.78 3.11 3.46 3.84 4.25 ROE (%) 16.7 18.8 18.4 13.9 14.6 15.4 P/E (x) 8.1 9.5 11.2 8.6 7.7 7.0 P/B (x) 1.1 1.3 1.4 1.2 1.1 1.1 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 7, 2020 China Resources Land

I. Investment thesis

1. Strong balance sheet

CR Land has one of the strongest balance sheets in the industry. 1) Over the past three years, the company’s net gearing ratio (previously around 40%) has steadily fallen, reaching an industry low of 32% in 2019 (-2.6%p YoY). 2) The company has lowered its percentage of foreign currency-denominated debt by 8%p YoY, significantly reducing F/X risks. 3) The company has also reduced its credit risks by lengthening its average debt tenor by 1.7 years.

CR Land has received one of the highest credit ratings in the industry, reflecting: 1) robust debt management efforts; 2) high operating efficiency; and 3) strong cash flow generation. In addition, being a state-owned developer has also had a positive impact on its rating. Against this backdrop, the company has been able to raise funds at cheaper rates than competitors, which has in turn led to higher margins.

Notably, CR Land’s stable balance sheet allows for more flexible land banking activities, which should lay the foundation for sustained earnings growth in its development business. This should prove to be a particularly valuable advantage amid the current uncertain environment.

Figure 2. Chinese real estate developers: Net gearing ratio Figure 1. CR Land: Net gearing ratio trend (2019)

100% 42% 40% 37% 80% 36% 35% 32% 60%

24% 23% 40%

20%

2012 2013 2014 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 3. CR Land: Debt breakdown (CNY and non-CNY) Figure 4. CR Land: Non-CNY net debt exposure

CNY Non-CNY 57%

26% 29% 29% 34% 45% 47% 64%

26% 23% 23% 74% 69% 71% 66% 53% 36% 8%

2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 70 August 7, 2020 China Resources Land

Figure 5. CR Land: Debt maturity profile Figure 6. CR Land: Average debt tenor

(CNYbn) (Years) 40 Onshore Offshore 6 5.4

5 30 4.2 4.1 4.2 4 3.7 13.9

20 16.6 3 8.4 15.8 6.6 2 10 17.7 7.1 1 12.9 12.5 11 6.2 5.8 0 0 2020 2021 2022 2023 2024 2025-44 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 7. Credit ratings of Chinese property developers Figure 8. CR Land: Lower funding costs Company Ticker Moody's rating

CR Land 1109 HK Baa1 5% COLI 688 HK Baa1 4.63% 4.47% Vanke 2202 HKBaa1 4.51% 4.23% China Jinmao 817 HK Baa3 4.45% Longfor 960 HK Baa3 4% 4.16% Sino-Ocean 3377 HKBaa3 3.76% Country Garden 2007 HK Ba1 3.77%

Shimao 813 HK Ba1 Agile 3383 HKBa2 3% CIFI 884 HK Ba3 Guangzhou R&F 2777 HK Ba3 Logan 3380 HKBa3 China SCE 1966 HK B1 KWG 1813 HKB1 2% China Evergrande 3333 HK B1 2012 2013 2014 2015 2016 2017 2018 2019 Source: Moody’s, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 71 August 7, 2020 China Resources Land

2. Luxury shopping malls relatively immune to e-commerce threat

The investment property division (shopping malls, offices, hotels, etc.), though it accounts for a much smaller percentage of revenue than the development division, is a fast-growing business that generates high margins. Shopping malls are particularly important, with related revenue (rents) accounting for 76% of total investment property revenue.

We forecast investment property revenue to grow just 5% YoY in 2020, as rental income between February and April was hit hard by the COVID-19 outbreak. Fortunately, rental income has been showing signs of a recovery, returning to positive growth YoY in May. In 2021-22, we see revenue growth improving to over 20% YoY, as the shopping mall segment is likely to recover on the back of 1) the launch of new malls and 2) improvements in the operating indicators of existing malls.

We believe the structural growth story of China’s shopping malls remains intact, considering: 1) still-limited retail space per capita; 2) the rapid increase in middle-class consumers with purchasing power; and 3) the continuing shortage of high-quality shopping mall operators (due to underdeveloped capital markets and absence of REITs). In our view, CR Land is already well-positioned.

The rise of e-commerce poses a risk to offline shopping malls, but the luxury positioning of CR Land’s shopping malls makes them relatively immune to the threat of e-commerce. Significantly, the company’s shopping malls target consumers that value the experience of shopping over convenience. Restrictions on overseas travel could also prove favorable to CR Land by encouraging Chinese consumers to satisfy their luxury shopping needs at local shopping malls.

Figure 9. CR Land: Investment property revenue, YoY growth, Figure 10. CR Land: No. of malls in operation and % of total revenue

(CNYbn) 140 Asset-heavy malls Asset-light malls 20 Investment property revenue (L) 40% YoY (R) 120 116 111 % of total revenue (R) 101 16 100 30% 88 25% 26% 80 77 22% 22% 12 21% 61 64 20% 60 51 8 40 63 10% 52 42 42 4 20 34 5% 0 0 0% 2018 2019 2020F 2021F 2022F 2023F 2024F After 2017 2018 2019 2020F 2021F 2022F 2024F

Source: Company data, Mirae Asset Daewoo Research Note: Asset-heavy malls are those mostly owned by CR Land Source: Company data, Mirae Asset Daewoo Research

Table 1. Operating indicators of CR Land’s shopping malls by stage Mature stage Stable stage Cultivation stage Years open 5+ years 3-5 years 1-2 years Composition 6 MixC + 4 MixC One 6 MixC + 4 MixC One 13 MixC + 9 MixC One FY19 FY18 Change FY19 FY18 Change FY19 FY18 Change Rental income (CNYmn) 4,055 3,678 10.3% 2,226 1,895 17.5% 3,042 1,280 137.7% Occupancy rate 96.0% 95.9% 0.2%p 95.1% 92.7% 2.4%p 94.1% 93.9% 0.3%p Gross margin 80.8% 80.6% 0.2%p 70.2% 66.0% 4.2%p 71.0% 68.4% 2.6%p Avg. return on historical costs 33.4% 31.1% 2.3%p 13.1% 11.2% 1.9%p 14.6% 12.9% 1.7%p Retail sales (CNYmn) 28,666 26,036 10.1% 15,882 12,794 24.1% 20,038 8,464 136.7% Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 72 August 7, 2020 China Resources Land

3. Expectations on high-margin redevelopment projects

In 2016-18, CR Land was able to sustain strong earnings growth mainly thanks to high-margin redevelopment projects, such as the CR City project in 2014 and the Shenzhen Bay project in 2016. In 2019, however, earnings growth slowed, partly due to the absence of such projects.

As of end-2019, CR Land had 19 ongoing redevelopment projects with a total gross floor area (GFA) of 30mn m2. Of them, 98% are located in the Greater Bay Area (GBA), and 71% are located in Shenzhen and Guangzhou. We believe these redevelopment projects will sustain the growth momentum of contracted sales while also providing some support to gross margin, which has been on the decline.

The company aims to secure 2mn m2 of land this year for six redevelopment projects. For the Hu Bei project, the company has already begun taking down old buildings and is anticipated to acquire sizeable land by the end of the year. Management expects to secure 9mn m2 of land over the next three years.

Figure 11. CR Land: Redevelopment project pipeline

Source: Company data, Mirae Asset Daewoo Research

Table 2. CR Land: 2020 redevelopment project pipeline Project City Hu Bei Shenzhen (Luohu district) Snowflake beer factory Shenzhen (Bao'an district) XI'shang'xi Shenzhen (Luohu district) Wucheng Village Taiyuan Xinxi village Huizhou Zhanjiang project Zhanjiang Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 73 August 7, 2020 China Resources Land

II. Earnings and forecasts

CR Land posted a 7% YoY decline in cumulative contracted sales from January to June amid the COVID-19 pandemic, achieving only 42% of its annual sales target. However, given that sales have been recovering since April (when lockdown measures were lifted) and surged 12% YoY in June, management has expressed strong confidence in achieving its full-year target.

During the 2020-22 period, we expect the company’s net profit (adjusted) to expand at a CAGR of 12%.

1) Revenue from the property development business should expand at a healthy pace, aided by continued growth in contracted sales and the firm’s proactive land acquisitions in first- and second-tier cities. We expect gross margin to eventually settle at around 25-30% in the long run, but several positive events (redevelopment projects, etc.) could help gross margin stay above 30% through 2022.

2) Revenue from the investment property business (shopping malls, offices, hotels, etc.) will likely show only single-digit growth this year. From 2021, however, we look for a robust recovery in the shopping mall segment, which should drive overall revenue expansion.

Figure 12. CR Land: Core NP and YoY growth Figure 13. CR Land: Contracted sales and YoY growth

(CNYbn) (CNY bn) 35 Core NP (L) 30% 300 Contracted sales (L) YoY (R) 70% YoY (R) 262 30 60% 60% 250 50% 25 18% 18% 20% 200 40%

20 30% 14% 27% 12% 150 22% 23% 20% 15 11% 11% 111 8% 10% 100 15% 10% 10 0% 5 50 -7% -10%

0 0% 0 -20% 2017 2018 2019 2020F 2021F 2022F 2015 2016 2017 2018 2019 6M20 2020 target

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 14. CR Land: Property development revenue, YoY Figure 15. CR Land: Investment property revenue, YoY growth, and gross margin growth, and gross margin

(CNYbn) Development revenue (L) (CNYbn) Investment property revenue (L) 250 YoY (R) 50% 20 YoY (R) 80% Gross margin (R) Gross margin (R) 43% 66% 66% 65% 200 40% 40% 16 65% 65% 61% 60% 36% 32% 30% 150 31% 30% 12 40% 100 17% 21% 17% 17% 20% 8 25% 26% 22% 22% 21% 20% 50 10% 10% 4

5% 1% 0 0% 0 0% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 74 August 7, 2020 China Resources Land

Table 3. CR Land: Annual earnings forecasts and key assumptions (CNY mn) 2017 2018 2019 2020F 2021F 2022F Earnings drivers Contracted sales 172,300 210,700 242,500 262,000 299,056 342,120 YoY growth 59.5% 22.3% 15.1% 8.0% 14.1% 14.4% Contracted GFA (mn m2) 10.2 12.0 13.2 14.6 16.0 17.6 YoY growth 30.8% 17.6% 10.4% 10.0% 10.0% 10.0% Contracted ASP (CNY/m2) 16,903 17,572 18,304 17,938 18,655 19,402 YoY growth 21.4% 4.0% 4.2% -2.0% 4.0% 4.0% Revenue 101,943 121,189 147,736 162,338 190,852 224,185 Property development 89,511 105,148 127,199 139,918 164,124 192,518 Investment property rentals 7,646 9,519 12,028 12,634 15,474 18,725 Other 4,786 6,522 8,510 9,786 11,254 12,942 Cost of revenue (60,981) (68,607) (91,736) (107,591) (127,890) (151,929) Gross profit 40,962 52,582 56,000 54,747 62,962 72,256 SG&A (7,036) (8,337) (10,815) (11,884) (13,971) (16,411) EBIT 33,925 44,245 45,185 42,864 48,991 55,845 EBITDA 34,433 44,810 45,946 43,527 49,654 56,508 Net financial income/expenses (364) (1,543) 718 879 743 591 Share in profits/losses of joint ventures/associates 202 1,297 3,718 4,089 4,498 4,948 Net other income/expenses 5,662 7,727 11,373 5,000 5,000 5,000 Profit before tax 39,425 51,726 60,994 52,833 59,233 66,384 Tax (17,675) (24,449) (26,643) (23,078) (25,873) (28,997) Profit after tax 21,750 27,277 34,352 29,755 33,360 37,387 Perpetual capital securities 0 288 289 0 0 0 Minority interests 2,060 2,752 5,390 5,058 6,005 7,104 NP 19,690 24,238 28,672 24,697 27,355 30,284 Core NP 16,379 19,296 21,647 24,697 27,355 30,284 Growth (YoY) Revenue 9.0% 18.9% 21.9% 9.9% 17.6% 17.5% Property development 1.3% 17.5% 21.0% 10.0% 17.3% 17.3% Investment property rentals 21.9% 24.5% 26.3% 5.0% 22.5% 21.0% Other 59.6% 36.3% 30.5% 15.0% 15.0% 15.0% Gross profit 29.8% 28.4% 6.5% -2.2% 15.0% 14.8% EBIT 29.7% 30.4% 2.1% -5.1% 14.3% 14.0% Profit before tax 20.0% 31.2% 17.9% -13.4% 12.1% 12.1% Core NP 17.7% 17.8% 12.2% 14.1% 10.8% 10.7% Gross margin 40.2% 43.4% 37.9% 33.7% 33.0% 32.2% Property development 39.7% 42.9% 36.5% 32.0% 31.0% 30.0% Investment property rentals 61.4% 65.9% 66.5% 65.0% 65.0% 65.0% Other 14.3% 18.4% 18.9% 18.0% 18.0% 18.0% SG&A/revenue 6.9% 6.9% 7.3% 7.3% 7.3% 7.3% EBIT margin 33.3% 36.5% 30.6% 26.4% 25.7% 24.9% Tax rate 44.8% 47.3% 43.7% 43.7% 43.7% 43.7% Core net margin 16.1% 15.9% 14.7% 15.2% 14.3% 13.5% Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 75 August 7, 2020 China Resources Land

III. Valuation

We initiate our coverage of CR Land with a Buy recommendation and target price of HK$40.88 (24% upside). Our target price is based on our 12-month forward CEPS estimate (HK$4.09) and a multiple of 10x, which represents a 10% discount to 2019 P/CE (reflecting the COVID-19 impact). In our view, only a the modest discount is warranted due to the firm’s solid profit growth in 2020 (flattish YoY) and stable position (as a state-owned developer).

Shares are currently trading at 8.6x 2020F P/E and 7.7x 2021F P/E. Catalysts for share prices include: 1) a strong recovery in rental income (shopping malls) in 2H20; 2) additional land acquisition for redevelopment projects; and 3) a potential spin-off of the property management business.

Table 4. CR Land: P/E valuation (CNYmn) 2015 2016 2017 2018 2019 2020F 2021F 2022F Core NP 12,215 13,915 16,379 19,296 21,647 24,697 27,355 30,284 YoY growth 20.0% 13.9% 17.7% 17.8% 12.2% 14.1% 10.8% 10.7% Core EPS 1.81 2.01 2.36 2.78 3.11 3.46 3.84 4.25 YoY growth 15.9% 11.1% 17.7% 17.8% 11.6% 11.4% 10.8% 10.7% P/CE (x) 10.5 7.8 8.1 9.5 11.2 8.6 7.7 7.0 12MF EPS (HK$) 4.09 (CNY3.68 x 1.11 HKD/CNY) Target P/CE (x) 10 Target price (HK$) 40.88 Source: Company data, Mirae Asset Daewoo Research

Table 5. Chinese property developers: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F Vanke-H 2202 HK 25.0 44.76.0 5.4 1.2 1.1 21.5 21.8 5.2 11.05.0 5.8 Evergrande 3333 HK 22.0 37.1 7.9 7.0 1.5 1.4 20.7 21.6 89.7 12.8 5.5 6.5 COLI 688 HK 23.5 33.1 5.9 5.1 0.8 0.7 13.4 13.8 (7.6) 15.3 4.9 5.6 CR Land 1109 HK 33.0 30.3 8.6 7.7 1.2 1.1 13.9 14.6 11.4 10.8 3.6 3.9 Longfor 960 HK 38.0 29.4 10.6 9.0 1.9 1.7 18.7 19.4 2.8 18.6 4.1 5.0 Country Garden 2007 HK 10.1 28.4 4.3 3.9 1.1 0.9 26.2 24.5 13.1 11.8 7.1 7.8 Sunac 1918 HK 35.6 21.44.8 4.1 1.4 1.1 31.5 29.0 10.7 16.44.6 5.3 Shimao 813 HK 33.0 15.0 8.0 6.7 1.3 1.1 17.5 18.4 11.9 20.3 5.0 6.0 Logan 3380 HK 13.6 9.7 5.5 4.6 1.6 1.3 30.7 30.3 10.4 19.7 7.1 8.6 Jinmao 817 HK 5.3 8.5 7.6 6.2 1.2 1.1 17.4 19.0 13.4 23.4 5.2 6.5 Source: Bloomberg, Mirae Asset Daewoo Research

Table 6. Chinese property management companies: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CG Services 6098 HK 48.0 17.1 51.8 38.0 16.1 12.0 34.0 35.1 32.8 36.4 0.5 0.6 A-Living Services 3319 HK 45.9 7.9 31.9 24.4 7.5 6.4 25.1 27.7 40.8 30.6 1.3 1.6 Poly Property Services 6049 HK 84.9 6.1 57.4 41.9 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Greentown Service 2869 HK 10.7 4.4 44.4 34.3 6.6 5.8 16.5 17.7 27.1 29.6 0.9 1.2 China Overseas Property 2669 HK 8.2 3.5 39.0 30.3 13.2 10.0 36.7 35.2 28.4 28.6 0.8 1.0 Ever Sunshine Lifestyle Services 1995 HK 15.6 3.4 59.8 38.9 11.7 9.7 22.4 27.0 61.2 53.6 0.6 0.9 S-Enjoy Service 1755 HK 24.9 2.6 43.4 29.3 15.2 11.4 37.0 41.9 51.5 48.0 1.2 1.8 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 76 August 7, 2020 China Resources Land

Figure 16. CR Land: 12-month forward P/CE Figure 17. CR Land: 12-month forward P/B

(HK$) (HK$) 50 50 1.8x

12x 1.6x 40 40 10.5x 1.4x

9x 1.2x 30 30

7.5x 1x

20 6x 20

10 10 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 18. CR Land: 12-month forward P/E ±2 SD Figure 19. CR Land: 12-month forward P/B ±2 SD

(x) (x) 12 1.6

1.4 10 +2 SD +2 SD 1.2 +1 SD +1 SD

8 5Y avg. 5Y avg.

-1 SD 1.0 -1 SD

-2 SD -2 SD 6 0.8 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 77 August 7, 2020 China Resources Land

IV. Company overview

Established in 1994, CR Land is the property development subsidiary of state-owned China Resources Holdings. The company was listed on the SEHK in 1996 and included in the Hang Seng Index (HSI) in 2010.

CR Land’s businesses include: 1) property development (mostly mid/high-end residential construction in first- and second-tier cities; 86% of revenue); 2) investment properties (shopping malls, offices, hotels, etc.; 8%); and 3) other (6%). China Resources Holdings owns 59.55% of the company, and institutional and retail investors (both domestic and foreign) own the remaining 40.41%.

Figure 20. CR Land: Revenue growth trend Figure 21. CR Land: Business structure

(CNYbn) 160 Development Investment property business Other 120

0 2012 2013 2014 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 22. Gross margins of top 10 Chinese property Figure 23. CR Land: Ownership structure developers

45% 2019 2018 (%) 40% 38% 36% 33.24 34% 34% 35% 33% 32% 31% 30% 29% 30% 28% 59.55 1.39 25% 1.44 1.48 20% 2.9

China Resources Holdings APG Asset Management Matthews International The Vanguard Group Capital Research Global Investors Other

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 78 August 7, 2020 China Resources Land

China Resources Land (1109 HK)

Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNYmn) 2019 2020F 2021F 2022F Revenue 147,736 162,338 190,852 224,185 Current assets 520,095 551,779 585,676 621,907 Cost of sales -91,736 -107,591 -127,890 -151,929 Cash & cash equivalents 61,672 55,568 75,431 97,878 Gross profit 56,000 54,747 62,962 72,256 Current receivables 51,292 54,416 57,759 61,333 SG&A -10,815 -11,884 -13,971 -16,411 Completed properties for sale 15,603 16,554 17,571 18,658 EBIT 45,185 42,864 48,991 55,845 Properties under development 339,519 360,203 382,331 405,982 EBITDA 45,946 43,527 49,654 56,508 Other current assets 49,981 63,011 50,557 36,030 Net finance income/(expenses) 718 879 743 591 Non-current assets 242,013 256,757 272,530 289,389 Share in P/L of asso. & JV 3,718 4,089 4,498 4,948 Property, plant & equipment 11,104 11,781 12,504 13,278 Other income/(expenses) 11,373 5,000 5,000 5,000 Investment properties 156,490 166,024 176,223 187,124 Profit before tax 60,994 52,833 59,233 66,384 Investments in associates/JV 40,831 43,318 45,979 48,824 Income tax -26,643 -23,078 -25,873 -28,997 Other non-current assets 33,589 35,635 37,824 40,164 Profit after tax 34,352 29,755 33,360 37,387 Total assets 762,108 808,536 858,207 911,296 Perpetual capital securities 289 0 0 0 Minority interest 5,390 5,058 6,005 7,104 Current liabilities 391,067 427,673 445,433 463,664 Net profit 28,672 24,697 27,355 30,284 Contract liabilities 226,720 240,532 255,308 271,102 Core net profit 21,647 24,697 27,355 30,284 Trade and other payables 98,213 104,197 110,598 117,439 ST bank & other borrowings 21,345 18,934 21,600 24,581 Growth/margins Other payables 44,789 64,011 57,927 50,542 Revenue growth 21.9% 9.9% 17.6% 17.5% Non-current liabilities 147,569 143,756 161,100 180,390 Gross profit growth 6.5% -2.2% 15.0% 14.8% LT bank & other borrowings 113,200 107,293 122,398 139,293 EBIT growth 2.1% -5.1% 14.3% 14.0% Other liabilities 34,369 36,462 38,702 41,097 Core net profit growth 12.2% 14.1% 10.8% 10.7% Total liabilities 538,635 571,429 606,533 644,054 EPS growth 17.7% -15.9% 10.8% 10.7% Attributable to owners 173,574 182,219 191,296 200,828 Gross margin 37.9% 33.7% 33.0% 32.2% Minority interests 49,898 54,888 60,377 66,415 EBIT margin 30.6% 26.4% 25.7% 24.9% Total equity 223,473 237,107 251,674 267,242 Core net margin 14.7% 15.2% 14.3% 13.5%

Cash flow statement (summarized) Forecasts/valuations (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNY) 2019 2020F 2021F 2022F Profit before tax 60,994 52,833 59,233 66,384 P/E (x) 8.4 8.6 7.7 7.0 Depreciation & amortization 761 663 663 663 P/B( x) 1.4 1.2 1.1 1.1 Non-cash Items -14,192 -10,580 -10,580 -10,580 EV/EBITDA (x) 8.1 7.7 6.8 6.1 Changes in working capital -14,858 -16,472 -16,472 -16,472 Core EPS (CNY) 3.11 3.46 3.84 4.25 Cash from operating activities 32,706 26,443 32,843 39,994 BVPS (CNY) 24.92 25.55 26.83 28.16 Capital expenditures -5,321 -5,853 -6,438 -7,082 DPS (CNY) 1.07 1.06 1.15 1.27 Others -37,562 -10,000 -15,000 -20,000 Payout ratio (%) 34.3% 30.0% 30.0% 30.0% Cash from investing activities -42,883 -15,853 -21,438 -27,082 Dividend yield (%) 3.6% 3.6% 3.9% 4.3% Dividends paid -7,674 -8,377 -9,311 -10,342 ROAA (%) 3.1% 3.1% 3.3% 3.4% Equity issued/(repurchased) 6,051 0 0 0 ROAE (%) 13.9% 13.9% 14.6% 15.4% Debt raised/(repaid) 12,493 -8,317 17,770 19,877 Current ratio (x) 1.3 1.3 1.3 1.3 Cash from financing activities 2,118 -16,694 8,459 9,534 Quick ratio (x) 0.4 0.4 0.4 0.4 Effect of forex rate changes 485 0 0 0 Interest coverage ratio (x) 6.2 6.2 6.2 6.2 Net change in cash -7,574 -6,105 19,863 22,446 Net debt/equity (net gearing ratio) 31.7% 28.9% 26.4% 23.9% Beginning cash 69,246 61,672 55,568 75,431 Net debt/EBITDA (x) 1.5 1.6 1.3 1.1 Ending cash 61,672 55,568 75,431 97,878 Source: Company data, Mirae Asset Daewoo estimates

Mirae Asset Daewoo Research 79 [China] Property Developers

China Vanke Buy (2202 HK) (Initiate)

Remaining resilient TP: HK$31.34 Upside: 25.0%

Mirae Asset Daewoo Co., Ltd. Yongdai Park [email protected]

Investment points Strong brand power and high margins  China Vanke (Vanke) is the no. 2 player in China’s overall housing market (4% market share) and the no. 1 player in 21 cities (including Shenzhen, Hangzhou, and Shanghai) as of 2019.  Vanke boasts a much higher average sales price relative to its peers, which allows for high gross and net margins.  Compared to rivals, Vanke has a low debt-to-equity ratio, making it well-positioned to deliver high ROE. Next growth engine: Non-development businesses  We expect recurring income from non-development businesses to go some way toward offsetting the volatility of property development revenue.  The property management business deserves particular attention. In 2020-22, we forecast revenue at Vanke Service—China’s largest provider of property management services by revenue—to expand at 30% CAGR, given: 1) the company’s contracted service area with unrecognized sales; and 2) management’s strong commitment to growth.  Although Vanke has stated it has no plans to spin off Vanke Service, such a move would be a share price catalyst were it to take place in the future. Steady cash flow  Vanke has recorded positive net operating cash flows for 11 straight years, marking a stark contrast to rivals.  We are positive on the company’s strong commitment to recouping investments and financial management capabilities.

Valuation and Initiate coverage with Buy rating and TP of HK$31.34 recommendation  Our target price is equivalent to 7.3x our 12-month forward EPS estimate. Our target P/E reflects a 25% discount to Vanke’s 2014 P/E of 9.7x to account for the likely slowdown in net profit CAGR going forward (10% during 2020-22F vs. 24% during 2015-17).  We note that the current housing market slump is similar to the one seen in 2014 (caused by government regulations on home purchases and loans).  Shares are currently trading at 6.0x 2020F P/E and 5.4x 2021F P/E. Catalysts for share prices include: 1) robust contracted sales in 2H20; 2) continued solid property management revenue growth; and/or 3) a potential spin-off of the property management business.

Risks  1) A decline in dividend payout ratio; 2) slower-than-expected growth in contracted sales; and 3) a slowdown in land acquisition

Key data

200 2202 HK HSI Index Current price (8/4/20, HK$) 25.00 Market cap (HK$bn) 347.12

Exchange HKEX Market cap (Wtr) 53.3 150 EPS growth (20F, %) 5.2 Shares outstanding (mn) 1,893.5 P/E (20F, x) 6.0 52-week low (HK$) 21.65 100 Market P/E (20F, x) 11.6 52-week high (HK$) 34.75

50 Dividend yield (%) 5.0 16.1 17.1 18.1 19.1 20.1

Share performance Earnings and valuation metrics (%) 1M 6M 12M (Dec.) 2017 2018 2019 2020F 2021F 2022F Absolute -7.2 -13.0 -9.3 Revenue (CNYmn) 237,345 297,083 367,894 417,907 484,228 561,540 Relative -5.6 -6.6 -4.9 OP (CNYmn) 60,829 87,494 107,412 111,559 124,183 138,140

OP margin (%) 25.6 29.5 29.2 26.7 25.6 24.6 NP (CNYmn) 28,052 33,773 38,872 42,377 47,049 52,224 EPS (CNY) 2.54 3.06 3.47 3.65 4.05 4.50 ROE (%) 22.8 23.4 22.6 21.5 21.8 22.1 P/E (x) 10.2 7.6 8.6 6.0 5.4 4.9 P/B (x) 2.2 1.7 1.8 1.2 1.1 1.0 Source: Company data, Mirae Asset Daewoo Research estimates Analysts who prepared this report are registered as research analysts in Korea but not in any other jurisdiction, including the US. PLEASE SEE ANALYST CERTIFICATIONS AND IMPORTANT DISCLOSURES AND DISCLAIMERS IN APPENDIX 1 AT THE END OF REPORT. August 7, 2020 Vanke

I. Investment thesis

1. Strong brand power and high margins

Vanke is one of China's most popular housing brands. The company supplies housing throughout the country, with contracted sales well-balanced across regions. In the past four years, it has been named among the top three property developers in China based on sales performance in major cities. As of 2019, Vanke was the no. 2 player in China’s overall housing market (with a 4% market share) and the largest supplier of housing in 21 cities, including Shenzhen, Hangzhou, and Shanghai.

Vanke’s rivals include Country Garden and Evergrande, which are similar in size and also target the mass market. That said, Vanke’s properties have a much higher average sales price relative to its rivals’. The company is able to set premium prices thanks to its high brand equity and strong presence in first- and second-tier cities. As a result, Vanke enjoys high gross and net margins.

Figure 2. Vanke is among the top three players in terms of Figure 1. Vanke: Contracted sales by region contracted sales in major cities

Southern Shanghai region Northern Central/Western Other (No. of 2016 2017 2018 2019* cities) 17% 19% 21% 24%

No. 1 18 22 24 21 22% 24% 24% 23%

No. 2 12 33% 28% 30% 32% 22 15 N/A No. 3 7

28% 29% 24% 20% * 2019 breakdown: 21 cities include Shenzhen, Hangzhou, Shanghai, Dongguan, Hefei, and Changchun;12 cities include Kunming, Tianjin, Nanjing, Zhengzhou, Jinan, 2016 2017 2018 2019 Nantong, and Wuxi; 7 cities include Beijing, Chongqing, and Foshan. Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 3. Vanke: Share of the Chinese housing market by Figure 4. Avg. sales price of China’s top three property contracted sales developers

(CNYbn) (CNY/m2) 700 Contracted sales (L) 5% 18,000 Vanke Evergrande Country Garden M/S (R) 16,000 600 4.1% 4.0% 4.0% 4% 14,000 500 12,000 3.1% 3% 400 3.0% 10,000 2.8% 300 8,000 2.1% 2% 6,000 200 4,000 1% 100 2,000

0 0% 0 2013 2014 2015 2016 2017 2018 2019 201420152016201720182019

Source: CEIC, company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 81 August 7, 2020 Vanke

While Vanke outperforms Country Garden and Evergrande on margins, it slightly underperforms them in terms of ROE, as the firm has conservatively managed debt growth to defend its financial soundness. Recently, amid signs of slowing housing market growth, China’s government has begun to encourage deleveraging, putting an end to the era of expansion through excessive leverage. Against this backdrop, we believe Vanke is better positioned than its rivals to maintain high profitability on the back of its sound balance sheet.

Figure 5. Gross margin by major Chinese property developer

50% 2019 2018 2017

40% 38% 36% 34% 34% 33% 32% 31% 30% 29% 30% 28% 26% 25% 25%

20% 20%

10% CR Land Vanke COLI Longfor Guangzhou Logan Shimao Agile Jinmao Evergrande Country CIFI Sunac Sino-Ocean R&F Garden

Source: Refinitiv, Mirae Asset Daewoo Research

Figure 6. ROE by major Chinese property developer

50% 2019 2018 2017

40% 36% 34% 29% 30% Vanke's ROE (23%) is a bit lower than the levels of major peers 24% (Evergrande, Country Garden) but still higher than the industry avg. 23% 23% 19% 20% 18% 17% 17% 14% 14% 13%

10% 5%

0% Sunac Logan Country Evergrande CIFI Vanke Longfor Agile Shimao Jinmao COLI CRL Guangzhou Sino-Ocean Garden R&F

Source: Refinitiv, Mirae Asset Daewoo Research

Figure 8. Debt-to-equity ratio by major Chinese property Figure 7. Debt by major Chinese property developer developer

(CNYbn) 350% 1,000 Vanke Evergrande Country Garden Vanke Evergrande Country Garden

300% 800 250% 223% 600 200% 169%

150% 400 104% 100% 200 50%

0 0% 2014 2015 2016 2017 2018 2019 2014 2015 2016 2017 2018 2019

Note: Includes both short-term and long-term debt Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 82 August 7, 2020 Vanke

2. Next growth engine: Non-development businesses

We expect Vanke’s core property development business to continue to grow, albeit not at the pace witnessed during the housing market’s boom years (+20% YoY). In 2020-22, we forecast property development revenue to expand at a CAGR of 15%.

Meanwhile, Vanke’s non-development businesses, which are still in the early stages of development, should expand at an accelerating rate. The revenue mix of non-development businesses has been increasing each year and is likely to reach 8.3% in 2022 (vs. 7.4% in 2019).

Non-development businesses include: 1) property management; 2) retail property development and management; 3) rental housing; 4) logistics and warehousing services; and 5) other. We expect recurring income from these businesses to go some way toward offsetting the volatility of property development revenue.

The growth momentum of the property management business (the highest revenue contributor among non-development businesses) deserves particular attention. The business is operated by Vanke Service, China’s largest provider of property management services by revenue (a position it has maintained for 10 consecutive years). Vanke Service reported revenue of CNY12.7bn (+30% YoY) in 2019.

Figure 9. Vanke: Revenue mix of property development Figure 10. Vanke: Revenue mix property management rising declining

(% of total revenue) (% of total revenue) 100% Property sales 8% Property management 7.8% Other services 7% 7.4% 98% 7.0% 6.7% 97.2% 6% 97.1% 96% 96.9% 5.5% 5% 95.1% 94% 93.6% 4% 4.0% 92.6% 3% 2.5% 92% 92.3% 92.0% 91.7% 2% 1.7% 2.0% 90% 1% 1.2% 0.6% 0.9% 0.9% 0.9% 0.7% 0.6% 0.5% 88% 0% 0.6% 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 12. Vanke: Property management revenue and YoY Figure 11. China’s top 10 property management firms (2019) growth

(CNYbn) 1 30 100% Property management revenue (L) Vanke Service 6 Evergrande Jinbi Property YoY growth (R) 25 2 80% 78% Greentown Service 7 A-Living Services 20

3 15 60%

CG services 8 Gemdale Property Management 49% 10 45% 4 40% 36% 5 30% 30% 30% Poly Property Services 9 Longfor Smart Service 31% 30%

5 0 20% 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F Changcheng Property 10 Jinke Property Service Source: CREIS, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 83 August 7, 2020 Vanke

In 2019, Vanke Service’s contracted service area increased by 121mn m2 (estimated annual service income of CNY5.4bn), bringing the cumulative total to 640mn m2. Of this, the area generating service revenue at end-2019 amounted to 450mn m2. Going forward, the remaining area (190mn m2) is set to generate revenue.

Management is actively supporting non-development businesses, especially property management, to diversify the firm’s revenue structure. Thus, Vanke is likely to secure more contracted service area to sustain growth momentum. Although Vanke has stated it has no plans to spin off Vanke Service, such a spin-off would be a share price catalyst were it to occur in the future.

Table 1. Listed Chinese property management companies P/E (x) Revenue (CNYbn) YoY (%) Developer Property management subsidiary Listing date 2017 2018 2019 2017 2018 2019 2017 2018 2019 Country Garden CG Services (6098 HK) 6/19/18 29.6 37.4 3.1 4.7 9.6 32.4 49.8 106.3 Agile A-Living Services (3319 HK) 2/9/18 15.0 26.1 1.8 3.4 5.1 41.5 91.8 51.8 Poly Real Estate Poly Property Services (6049 HK) 12/20/19 34.5 3.2 4.2 6.0 26.4 30.5 41.1 Greentown Greentown Service (2869 HK) 7/12/16 36.4 31.0 44.8 5.1 6.7 8.6 38.1 30.5 27.9 COLI China Overseas Property (2669 HK) 10/23/15 22.7 18.7 30.0 2.8 3.7 4.9 -5.3 31.2 33.2 CIFI Ever Sunshine Lifestyle Services (1995 HK) 12/17/18 17.7 32.4 0.7 1.1 1.9 51.1 48.3 74.5 Future Land S-Enjoy Service (1755 HK) 11/6/18 14.1 32.0 0.9 1.2 2.0 51.1 35.4 72.5 Average 29.6 21.0 33.9 33.6 45.4 58.2 Source: Bloomberg, Mirae Asset Daewoo Research

Table 2. Chinese property management companies: Valuation table

Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Dividend yield (%) Company Ticker (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CG Services 6098 HK 48.0 17.1 51.8 38.0 16.1 12.0 34.0 35.1 32.8 36.4 0.5 0.6 A-Living Services 3319 HK 45.9 7.9 31.9 24.4 7.5 6.4 25.1 27.7 40.8 30.6 1.3 1.6 Poly Property Services 6049 HK 84.9 6.1 57.4 41.9 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Greentown Service 2869 HK 10.7 4.4 44.4 34.3 6.6 5.8 16.5 17.7 27.1 29.6 0.9 1.2 China Overseas Property 2669 HK 8.2 3.5 39.0 30.3 13.2 10.0 36.7 35.2 28.4 28.6 0.8 1.0 Ever Sunshine Lifestyle Services 1995 HK 15.6 3.4 59.8 38.9 11.7 9.7 22.4 27.0 61.2 53.6 0.6 0.9 S-Enjoy Service 1755 HK 24.9 2.6 43.4 29.3 15.2 11.4 37.0 41.9 51.5 48.0 1.2 1.8 Average 46.8 33.9 11.1 8.8 26.4 28.6 35.9 37.7 0.8 1.1 Note: Based on Aug. 4 closing prices Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 84 August 7, 2020 Vanke

3. Steady cash flow

Securing steady cash flow is critical for property developers. When a housing development project books sluggish contracted sales, the resulting liquidity issues may lead to insolvency. In this respect, Vanke stands in stark contrast to its rivals, having achieved positive net operating cash flows for 11 consecutive years from 2009 to 2019. This has allowed Vanke to efficiently execute new projects. Notably, Vanke’s projects are characterized by high presale ratios and down payment rates (backed by its trusted brand and project execution capabilities), supporting healthy cash flows. We expect Vanke to maintain positive net operating cash flows in 2020-22, given management’s strong commitment to recouping investments from development projects and rigorous financial management.

Figure 13. Vanke: Net cash flow from operating activities

(CNYbn) 100

82 80 75 Positive operating cash flow for 11 consecutive years 61 60 46 48 42 40 40 34

20 16 9 2 3 4 2 0 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research

Figure 15. Country garden: Net cash flow from operating Figure 14. Evergrande: Net cash flow from operating activities activities

(CNYbn) (CNYbn) 70 55 60

40 41 40 10 29 24 -20 20 15 -24 -50 -39 -45 -59 0 -80 -67 -6 -4 -110 -20 -18 -140

-170 -151 -40 13 14 15 16 17 18 19 13 14 15 16 17 18 19

Source: Evergrande, Mirae Asset Daewoo Research Source: Country Garden, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 85 August 7, 2020 Vanke

II. Earnings and forecasts

Vanke fared well in 1Q20. Revenue was flattish YoY, but net profit rose 11% YoY on a decline in minority interests. Although the first quarter is usually not very important to full-year earnings, the stronger-than-expected 1Q20 results have raised expectations on the subsequent quarters. Of note, Vanke’s balance sheet improved, with: 1) a 4% YTD increase in cash and cash equivalents; and 2) an 8.4%p YTD decline in the net debt-to-equity ratio.

We forecast Vanke’s net profit to increase 9% in 2020 and 11% in 2021, assuming that: 1) property development and related revenue grows 13% in 2020 and 15% in 2021 (with gross margins of 35% and 34%, respectively); and 2) property management revenue expands at a CAGR of 30% (with a gross margin of 20%).

The firm’s contracted sales growth was tepid from February to April due to COVID-19, but turned positive once economic activities resumed. The recovery gathered steam in June (+11% YoY). Cumulatively from January to June, contracted sales declined only 4% YoY. We project contracted sales to grow 7% YoY in both 2020 and 2021. As of 1Q20, sold but unbooked sales amounted to CNY659bn, which represents 171% of our full-year property development revenue estimate. Accordingly, we believe Vanke’s property development business is well positioned to display revenue growth in the low-10% range.

Figure 16. Vanke: NP and YoY growth Figure 17. Vanke: Contracted sales and YoY growth

(CNYbn) (CNYbn) Contracted sales (L) YoY (R) 60 NP (L) YoY (R) 40% 700 45% 50%

35% 40% 50 33% 600 40% 30% 500 40 30% 25% 400 30 20% 20% 22% 20% 300 15% 16% 15% 15% 20 15% 11% 11% 10% 200 10% 4% 10 9% 0% 5% 100 -4% 0 0% 0 -10% 2015 2016 2017 2018 2019 2020F 2021F 2022F 2015 2016 2017 2018 2019 6M20

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Figure 18. Vanke: Property development revenue, YoY Figure 19. Vanke: Property management revenue, YoY growth, and gross margin growth, and gross margin

(CNYbn) Development/related revenue (L) (CNYbn) Property management revenue (L) 600 YoY (R) 50% 25 YoY (R)

Gross margin (R) Gross margin (R) 90% 500 40% 20 37% 36% 35% 34% 33% 78% 400 32% 70% 30% 15 25% 300 24% 50% 20% 10 15% 200 15% 36% 30% 30% 30% 30% 30% 13% 10% 5 100 20% 20% 19% 19% 20% 20% 2% 0 0% 0 10% 2017 2018 2019 2020F 2021F 2022F 2017 2018 2019 2020F 2021F 2022F

Source: Company data, Mirae Asset Daewoo Research Source: Company data, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 86 August 7, 2020 Vanke

Table 3. Vanke: Annual earnings forecasts and key assumptions (CNY mn) 2017 2018 2019 2020F 2021F 2022F Earning drivers Contracted sales 529,882 606,954 630,840 675,630 723,599 774,975 Contracted GFA (mn m2) 36 40 41 43 45 48 Contracted ASP (CNY/m2) 14,739 15,032 15,341 15,647 15,960 16,280 Booked sales 227,687 273,680 334,040 385,816 445,618 514,688 Booked GFA (mn m2) 20 22 25 27 30 33 Booked ASP (CNY/m2) 11,496 12,489 13,577 14,256 14,969 15,717 Revenue 237,345 297,083 367,894 417,907 484,228 561,540 Property development/related 227,979 284,561 352,654 398,730 459,964 530,697 Property sales 225,761 278,083 340,582 385,816 445,618 514,688 Investment property rentals 1,373 3,067 4,773 5,250 6,300 7,560 Construction contracts 845 3,411 7,299 7,664 8,047 8,449 Property management 7,199 9,796 12,700 16,510 21,463 27,902 Other services 2,166 2,726 2,540 2,667 2,801 2,941 Cost of revenue (160,621) (187,131) (235,697) (272,916) (321,307) (378,477) Gross profit 76,723 109,952 132,197 144,991 162,921 183,063 SG&A (15,895) (22,458) (24,785) (33,433) (38,738) (44,923) EBIT 60,829 87,494 107,412 111,559 124,183 138,140 Net financial income/expenses (1,917) (5,662) (5,399) (5,013) (5,340) (5,676) Share in profits/losses of joint ventures/associates 4,569 6,280 3,791 5,000 5,000 5,000 Net other income/expenses 1,201 (1,047) 313 0 0 0 Profit before tax 64,682 87,065 106,116 111,545 123,842 137,464 Tax (27,473) (37,793) (50,985) (51,006) (56,629) (62,858) Profit after tax 37,208 49,272 55,131 60,539 67,213 74,606 Minority interests 9,157 15,500 16,260 18,162 20,164 22,382 NP 28,052 33,773 38,872 42,377 47,049 52,224 YoY growth Revenue 3.7% 25.2% 23.8% 13.6% 15.9% 16.0% Property development/related 2.3% 24.8% 23.9% 13.1% 15.4% 15.4% Property sales 1.5% 23.2% 22.5% 13.3% 15.5% 15.5% Investment property rentals 123.4% 55.6% 10.0% 20.0% 20.0% Construction contracts 77.6% 303.5% 114.0% 5.0% 5.0% 5.0% Property management 77.5% 36.1% 29.7% 30.0% 30.0% 30.0% Other services 9.6% 25.9% -6.8% 5.0% 5.0% 5.0% Gross profit 31.6% 43.3% 20.2% 9.7% 12.4% 12.4% EBIT 32.3% 43.8% 22.8% 3.9% 11.3% 11.2% Profit before tax 30.8% 34.6% 21.9% 5.1% 11.0% 11.0% NP 33.4% 20.4% 15.1% 9.0% 11.0% 11.0% Gross margin 32.3% 37.0% 35.9% 34.7% 33.6% 32.6% Property development/related 32.5% 37.4% 36.2% 35.0% 34.0% 33.0% Property management 19.5% 18.6% 18.6% 20.0% 20.0% 20.0% Other services 58.3% 61.5% 86.2% 80.0% 80.0% 80.0% SG&A/revenue 6.7% 7.6% 6.7% 8.0% 8.0% 8.0% EBIT margin 25.6% 29.5% 29.2% 26.7% 25.6% 24.6% Tax rate 42.5% 43.4% 48.0% 45.7% 45.7% 45.7% Net margin 11.8% 11.4% 10.6% 10.1% 9.7% 9.3% Source: Company data , Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 87 August 7, 2020 Vanke

III. Valuation

We initiate our coverage of Vanke with a Buy recommendation and target price of HK$31.34 (25% upside). Our target price is based on our 12-month forward EPS estimate (HK$4.31) and a P/E of 7.3x, which represents a 25% discount to the firm’s P/E in 2014, when government regulations on home purchases and loans weighed on the residential property market (leading to a marked slowdown in property investment growth). The discount is due to the likely slowdown in net profit CAGR going forward (10% during 2020-22F vs. 24% CAGR 2015- 17).

Vanke shares are currently trading at 6.0x 2020F P/E and 5.4x 2021F P/E. Catalysts for share prices include: 1) robust contracted sales in 2H20; 2) solid property management revenue growth; and/or 3) the spin-off of the property management business.

Table 4. Vanke: P/E valuation (CNYmn) 2015 2016 2017 2018 2019 2020F 2021F 2022F NP 12,215 13,915 16,379 19,296 21,647 24,697 27,355 30,284 YoY 15.1% 16.0% 33.4% 20.4% 15.1% 9.0% 11.0% 11.0% EPS 1.64 1.90 2.54 3.06 3.47 3.65 4.05 4.50 YoY 14.8% 16.0% 33.4% 20.4% 13.3% 5.2% 11.0% 11.0% P/E (x) 11.7 8.3 10.2 7.6 8.6 6.0 5.4 4.9 12MF EPS (HK$) 4.31 (CNY3.88 x 1.11 HKD/CNY) Target P/E 7.3 Target price (HK$) 31.34 Source: Company data, Mirae Asset Daewoo Research

Table 5. Chinese property developers: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F Vanke-H 2202 HK 25.0 44.76.0 5.4 1.2 1.1 21.5 21.8 5.2 11.05.0 5.8 Evergrande 3333 HK 22.0 37.1 7.9 7.0 1.5 1.4 20.7 21.6 89.7 12.8 5.5 6.5 COLI 688 HK 23.5 33.1 5.9 5.1 0.8 0.7 13.4 13.8 (7.6) 15.3 4.9 5.6 CR Land 1109 HK 33.0 30.3 8.6 7.7 1.2 1.1 13.9 14.6 11.4 10.8 3.6 3.9 Longfor 960 HK 38.0 29.4 10.6 9.0 1.9 1.7 18.7 19.4 2.8 18.6 4.1 5.0 Country Garden 2007 HK 10.1 28.4 4.3 3.9 1.1 0.9 26.2 24.5 13.1 11.8 7.1 7.8 Sunac 1918 HK 35.6 21.44.7 4.0 1.3 1.0 31.5 29.0 14.7 16.44.7 5.5 Shimao 813 HK 33.0 15.0 8.0 6.7 1.3 1.1 17.5 18.4 11.9 20.3 5.0 6.0 Logan 3380 HK 13.6 9.7 5.5 4.6 1.6 1.3 30.7 30.3 10.4 19.7 7.1 8.6 Jinmao 817 HK 5.3 8.5 7.6 6.2 1.2 1.1 17.4 19.0 13.4 23.4 5.2 6.5 Source: Bloomberg, Mirae Asset Daewoo Research

Table 6. Chinese property management companies: Valuation table Dividend yield Price Mkt cap P/E (x) P/B (x) ROE (%) EPS growth (%) Company Ticker (%) (local) (US$bn) 20F 21F 20F 21F 20F 21F 20F 21F 20F 21F CG Services 6098 HK 48.0 17.1 51.8 38.0 16.1 12.0 34.0 35.1 32.8 36.4 0.5 0.6 A-Living Services 3319 HK 45.9 7.9 31.9 24.4 7.5 6.4 25.1 27.7 40.8 30.6 1.3 1.6 Poly Property Services 6049 HK 84.9 6.1 57.4 41.9 7.3 6.5 13.2 15.8 9.9 36.9 0.5 0.7 Greentown Service 2869 HK 10.7 4.4 44.4 34.3 6.6 5.8 16.5 17.7 27.1 29.6 0.9 1.2 China Overseas Property 2669 HK 8.2 3.5 39.0 30.3 13.2 10.0 36.7 35.2 28.4 28.6 0.8 1.0 Ever Sunshine Lifestyle Services 1995 HK 15.6 3.4 59.8 38.9 11.7 9.7 22.4 27.0 61.2 53.6 0.6 0.9 S-Enjoy Service 1755 HK 24.9 2.6 43.4 29.3 15.2 11.4 37.0 41.9 51.5 48.0 1.2 1.8 Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 88 August 7, 2020 Vanke

Figure 20. Vanke: 12-month forward P/E Figure 21. Vanke: 12-month forward P/B

(HK$) 14x (HK$) 50 50 3x 12x 2.5x

40 10x 40 2x

30 8x 30 1.5x

6x 20 20 1x

10 10

0 0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Figure 22. Vanke: 12-month forward P/E ±2 SD Figure 23. Vanke: 12-month forward P/B ±2 SD

(x) (x) 12 2.5

2.2 10

+2 SD 1.9 +2 SD +1 SD 8 +1 SD 5Y avg. 1.6 5Y avg. -1 SD 6 1.3 -1 SD -2 SD -2 SD 4 1.0 2015 2016 2017 2018 2019 2020 2015 2016 2017 2018 2019 2020

Source: Bloomberg, Mirae Asset Daewoo Research Source: Bloomberg, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 89 August 7, 2020 Vanke

IV. Company overview

Vanke is the world’s largest property developer by market cap. Founded in 1984, Vanke was listed on the Shenzhen Stock Exchange in 1991 and then on the SEHK in 2014 through the conversion of its Shenzhen-listed B shares to Hong Kong-listed H shares (rather than the issuance of new shares).

Initially drawing attention as the first private-sector firm to join the Chinese property market when it was still dominated by state-run companies, Vanke eventually grew to become the largest property developer in China. In June 2017, however, Wang Shi, the founder of Vanke Group, stepped down as chairman after Baoneng's drawn-out hostile takeover bid. Shenzhen Metro Group, the state-owned railway company, stepped in as a white knight for Vanke, becoming the largest shareholder with a 28.7% stake.

Vanke’s businesses are: 1) property development (housing, office/retail space, amenities; 93% of total revenue); 2) property management; and 3) other (e.g., rental housing and construction).

Figure 24. Vanke: Revenue trends Figure 25. Vanke: Business structure

(CNYbn) 500 Development/related Property management Other

400

300

200

100

0 2013 2014 2015 2016 2017 2018 2019

Source: Company data, Mirae Asset Daewoo Research Source: Company materials, Mirae Asset Daewoo Research

Figure 26. Vanke: Listed shares Figure 27. Vanke: Ownership structure

A shares H shares Total (%) 16.29 Shares outstanding 9,724 1,893 11,618 27.91 (mn)

Free float 5,436 1,893 7,330 (mn) 3.93 Free float % 55.9% 100.0% 63.1% 3.47 48.39 Ownership by strategic 44.1% 0% 36.9% entities Shenzhen Metro Group Guosen Securities Market cap Ju Shenghua Other A-shareholders 44.7 (US$bn) H-shareholders

Source: Refinitiv, Mirae Asset Daewoo Research Source: Refinitiv, Mirae Asset Daewoo Research

Mirae Asset Daewoo Research 90 August 7, 2020 Vanke

Vanke (2202 HK)

Income statement (summarized) Balance sheet (summarized) (CNYmn) 2019 2020F 2021F 2022F (CNYmn) 2019 2020F 2021F 2022F Revenue 367,894 417,907 484,228 561,540 Current assets 1,439,063 1,479,395 1,573,599 1,702,831 Cost of sales -235,697 -272,916 -321,307 -378,477 Cash & cash equivalents 159,739 163,269 171,631 191,498 Gross profit 132,197 144,991 162,921 183,063 Current receivables 355,062 365,013 388,256 420,142 SG&A -24,785 -33,433 -38,738 -44,923 Completed properties for sale 66,034 67,885 72,208 78,138 EBIT 107,412 111,559 124,183 138,140 Properties under development 622,292 639,733 680,470 736,353 EBITDA 113,718 118,179 131,135 145,439 Other current assets 229,480 237,039 254,579 270,244 Net finance income/(expenses) -5,399 -5,013 -5,340 -5,676 Non-current assets 290,940 299,094 318,140 344,267 Share in P/L of asso. & JV 3,791 5,000 5,000 5,000 Property, plant & equipment 29,698 30,530 32,474 35,141 Other income/(expenses) 313 0 0 0 Investment properties 48,951 50,323 53,527 57,923 Profit before tax 106,116 111,545 123,842 137,464 Investments in associates/JV 130,476 134,133 142,674 154,391 Income tax -50,985 -51,006 -56,629 -62,858 Other non-current assets 81,816 84,109 89,464 96,812 Profit after tax 55,131 60,539 67,213 74,606 Total assets 1,730,003 1,778,489 1,891,739 2,047,098 Perpetual capital securities 0 0 0 0 Minority interests 16,260 18,162 20,164 22,382 Current liabilities 1,272,610 1,290,322 1,367,014 1,483,279 Net profit 38,872 42,377 47,049 52,224 Contract liabilities 577,047 618,018 661,897 708,892 Trade and other payables 542,268 557,466 592,964 641,661 Growth/margins ST bank & other borrowings 96,511 100,453 107,006 113,734 Revenue growth 23.8% 13.6% 15.9% 16.0% Other payables 56,783 14,386 5,147 18,992 Gross profit growth 20.2% 9.7% 12.4% 12.4% Non-current liabilities 186,814 196,611 209,435 222,636 EBIT growth 22.8% 3.9% 11.3% 11.2% LT bank & other borrowings 185,243 194,996 207,717 220,777 Net profit growth 15.1% 9.0% 11.0% 11.0% Other liabilities 1,571 1,615 1,718 1,859 EPS growth 13.3% 5.2% 11.0% 11.0% Total liabilities 1,459,424 1,486,933 1,576,449 1,705,915 Gross margin 35.9% 34.7% 33.6% 32.6% Attributable to owners 188,058 205,734 225,177 246,565 EBIT margin 29.2% 26.7% 25.6% 24.6% Minority interests 82,521 85,821 90,113 94,618 Net margin 10.6% 10.1% 9.7% 9.3% Total equity 270,579 291,556 315,290 341,183

Cash flow statement (summarized) Key valuation metrics/ratios (CNYmn) 2019 2020F 2021F 2022F (CNY) 2019 2020F 2021F 2022F Profit before tax 106,116 111,545 123,842 137,464 P/E (x) 8.6 6.0 5.4 4.9 Depreciation & amortization 6,306 6,621 6,952 7,300 P/B (x) 1.8 1.2 1.1 1.0 Non-cash items -40,509 -40,000 -40,000 -40,000 EV/EBITDA (x) 4.9 4.4 4.1 3.7 Changes in working capital -26,226 -30,000 -30,000 -30,000 EPS (CNY) 3.47 3.65 4.05 4.50 Cash from operating activities 45,687 48,166 60,794 74,763 BVPS (CNY) 16.77 17.71 19.38 21.22 Capital expenditures -6,244 -6,869 -7,555 -8,311 DPS (CNY) 1.05 1.09 1.28 1.42 Other -22,383 -30,000 -40,000 -40,000 Payout ratio 30.4% 30.0% 35.0% 35.0% Cash from investing activities -28,627 -36,869 -47,555 -48,311 Dividend yield 4.0% 4.2% 4.9% 5.4% Dividends paid -36,823 -21,462 -24,151 -26,372 ROAA 2.4% 2.4% 2.6% 2.7% Equity issued/(repurchased) 6,643 0 0 0 ROAE 22.6% 21.5% 21.8% 22.1% Debt raised/(repaid) -8,571 13,695 19,274 19,787 Current ratio (x) 1.1 1.1 1.2 1.1 Cash from financing activities -33,338 -7,767 -4,877 -6,585 Quick ratio (x) 0.6 0.6 0.6 0.6 Effect of forex rate changes 349 - - - Interest coverage ratio (x) 8.1 8.0 8.3 8.7 Net change in cash -15,930 3,530 8,362 19,867 Net debt/equity (net gearing ratio) 42.7% 43.1% 43.3% 40.0% Beginning cash 175,668 159,739 163,269 171,631 Net debt/EBITDA (x) 1.0 1.1 1.0 0.9 Ending cash 159,739 163,269 171,631 191,498 Source: Company data, Mirae Asset Daewoo Research estimates

Mirae Asset Daewoo Research 91 August 7, 2020 Asian Property Developers

Appendix 1

Important disclosures & disclaimers

Korea Two-year rating and TP history

Company (Ticker) Date Rating TP Company (Ticker) Date Rating TP Vinhomes (VHM VN) 08/07/2020 Buy 112,000 China Resources Land (1109 HK) 08/07/2020 Buy 40.88 Vingroup (VIC VN) 08/07/2020 Buy 116,000 Vanke (2202 HK) 08/07/2020 Buy 31.34 Sunac China Holdings (1918 HK) 08/07/2020 Buy 47.63

(HK$) China Vanke (2202 HK) (HK$) China Resources Land (HK$) Sunac China Holdings (1918 HK) (VND) Vinhomes (VHM VN) 40 50 (1109 HK) 60 120,000 50 100,000 40 30 40 80,000 30 20 30 60,000 20 20 40,000 10 10 10 20,000 0 0 0 0 8/18 1/19 6/19 11/19 4/20 8/18 1/19 6/19 11/19 4/20 8/18 1/19 6/19 11/19 4/20 8/18 1/19 6/19 11/19 4/20

(VND) Vingroup (VIC VN) 150,000

120,000

90,000

60,000

30,000

0 8/18 1/19 6/19 11/19 4/20

Stock ratings Sector ratings Buy Expected 12-month performance: +20% or greater Overweight Expected to outperform the market over 12 months Trading Buy Expected 12-month performance: +10% to +20% Neutral Expected to perform in line with the market over 12 months Hold Expected 12-month performance: -10% to +10% Underweight Expected to underperform the market over 12 months Sell Expected 12-month performance: -10% or worse

Rating and TP history: Share price (─), TP (▬), Not Rated (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆) * Our investment rating is a guide to the expected return of the stock over the next 12 months. * Outside of the official ratings of Mirae Asset Daewoo Co., Ltd., analysts may call trading opportunities should technical or short-term material developments arise. * The TP was determined by the research analyst through valuation methods discussed in this report, in part based on estimates of future earnings. * TP achievement may be impeded by risks related to the subject securities and companies, as well as general market and economic conditions.

Ratings distribution and investment banking services Buy Trading Buy Hold Sell Ratings distribution 76.22% 11.59% 11.59% 0.60% Investment banking services 75.00% 10.00% 15.00% 0% * Based on recommendations in the last 12 months (as of June 30, 2020)

Disclosures As of the publication date, Mirae Asset Daewoo Co., Ltd. and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Analyst Certification The research analysts who prepared this report (the “Analysts”) are registered with the Korea Financial Investment Association and are subject to Korean securities regulations. They are neither registered as research analysts in any other jurisdiction nor subject to the laws or regulations thereof. Each Analyst responsible for the preparation of this report certifies that (i) all views expressed in this report accurately reflect the personal views of the Analyst about any and all of the issuers and securities named in this report and (ii) no part of the compensation of the Analyst was, is, or will be directly or indirectly related to the specific recommendations or views contained in this report. Mirae Asset Daewoo Co., Ltd. (“Mirae Asset Daewoo”) policy prohibits its Analysts and members of their households from owning securities of any company in the Analyst’s area of coverage, and the Analysts do not serve as an officer, director or advisory board member of the subject companies. Except as otherwise specified herein, the Analysts have not received any compensation or any other benefits from the subject companies in the past 12 months and have not been promised the same in connection with this report. Like all employees of Mirae Asset Daewoo, the Analysts receive compensation that is determined by overall firm profitability, which includes revenues from, among other business units, the institutional equities, investment banking, proprietary trading and private client division. At the time of publication of this report, the Analysts do not know or have reason to know of any actual, material conflict of interest of the Analyst or Mirae Asset Daewoo except as otherwise stated herein.

Mirae Asset Daewoo Research 92 August 7, 2020 Asian Property Developers

Disclaimers This report was prepared by Mirae Asset Daewoo, a broker-dealer registered in the Republic of Korea and a member of the Korea Exchange. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and Mirae Asset Daewoo makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness, or correctness of the information and opinions contained herein or of any translation into English from the Korean language. In case of an English translation of a report prepared in the Korean language, the original Korean language report may have been made available to investors in advance of this report. The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws, and accounting principles, and no person whose receipt or use of this report would violate any laws or regulations or subject Mirae Asset Daewoo or any of its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof. This report is for general information purposes only and is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person, and such person shall not be treated as a client of Mirae Asset Daewoo by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents do not accept any liability for any loss arising out of the use hereof. Mirae Asset Daewoo may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views, and analytical methods of the analysts who prepared them. Mirae Asset Daewoo may make investment decisions that are inconsistent with the opinions and views expressed in this research report. Mirae Asset Daewoo, its affiliates, and their directors, officers, employees, and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. Mirae Asset Daewoo and its affiliates may have had, or may be expecting to enter into, business relationships with the subject companies to provide investment banking, market-making, or other financial services as are permitted under applicable laws and regulations. No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of Mirae Asset Daewoo. For further information regarding company-specific information as it pertains to the representations and disclosures in this Appendix 1, please contact [email protected] or +1 (212) 407-1000.

Vietnam Disclosures As of the publication date, Mirae Asset (Vietnam) LLC, and/or its affiliates do not have any special interest with the subject company and do not own 1% or more of the subject company's shares outstanding.

Stock Ratings Industry Ratings Buy Relative performance of 20% or greater Overweight Fundamentals are favorable or improving Trading Buy Relative performance of 10% or greater, but with volatility Neutral Fundamentals are steady without any material changes Hold Relative performance of -10% and 10% Underweight Fundamentals are unfavorable or worsening Sell Relative performance of -10% Ratings and Target Price History (Share price (─), Target price (▬), Not covered (■), Buy (▲), Trading Buy (■), Hold (●), Sell (◆)) * Our investment rating is a guide to the relative return of the stock versus the market over the next 12 months. * Although it is not part of the official ratings at Mirae Asset (Vietnam) LLC, we may call a trading opportunity in case there is a technical or short- term material development. * The target price was determined by the research analyst through valuation methods discussed in this report, in part based on the analyst’s estimate of future earnings. * The achievement of the target price may be impeded by risks related to the subject securities and companies, as well as genera market and economic conditions

Disclaimers This report is published by Mirae Asset (Vietnam) LLC (MAS), a broker dealer registered in the Socialist Republic of Vietnam and a member of the Vietnam Stock Exchanges. Information and opinions contained herein have been compiled in good faith and from sources believed to be reliable, but such information has not been independently verified and MAS makes no guarantee, representation or warranty, express or implied, as to the fairness, accuracy, completeness or correctness of the information and opinions contained herein or of any translation into English from the Vietnamese language. In case of an English translation of a report prepared in the Vietnamese language, the original Vietnamese language report may have been made available to investors in advance of this report

The intended recipients of this report are sophisticated institutional investors who have substantial knowledge of the local business environment, its common practices, laws and accounting principles and no person whose receipt or use of this report would violate any laws and regulations or subject MAS and its affiliates to registration or licensing requirements in any jurisdiction shall receive or make any use hereof

This report is for general information purposes only and it is not and shall not be construed as an offer or a solicitation of an offer to effect transactions in any securities or other financial instruments. The report does not constitute investment advice to any person and such person shall not be treated as a client of MAS by virtue of receiving this report. This report does not take into account the particular investment objectives, financial situations, or needs of individual clients. The report is not to be relied upon in substitution for the exercise of independent judgment. Information and opinions contained herein are as of the date hereof and are subject to change without notice. The price and value of the investments referred to in this report and the income from them may depreciate or appreciate, and investors may incur losses on investments. Past performance is not a guide to future performance. Future returns are not guaranteed, and a loss of original capital may occur. Mirae Asset Vietnam, its affiliates and their directors, officers, employees and agents do not accept any liability for any loss arising out of the use hereof.

MAS may have issued other reports that are inconsistent with, and reach different conclusions from, the opinions presented in this report. The reports may reflect different assumptions, views and analytical methods of the analysts who prepared them. MAS may make investment decisions that are inconsistent with the opinions and views expressed in this research report. MAS, its affiliates and their directors, officers, employees and agents may have long or short positions in any of the subject securities at any time and may make a purchase or sale, or offer to make a purchase or sale, of any such securities or other financial instruments from time to time in the open market or otherwise, in each case either as principals or agents. MAS and its affiliates may have had, or maybe expecting to enter into, business relationships with the subject companies to provide investment banking, market making or other financial services as are permitted under applicable laws and regulations

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No part of this document may be copied or reproduced in any manner or form or redistributed or published, in whole or in part, without the prior written consent of MAS.

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