Longfor Properties (960 HK) Longfor Pr Operties

China Financials 11 April 2016

Longfor Properties (960 HK) Longfor Pr operties

Target price: HKD13.29 Share price (8 Apr): HKD11.24 | Up/downside: +18.2%

Initiation: ahead of the pack in strategy

 Reaping the rewards of its early return to China’s upper-tier cities Cynthia Chan (852) 2773 8243  Profitability and sales growth sustained in difficult environment [email protected]  Initiating with Buy (1) rating and 12-month target price of HKD13.29

Investment case: We initiate coverage of Longfor Properties, a Beijing- Share price performance based company engaged in property development and investment in 24 (HKD) (%) cities in China, with a Buy (1) call. We see Longfor as well placed to reap 15 130 the benefits of its early return to the upper-tier cities, chiefly through the 13 120 11 110 reasonable cost of land it acquired in these cities. 10 100

8 90 In the face of housing oversupply in lower-tier cities, Longfor returned to Apr-15 Jul-15 Oct-15 Jan-16 Apr-16

China’s upper-tier cities before many of its peers, and we believe it remains Long Prop (LHS) Relative to HSI (RHS) ahead in terms of strategy. In our view, it has proven its sales execution ability in its 9 core cities (including Beijing, Shanghai, Chongqing, Chengdu, 12-month range 8.53-14.30 Hangzhou) in the past few years, which should enable sustained stable Market cap (USDbn) 8.43 contract sales growth of 13.9% YoY in 2016 (to CNY62.1bn) and 12.1% 3m avg daily turnover (USDm) 5.89 YoY in 2017 (to CNY69.6bn). Moreover, Longfor acquired land in its core Shares outstanding (m) 5,821 Major shareholder Madam Wu Yajun (44.2%) cities at a reasonable cost before other developers returned, which should support steady margins. Financial summary (CNY) Year to 31 Dec 16E 17E 18E Due to Longfor’s robust investment property pipeline, we forecast 39.6% Revenue (m) 55,701 60,445 67,212 YoY growth in rental income in 2016 (to CNY1,976m), following a 61.5% Operating profit (m) 12,861 13,827 15,473 Net profit (m) 8,079 9,050 10,006 YoY rise in 2015. Our forecasts call for rental income growth of 32.6% YoY Core EPS (fully-diluted) 1.378 1.544 1.707 in 2017 and 22.6% YoY in 2018, and by 2018 Longfor’s rental income EPS change (%) 16.3 12.0 10.6 should fully cover interest expenses. Daiwa vs Cons. EPS (%) (1.7) (0.9) 2.8 PER (x) 6.8 6.1 5.5 Dividend yield (%) 4.4 5.0 5.5 Separately, we believe the company has shown sound financial DPS 0.416 0.466 0.516 management skills (in recent years). As a result of its stable net gearing PBR (x) 0.9 0.8 0.7 (below 60%), well-managed debt structure, and declining average EV/EBITDA (x) 7.7 7.4 7.0 ROE (%) 13.9 14.2 14.2 borrowing cost, Longfor has been assigned favourable credit ratings by Source: FactSet, Daiwa forecasts credit rating agencies. Also, with 50% of its foreign currency debt hedged, CNY depreciation should have a minimal impact on Longfor’s earnings, in our view.

Catalysts: Among the possible share-price catalysts that we see are: 1) strong home sales in cities to which Longfor has large exposure, and 2) increased market interest in quality non-SOE developers that can achieve sustained growth and profitability, especially after the release of 2015 results by China developers.

Valuation: Our 12-month target price of HKD13.29 is set at a 30% discount to our forecast end-2016 NAV of HKD18.98, and translates into PERs of 8.0x for 2016E and 7.2x for 2017E.

Risks: The key risks to our call include: 1) a further deterioration in China’s economy weighing on housing demand, 2) more property tightening measures imposed in upper-tier cities, and 3) intense competition for quality land plots in upper-tier cities.

See important disclosures, including any required research certifications, beginning on page 42

Longfor Properties (960 HK): 11 April 2016

Table of contents

Strategically speaking, ahead of its peers ...... 6 Returned to upper-tier cities before many of its peers ...... 6 Landbank optimisation done at reasonable cost ...... 11 Land acquisitions have slowed in recent years ...... 11 Rapidly growing recurring income ...... 17 4.8m sq m of investment properties ...... 17 Sound financial management ...... 20 Well-managed gearing, debt structure and borrowing costs ...... 20 Stable earnings growth ...... 23 Earnings outlook ...... 23 Valuation ...... 26 Initiating with a Buy (1) call and TP of HKD13.29 ...... 26 Risks ...... 30 Appendix I: company background ...... 31 Mid-range to high-end property developer ...... 31 Appendix II: residential market in Longfor’s core cities ...... 36 Appendix III: housing inventory situation in Longfor’s core cities ...... 38

Longfor Properties (960 HK): 11 April 2016

How do we justify our view? Growth outlook Valuation Earnings revisions

Growth outlook Longfor: contract sales Longfor recorded contract sales of CNY54.5bn in 2015, a ('000 sqm) (CNY/sqm) 10,000 18,000 rise of 11.2% YoY. We forecast contract sales of 14,771 13,510 CNY62.1bn (up 13.9% YoY) in 2016 and CNY69.6bn (up 8,000 12,854 11,645 12.1% YoY) in 2017. We believe the company is on track to 11,293 10,803 9,601 12,000 deliver steady sales growth given its focus on 10 core 6,000 4,540 4,599 4,715 cities, where property markets showed decent growth in 4,180 4,261 4,243 4,000 3,286 terms of home sales and prices in 2010-15 and housing 6,000 demand-supply dynamics are more balanced (than in 2,000 lower-tier cities). 0 0 2011 2012 2013 2014 2015 2016E 2017E Contracted GFA Contracted ASP (RHS)

Source: Longfor, Daiwa forecasts

Valuation Longfor: discount to NAV Longfor shares are trading at a 40.8% discount to our end- (%) 2016 NAV forecast, below their 2010-15 mean discount of (10) 37.5%. Compared with large-cap peers, which are trading at 42.8% discount to NAV, on our forecasts, Longfor’s NAV (20) valuation does not seem expensive. We believe Longfor +1SD -29.0% merits a premium valuation, based on its early return to the (30) upper-tier cities, land acquisitions in upper-tier cities at (40) Mean -37.5% reasonable costs, ability to maintain growth and profitability, rapidly growing investment property portfolio, (50) -1SD -46.0% and prudent financial management. In our view, these qualities are unusual among China developers, especially (60) 2010 2011 2012 2013 2014 2015 2016 non-SOEs. Source: Bloomberg, Daiwa

Earnings revisions Longfor: revisions to Bloomberg consensus EPS forecasts Our 2016-17 earnings forecasts are 1-2% below those of (CNY) the Bloomberg consensus on our lower revenue and gross 2.4 margin forecasts. But our 2018E EPS is 3% above 2.2 consensus, largely because we expect higher revenue 2.0 from more recognised projects that year (our revenue 1.8 forecast is 3% above consensus). 1.6 1.4 1.2 1.0 0.8 Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16 Mar-16 2016E consensus EPS 2017E consensus EPS

Source: Bloomberg, Daiwa

Longfor Properties (960 HK): 11 April 2016

Financial summary Key assumptions Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Recognized GFA ('000 sqm) 1,678 2,512 4,131 4,512 4,851 4,731 4,577 4,676 Recognized ASP (CNY/sqm) 13,930 10,727 9,738 10,925 9,275 11,120 12,366 13,398 Contracted GFA ('000 sqm) 3,286 4,180 4,261 4,540 4,243 4,599 4,715 4,784 Contracted ASP (CNY/sqm) 11,645 9,601 11,293 10,803 12,854 13,510 14,771 15,850 Contract sales (CNY m) 38,268 40,130 48,123 49,046 54,540 62,141 69,643 75,832

Profit and loss (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Property development 23,376 26,946 40,224 49,289 44,993 52,609 56,597 62,648 Property investment 402 483 635 876 1,415 1,976 2,620 3,212 Other Revenue 315 463 652 826 1,015 1,116 1,228 1,351 Total Revenue 24,093 27,893 41,510 50,991 47,423 55,701 60,445 67,212 Other income 28 43 338 174 215 249 273 301 COGS (14,324) (16,710) (29,972) (37,475) (34,408) (40,359) (43,930) (48,746) SG&A (1,352) (1,561) (1,972) (2,363) (2,453) (2,729) (2,962) (3,293) Other op.expenses 0 0 0 0 0 0 0 0 Operating profit 8,445 9,665 9,904 11,327 10,777 12,861 13,827 15,473 Net-interest inc./(exp.) (62) 92 77 123 195 225 244 265 Assoc/forex/extraord./others 3,061 1,545 3,238 2,177 2,966 123 121 130 Pre-tax profit 11,444 11,302 13,219 13,627 13,938 13,209 14,192 15,868 Tax (4,524) (4,436) (4,583) (4,876) (4,574) (4,641) (4,819) (5,366) Min. int./pref. div./others (593) (564) (599) (397) (376) (489) (323) (496) Net profit (reported) 6,328 6,301 8,037 8,354 8,988 8,079 9,050 10,006 Net profit (adjusted) 4,500 5,400 6,210 6,610 6,947 8,079 9,050 10,006 EPS (reported)(CNY) 1.227 1.203 1.478 1.531 1.544 1.388 1.555 1.719 EPS (adjusted)(CNY) 0.873 1.031 1.142 1.211 1.193 1.388 1.555 1.719 EPS (adjusted fully-diluted)(CNY) 0.869 1.022 1.130 1.206 1.185 1.378 1.544 1.707 DPS (CNY) 0.175 0.200 0.228 0.284 0.357 0.416 0.466 0.516 EBIT 8,445 9,665 9,904 11,327 10,777 12,861 13,827 15,473 EBITDA 8,445 9,665 9,904 11,327 10,777 12,861 13,827 15,473

Cash flow (CNYm) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Profit before tax 11,444 11,302 13,219 13,627 13,938 13,209 14,192 15,868 Depreciation and amortisation 27 33 39 55 72 94 122 158 Tax paid (2,500) (2,574) (3,899) (3,838) (2,730) (2,642) (2,838) (3,174) Change in working capital 4,342 4,377 6,706 11,087 (4,078) 1,330 1,772 1,836 Other operational CF items (2,834) (1,507) (3,206) (2,356) (2,288) (2,522) (2,547) (2,805) Cash flow from operations 10,479 11,631 12,858 18,574 4,914 9,469 10,700 11,884 Capex (30) (32) (10) (62) (90) (119) (150) (189) Net (acquisitions)/disposals (3,821) (3,406) (5,532) (7,653) (7,710) (9,284) (10,303) (12,395) Other investing CF items (7,064) (12,452) (12,523) (15,248) 3,020 1,440 1,625 1,629 Cash flow from investing (10,915) (15,889) (18,065) (22,963) (4,780) (7,962) (8,827) (10,956) Change in debt 6,822 8,807 5,134 9,633 3,469 4,434 4,877 5,365 Net share issues/(repurchases) 0 2,554 36 (6) 0 0 0 0 Dividends paid (706) (953) (1,155) (1,341) (2,083) (2,424) (2,715) (3,002) Other financing CF items (1,346) (1,849) (2,753) 498 (2,395) (2,621) (2,728) (2,902) Cash flow from financing 4,770 8,558 1,261 8,784 (1,009) (611) (566) (539) Forex effect/others 0 0 0 0 0 0 0 0 Change in cash 4,334 4,299 (3,945) 4,395 (875) 896 1,307 389 Free cash flow 10,449 11,599 12,849 18,513 4,824 9,350 10,551 11,695 Source: FactSet, Daiwa forecasts

Longfor Properties (960 HK): 11 April 2016

Financial summary continued … Balance sheet (CNYm) As at 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Cash & short-term investment 14,527 18,611 14,676 19,037 18,160 19,056 20,362 20,752 Inventory 49,811 62,861 77,092 79,122 82,036 85,205 88,498 91,919 Accounts receivable 3,344 4,098 4,343 5,668 9,920 12,400 14,880 17,856 Other current assets 1,094 2,251 2,634 6,110 10,061 10,226 10,398 10,580 Total current assets 68,776 87,821 98,746 109,937 120,177 126,887 134,139 141,107 Fixed assets 175 186 185 190 208 233 261 293 Goodwill & intangibles 0 0 0 0 0 0 0 0 Other non-current assets 28,309 37,419 45,241 58,029 63,703 72,517 82,291 94,294 Total assets 97,260 125,426 144,172 168,156 184,089 199,638 216,692 235,694 Short-term debt 3,580 5,109 9,067 7,973 6,178 6,340 6,974 7,672 Accounts payable 6,841 7,670 10,479 19,165 19,620 22,252 25,248 28,659 Other current liabilities 40,161 49,796 53,041 47,224 45,249 46,915 48,664 50,501 Total current liabilities 50,582 62,575 72,587 74,362 71,047 75,507 80,886 86,832 Long-term debt 20,386 27,728 28,636 39,769 46,088 50,359 54,602 59,269 Other non-current liabilities 2,197 2,546 3,174 3,753 4,487 5,160 5,934 6,824 Total liabilities 73,165 92,849 104,397 117,884 121,621 131,026 141,422 152,925 Share capital 453 476 477 506 508 508 508 508 Reserves/R.E./others 21,487 29,433 36,507 47,258 54,617 60,272 66,607 73,611 Shareholders' equity 21,941 29,909 36,984 47,764 55,125 60,780 67,115 74,119 Minority interests 2,154 2,668 2,792 2,508 7,343 7,832 8,154 8,650 Total equity & liabilities 97,260 125,426 144,172 168,156 184,089 199,638 216,692 235,694 EV 64,339 69,444 77,336 82,527 94,828 98,818 102,673 108,104 Net debt/(cash) 9,440 14,226 23,027 28,705 34,106 37,644 41,214 46,189 BVPS (CNY) 4.256 5.710 6.802 8.751 9.469 10.441 11.529 12.732

Key ratios (%) Year to 31 Dec 2011 2012 2013 2014 2015 2016E 2017E 2018E Sales (YoY) 59.6 25.8 48.8 22.8 (7.0) 17.5 8.5 11.2 EBITDA (YoY) 93.4 14.4 2.5 14.4 (4.9) 19.3 7.5 11.9 Operating profit (YoY) 93.4 14.4 2.5 14.4 (4.9) 19.3 7.5 11.9 Net profit (YoY) 74.8 21.4 15.0 6.4 5.1 16.3 12.0 10.6 Core EPS (fully-diluted) (YoY) 74.7 21.4 10.6 6.7 (1.7) 16.3 12.0 10.6 Gross-profit margin 40.5 40.1 27.8 26.5 27.4 27.5 27.3 27.5 EBITDA margin 35.1 35.6 23.9 22.2 22.7 23.1 22.9 23.0 Operating-profit margin 35.1 35.5 23.9 22.2 22.7 23.1 22.9 23.0 Net profit margin 18.7 19.4 15.0 13.0 14.6 14.5 15.0 14.9 ROAE 23.7 19.8 18.6 15.6 13.5 13.9 14.2 14.2 ROAA 5.3 7.8 4.6 4.2 3.9 4.2 4.3 4.4 ROCE 20.4 17.6 13.9 12.9 10.1 10.7 10.5 10.8 ROIC 17.7 14.6 14.6 10.3 8.2 8.2 8.2 8.3 Net debt to equity 43.0 47.6 62.3 60.1 54.6 54.9 54.8 55.8 Effective tax rate 39.5 39.3 34.7 35.8 32.8 35.1 34.0 33.8 Accounts receivable (days) 44.4 48.7 37.1 35.8 60.0 73.1 82.4 88.9 Current ratio (x) 1.4 2.2 1.4 1.5 1.7 1.7 1.7 1.6 Net interest cover (x) 5.5 4.7 3.8 4.1 3.6 4.5 4.6 4.8 Net dividend payout 20.1 20.1 20.0 25.0 30.0 30.0 30.0 30.0 Free cash flow yield 19.1 21.2 23.5 33.9 8.8 17.1 19.3 21.4 Source: FactSet, Daiwa forecasts

Company profile

Longfor Properties is a property developer originating from Chongqing and headquartered in Beijing. Specialising in the development of and investment in mixed-use residential and commercial projects, the company has a total GFA of 34.9m sq m in 24 cities in China.

Longfor Properties (960 HK): 11 April 2016

Strategically speaking, ahead of its peers Returned to upper-tier cities before many of its peers Decided to focus on 10 core cities in 2013 Has already entered 9 cities Longfor’s 10 core cities: In the 2 years after home purchase restrictions (HPR) were introduced in China in 2011, Beijing, Shanghai, Longfor entered many new cities, including tier-1 cities (ie, Beijing and Shanghai), Guangzhou, Shenzhen, wealthier tier-2 cities (ie, Chongqing, Chengdu, Hangzhou, Ningbo), and tier-3 cities (ie, Chongqing, Chengdu, Changzhou, Yuxi). However, housing oversupply started to rear its head in some of the Hangzhou, Xiamen, tier-2 and tier-3 cities to which Longor was exposed, and as a result in 2013 the company Nanjing and Suzhou decided to focus on property development and investment in 10 cities — four tier-1 cities (Beijing, Shanghai, Guangzhou, Shenzhen), along with Chongqing, Chengdu, Hangzhou, Xiamen, Nanjing and Suzhou.

Of its 10 core cities, Longfor had already entered Beijing, Shanghai, Chongqing, Chengdu and Hangzhou prior to 2012. It entered Xiamen in 2012 and then Suzhou in 2013. In 2014, the company acquired land for the first time in Guangzhou and Nanjing. Shenzhen is the only city among the chosen 10 that Longfor has yet to enter, and the company says it is currently looking at acquisition opportunities there.

While Longfor returned to the upper-tier cities in 2013, many developers did not make the same move until 2H14 and 2015, when the lower-tier cities were facing slow home sales and mounting housing inventory. As a result of its early return to the upper-tier cities, Longfor has delivered sustained contract sales growth in the past few years, and we expect it continue to do so over our forecast horizon.

Core cities account for 47% of total landbank Since 2013, Longfor has been aggressively acquiring landbank in 9 core cities (excluding Shenzhen). Of the land it acquired in 2013, 2014 and 2015, the core cities accounted for 57%, 79% and 89%, respectively, in terms of GFA. And, given the company’s aggressive landbank acquisition in its core cities in 2013-15, its proportion of landbank exposure in these cities has been increasing. As at end-2015, the company had around 16.5m sq m GFA of landbank in its 9 core cities, which accounted for 47% of its total landbank.

Longfor: landbank breakdown among core cities as at end-2015 Chengdu 6%

Chongqing 19%

Guangzhou Others 1% 53% Xiamen 3% Nanjing 3% Suzhou 2% Hangzhou 5% Shanghai 3% Beijing 5%

Source: Company, Daiwa

Longfor Properties (960 HK): 11 April 2016

Decent growth in home sales and prices in core cities One major criterion for One of the major factors behind Longfor’s decision to focus on 10 core cities was that each Longfor in selecting its city has experienced decent growth in home sales and prices over the past few years, core cities was decent even with the restrictions on home purchases. In general, the local property markets in the growth in the local company’s 10 core cities have been sturdy in 2010-15, with home sales and ASPs both property markets showing considerable growth. During the period, Shanghai, Shenzhen, Xiamen, Suzhou and Nanjing saw residential property sales CAGRs of more than 20%, while Beijing, Chongqing, Chengdu and Hangzhou saw residential sales CAGRs of more than 5%.

With the exception of Hangzhou and Chongqing, which respectively recorded only 6% and 8% growth in home prices during 2010-15, each of the company’s cities saw jumps of at least 20% in average new home prices over the 5-year period. Among the standouts on this measure are Xiamen, Shanghai and Shenzhen, with 81%, 77% and 66% rises in home prices over the past 5 years, respectively.

Longfor: residential sales in core cities (CNYm) 400,000

300,000

200,000

100,000

0 2010 2011 2012 2013 2014 2015 Beijing Shanghai Guangzhou Shenzhen Chongqing Chengdu Hangzhou Xiamen Suzhou Nanjing

Source: CREIS, Daiwa

Longfor: residential ASPs in core cities (CNY/sqm) 40,000

30,000

20,000

10,000

0 2010 2011 2012 2013 2014 2015 Beijing Shanghai Guangzhou Shenzhen Chongqing Chengdu Hangzhou Xiamen Suzhou Nanjing

Source: CREIS, Daiwa

Healthy housing demand-supply dynamics Another major criterion for Longfor in choosing its core cities is the housing demand-supply picture. We believe that the demand-supply dynamics in the core cities are healthy, with an average inventory duration of 8.2 months as at end-February 2016. Following an improvement in home sales and concerted efforts by developers and local governments to clear inventory in 2015, both absolute inventory and inventory duration have come down in most of Longfor’s core cities. As at end-February 2016, the 4 tier-1 cities had an average inventory duration of 8.3 months (Beijing: 10.1 months, Shanghai: 6.9 months, Guangzhou: 9.5 months, Shenzhen: 7.0 months), while the 6 tier-2 cities had an average inventory duration of 8.1 months (Chongqing: 9.9 months, Chengdu: 11.3 months, Hangzhou: 9.8 months, Xiamen: 10.7 months, Suzhou: 3.4 months, Nanjing: 3.7 months).

Longfor Properties (960 HK): 11 April 2016

Longfor: inventory duration in core cities Balanced housing (No. of months) demand-supply 35 dynamics are another 30 thing Longfor looked for 25 when selecting its core 20 cities 15 10 5 0 Jan 13 Apr 13 Jul 13 Oct 13 Jan 14 Apr 14 Jul 14 Oct 14 Jan 15 Apr 15 Jul 15 Oct 15 Jan 16 Beijing Shanghai Guangzhou Shenzhen Chongqing Chengdu Hangzhou Xiamen Suzhou Nanjing

Source: CREIS, Daiwa

Good sales execution ability in core cities Longfor has gained In our opinion, Longfor has shown good sales execution ability in its 9 core cities, winning market share in terms of market share in the local property markets. In general, the company’s market share in property sales in its core terms of residential property sales value in its core cities has been steadily increasing cities since 2012, with the exception of Chengdu, where its market share has declined. Among the 9 core cities, Longfor had the largest market share in terms of residential sales value in Chongqing, Hangzhou, Chengdu and Xiamen as of 2015.

In terms of ranking among developers by residential contract sales in individual cities, Longfor was ranked number 1 and 4 in Chongqing and Hangzhou, respectively, in 2015. Besides these 2 cities, the company was ranked among the top 10 developers on residential sales in Chengdu and Xiamen.

Longfor: market share in the focused cities in terms of residential sales value 2012 2013 2014 2015 Residential sales Market share Residential sales Market share Residential sales Market share Residential sales Market share (CNY m) (%) (CNY m) (%) (CNY m) (%) (CNY m) (%) Beijing 7,188 2.9% 7,853 3.1% 8,087 4.0% 7,870 2.8% Shanghai 2,157 1.0% 1,260 0.4% 4,303 1.4% 3,814 0.7% Hangzhou 2,971 4.2% 6,264 8.0% 6,062 8.1% 5,213 4.6% Chongqing 10,748 9.2% 10,651 8.0% 10,448 8.7% 9,189 8.2% Chengdu 5,022 6.5% 5,988 5.7% 3,348 3.6% 3,615 4.1% Xiamen - - 2,601 1,041 1.9% 2,979 4.0% Nanjing ------2,705 1.4% Suzhou - - - - 1,902 2.1% 2,672 1.8% Guangzhou ------1,074 0.7% Total 28,086 34,617 35,191 39,131

Source: Longfor, CREIS, Daiwa

Contract sales contribution from core cities expected to increase In 2011-15, Longfor’s contract sales value in its core cities showed decent growth, going from CNY25.8bn to CNY39.1bn. Sales in the core cities as a proportion of the company’s total sales have increased gradually, from 68% in 2011 to 72% in 2015.

In 2016-17, we expect both Longfor’s absolute contract sales in its core cities and contract sales as a proportion of total sales to increase. In 2016, we expect sales in its core cities to grow by 15.6% YoY to CNY45.2bn, accounting for 73% of our total contract sales forecast of CNY62.1bn. In 2017, we expect core city residential sales to increase by 14.7% YoY to CNY51.9bn, representing around 74% of our total contract sales forecast of CNY69.6bn.

Longfor Properties (960 HK): 11 April 2016

Longfor: contract sales in core cities We expect contract (CNY m) 80,000 76% sales in core cities to 74% 73% 74% account for 73-74% of 72% 60,000 72% 72% 51,880 total sales in 2016-17, up 45,235 72% from 68% in 2011 70% 39,131 40,000 34,617 35,191 70% 25,839 28,086 68% 20,000 68% 66%

0 64% 2011 2012 2013 2014 2015 2016E 2017E Contract sales in focused cities % of total contract sales

Source: Longfor, Daiwa forecasts

Exposure in non-core cities not too big a problem Plans to replenish landbank in non-core cities only according to sales progress The remaining 15 non-core cities to which Longfor has exposure include Shenyang, Dalian, Ningbo, Changsha, Qingdao, Yantai, Wuxi, Xi’an, and Changzhou. Some of these cities (ie, Shenyang, Xi’an, Qingdao) have seen home sales improve in the past year and contributed to Longfor’s overall contract sales growth. However, others have continued to suffer from housing oversupply, leading to Longfor’s sales in these cities being relatively subdued. The company intends to refrain from aggressively acquiring land in these cities and will only replenish landbank in accordance with the progress of its property sales in the cities. Moreover, it aims to acquire land in the city centres of these non-core cities.

While some of Longfor’s non-core cities are not doing too badly in terms of home sales, and the company plans to be prudent in replenishing its landbank in its non-core cities, the sales contribution from these cities accounted for a relatively modest 28% of the company’s total sales in 2015. Moreover, we expect this proportion to decline to 26-27% in 2016-17. Hence, we believe the company’s landbank exposure in non-core cities (53% of its total landbank in terms of GFA) will not pose a major risk to its sales growth prospects and profitability in the short to medium term.

Steady annual contract sales growth of 10-15% YoY in 2016-17E Helped by core city focus In 2015, Longfor recorded CNY54.5bn of contract sales, a rise of 11.2% YoY and in line with its full-year sales target of CNY54bn. It had an overall sell-through rate of 55% on CNY98bn of saleable resources for the whole of the year. Its total contracted GFA in 2015 reached 4.24m sq m, down 6.6% YoY. However, the company had a contracted ASP of CNY12,854/sq m in 2015, up 19.0% YoY, which helped compensate for the lower contracted GFA.

Over 2011-15, Longfor achieved a contract sales CAGR of 9.3%, and it is looking to achieve steady annual contract sales growth (at least 10%) in the coming years. In 2016, we forecast it to see contract sales of CNY62.1bn, a rise of 13.9% YoY and in line with its full-year sales target of CNY62.0bn. In 2017, we forecast the company to deliver 12.1% YoY growth in contract sales to reach CNY69.6bn.

Alongside our expectation of steady contract sales growth, we look for Longfor to see steady increases in its contracted ASP in 2016 and 2017, backed by an increasing proportion of contract sales from its core cities, where ASPs are generally higher. In 2016, we forecast 5.1% YoY growth in the company’s contracted ASP to CNY13,510/sq m; in 2017, we anticipate a 9.3% YoY increase in its ASP to CNY14,771/sq m.

Longfor Properties (960 HK): 11 April 2016

Longfor: total contract sales value and ASP We expect contract ('000 sqm) (CNY/sqm) 5,000 4,540 4,599 4,715 20,000 sales growth of 14% YoY 4,180 4,261 4,243 in 2016 and 12% YoY in 4,000 16,000 2017 3,286 3,000 14,771 12,000 12,854 13,510 11,645 11,293 2,000 10,803 8,000 9,601

1,000 4,000

0 0 2011 2012 2013 2014 2015 2016E 2017E Contracted GFA Contracted ASP (RHS)

Source: Company, Daiwa forecasts

Longfor: monthly contract sales and ASP (CNY m) (CNY/sqm) 8,000 20,000

16,000 6,000

12,000 4,000 8,000

2,000 4,000

0 0 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16 Contract sales Contracted ASP (RHS)

Source: Company, Daiwa

2016 sales target of CNY62bn on CNY110bn of saleable resources 6 of 15 brand new projects due to be launched in 1H16 Longfor has set a 2016 contract sales target of CNY62.0bn, which is some 14% above achieved sales of CNY54.5bn in 2015. Saleable resources for the year amount to around CNY110.0bn, of which CNY43.5bn has been brought forward from 2015 and the remaining CNY66.5bn is from new launches. Of its total saleable resources, 39% are high-rise residential units, 21% are low-rise residential, 18% are commercial projects, and the rest are middle-rise residential, SOHO and car parks. Longfor requires a 56% sell-through to fully complete its sales target for 2016, which is similar to its achieved 55% sell-through for the whole of 2015.

Altogether, the company has 72 key projects available for sale this year, of which 15 are brand new projects and 27 are new phases of existing projects. Six of the 15 brand-new projects are due to be launched in 1H16, including Glory Villa in Chongqing, Jasper Sky in Chengdu, The Glorious City in Shanghai, Chunjiang Central in Nanjing, Central Courtyard in Hangzhou and Longfor Mansion in Suzhou. The remaining 9 brand-new projects (Aerospace Town B Plot in Xi’an, Jiading Jiangqiao Plot in Shanghai, West Lake Sandun Plot in Hangzhou, Yinzhou Newtown Plot in Ningbo, Sunhe II Plot in Beijing, Daxing Yinghai Plot in Beijing, Mentougou Newtown Plot in Beijing, Chunjiang Land in Xiamen) are planned to be launched in the second half of this year.

Longfor Properties (960 HK): 11 April 2016

Landbank optimisation done at reasonable cost Land acquisitions have slowed in recent years Shift in focus to acquiring quality landbank in core cities Current landbank sufficient for 3-5 years of development Longfor’s total landbank Back in 2011-13, Longfor was more aggressive in acquiring landbank. It acquired some has declined from 39.5m 4.8m sq m GFA in 2011, 8.9m sq m GFA in 2012 and 5.6m sq m GFA in 2013, above its sq m in 2013 to 34.9m sq contracted GFA of 3.3m sq m, 4.2m sq m and 4.3m sq m in those 3 years. However, in m in 2015 2014, the company shifted gears on its land acquisition strategy: instead of aggressively acquiring land in various cities, it slowed its landbank expansion considerably and focused on acquiring land in its selected core cities. Consequently, its landbank has fallen from 39.5m sq m as at end-2013 to 34.9m sq m as at end-2014 and end-2015. We estimate Longfor’s landbank is sufficient for 3-5 years of development, down from 5-7 years back when it acquired land aggressively.

Longfor: total landbank and average land cost (m sqm) 24.7% 80 21.9% 25% 20.5% 18.2% 20% 60 16.0%

39.5 39.5 15% 34.9 34.9 40 30.7 10%

20 5%

0 0% 2011 2012 2013 2014 2015 Total landbank Land cost as % of contracted ASP (RHS)

Source: Company, Daiwa

Longfor: landbank acquired and contracted GFA (m sqm) 10 8.9

5.6 5.8 6 4.8 4.5 4.2 4.3 4.2 4 3.3 3.1

0 2011 2012 2013 2014 2015 Total GFA acquired Contracted GFA (RHS)

Source: Company, Daiwa

Land acquisitions in 2013-15 focused on core cities Started moving ahead of developers’ rush back to upper-tier cities Since 2013, Longfor has been aggressively acquiring landbank in the 9 core cities (excluding Shenzhen). Of the total land acquired in 2013, 2014 and 2015 in terms of GFA, land acquisitions in its focus cities accounted for 57%, 79% and 89%, respectively.

Longfor Properties (960 HK): 11 April 2016

Longfor: land acquisitions in core cities as percentage of total land acquisitions Land acquisitions in (m sqm) 10 89% 100% core cities accounted for 79% 79% of Longfor’s total 8 80% acquisitions in 2014 and 57% 57% 89% in 2015 6 48% 5.2 60% 4.3 4 3.2 40% 2.8 2.5 2 20%

0 0% 2011 2012 2013 2014 2015 Land acquisitions in the 10 focused cities % of total land acquisitions (RHS)

Source: Company, Daiwa

Longfor: land acquisitions in 2015 Acquisition month Project City Stake Total GFA Attributable GFA Attributable land premium Land cost (%) (sq m) (sq m) (CNYm) (CNY/sq m) Jan -15 Emerald Legend Beijing 50% 53,666 26,833 584 21,765 Feb-15 Mentougou Newtown plot Beijing 17% 109,446 18,606 209 11,220 Feb-15 Taipingzhuang plot Beijing 25% 18,004 4,501 159 35,330 Feb-15 Chunjiang Central Xiamen 49% 346,694 169,880 1,386 8,161 Feb-15 Oriental Glorious Yard Shanghai 28% 33,515 9,384 68 7,246 Mar-15 Amber Garden Shanghai 30% 119,179 35,754 194 5,436 Apr-15 For Colourful Life Chongqing 100% 108,487 108,487 417 3,842 Jul-15 Daxing Yinghai plot Beijing 50% 184,339 92,170 1,359 14,741 Jul-15 Glory Villa Chongqing 50% 836,635 418,318 1,291 3,085 Jul-15 Central Courtyard Hangzhou 100% 241,422 241,422 1,279 5,300 Aug-15 Chunjiang Central Nanjing 51% 495,006 252,453 2,510 9,941 Aug-15 Longfor Mansion Suzhou 50% 217,107 108,554 1,380 12,710 Aug-15 The Honor of City Hangzhou 10% 323,691 32,369 206 6,379 Sep-15 Jasper Sky Chengdu 51% 312,479 159,364 572 3,589 Sep-15 South Dongba plot Beijing 34% 206,613 70,248 1,511 21,513 Sep-15 Chunjiang Land Xiamen 51% 350,045 178,523 2,366 13,253 Sep-15 Shunyi New Town plot Beijing 20% 251,602 50,320 287 5,695 Sep-15 Shunyi Renhe plot Beijing 26% 123,097 32,005 203 6,357 Nov-15 West Lake Sandun plot Hangzhou 30% 120,416 36,125 213 5,892 Dec-15 Jinhai Road plot Shenyang 100% 378,295 378,295 779 2,060 Dec-15 Jiading Jiangqiao plot Shanghai 100% 216,856 216,856 4,829 22,269 Dec-15 Aerospace Town B plot Xi'an 100% 228,883 228,883 376 1,644 Dec-15 Yinzhou Newtown plot Ningbo 20% 45,664 9,133 40 4,356 Dec-15 Longquan plot Chengdu 50% 356,035 178,018 285 1,603 Dec-15 Xingyi II plot Hangzhou 100% 152,552 152,552 1,465 9,608 Total 5,829,728 3,209,052 23,969 7,469

Source: Company, Daiwa

Proportion of landbank in core cities has increased Alongside its slower landbank expansion since 2014, the company has been changing its landbank mix by city. Its goal has been to optimise its landbank by focusing on expansion in its core cities, where property sales and prices have seen decent growth, and where housing demand-supply dynamics have been more balanced.

As at end-2015, the company had around 16.5m sq m GFA of landbank in its 9 core cities, up from 16.1m sq m in 2013 and 14.6m sq m in 2014. Consequently, Longfor’s proportion of landbank in its core cities has risen from 41% in 2013 and 42% in 2014 to 47% as at end-2015.

Longfor Properties (960 HK): 11 April 2016

Longfor: landbank in core cities Longfor’s proportion of (m sqm) 25 50% landbank in its core 47% cities increased from 20 48% 16.3 16.1 16.5 41% in 2013 to 47% in 14.2 14.6 2015 15 46%

10 44% 42% 42% 41% 5 41% 42%

0 40% 2011 2012 2013 2014 2015 Landbank in core cities % of total landbank (RHS)

Source: Company, Daiwa

Longfor: landbank breakdown among core cities as at end-2015 Chengdu 6%

Chongqing 19%

Guangzhou Others 1% 53% Xiamen 3% Nanjing 3% Suzhou 2% Hangzhou 5% Shanghai 3% Beijing 5%

Source: Company, Daiwa

Reasonable land cost-to-contracted ASP ratio of around 25% as at end-2015 Owing to its aggressive landbank expansion in its core cities in 2013-15, Longfor’s average land cost for newly acquired land rose from CNY3,120/sq m in 2013 to CNY6,785/sq m in 2014 and CNY7,469/sq m in 2015.

Nonetheless, despite the much higher land cost for new acquisitions, the company had an average land cost of CNY3,165/sq m for its total landbank as at end-2015, not significantly higher than its average land cost of CNY2,050/sq m in 2013 and CNY2,363/sq m in 2014.

Longfor’s average land cost-to-contracted ASP ratio was a reasonable-looking 24.7% as at end-2015, though higher than its ratios of 18.2% in 2013 and 21.9% in 2014. However, given that we expect the company’s contracted ASPs to rise in the coming years on a higher sales contribution from the core cities, we expect its average land cost-to-ASP ratio to be steady in the next few years.

Longfor Properties (960 HK): 11 April 2016

Longfor: average land cost of newly acquired land (CNY/sqm) (CNY/sqm) 12,000 30% 24.7% 10,000 21.9% 25% 20.5% 18.2% 7,469 8,000 16.0% 6,785 20%

6,000 15%

4,000 3,120 10% 2,479 1,950 2,000 5%

0 0% 2011 2012 2013 2014 2015 Average land cost of newly-acquired land Overall land cost as % of contracted ASP

Source: Company, Daiwa

Set to enjoy higher margins than latecomers in upper-tier cities We estimate an average 28% gross margin for core city projects acquired in 2013-15 With more developers returning to the upper-tier cities since 2014, land prices have been pushed up. Indeed, there are cases where transacted land prices in upper-tier cities are close to or even higher than home prices for nearby primary projects, resulting in very thin margins.

We believe that Longfor, as an early returnee to the upper-tier cities, will be better placed than its peers to realise decent margins from the landbank it acquired in the core cities in 2013-15, ie, before the land markets in these cities started overheating.

As shown in the table below, we estimate that Longfor will fetch an average 28% gross margin for its core city projects acquired in 2013-15, which should outperform the equivalent gross margins of many of its peers.

Longfor Properties (960 HK): 11 April 2016

Longfor: land acquisitions in core cities in 2013-15 and our estimated gross margins Forecasted Acquisition month Project City Stake Total GFA Attributable GFA Attributable land premium Land cost gross margin (%) (sq m) (sq m) (CNY m) (CNY/sq m) (%) Feb -13 Mingjing Tai Hangzhou 91% 272,872 249,132 1,933 7,084 24% Mar-13 North Paradise Walk Shanghai 100% 402,491 402,491 1,078 2,679 27% Apr-13 La Defense Chongqing 100% 1,066,762 1,066,762 1,379 1,293 28% Apr-13 Times Paradise Walk Suzhou 100% 645,251 645,251 2,605 4,037 29% Jun-13 River Bank Mansion Shanghai 91% 42,136 38,470 206 4,889 28% Nov-13 Rose and Gingko Mansion Beijing 31% 311,295 96,626 2,310 7,422 27% Dec-13 1st Avenue Chongqing 100% 313,671 313,671 2,520 8,033 32% Jan-14 Chunjiang Central Hangzhou 100% 556,235 556,235 4,338 7,798 30% Feb-14 Jade Mansion Beijing 50% 140,501 70,251 3,677 26,171 26% Feb-14 The Great Wall Chinoiserie Beijing 60% 229,818 137,891 542 3,930 25% Feb-14 Jinnan Walk Time Chengdu 100% 102,835 102,835 301 2,926 30% May-14 Chunjiang Center Nanjing 100% 447,542 447,542 2,539 5,673 32% Oct-14 Direct Mansion Hangzhou 51% 54,367 27,727 487 17,575 30% Nov-14 Longfor Mansion Guangzhou 100% 331,233 331,233 3,893 11,754 27% Nov-14 Hometown Chengdu 100% 146,632 146,632 584 3,983 26% Dec-14 The Glorious City Shanghai 100% 114,626 114,626 412 3,594 27% Dec-14 The Mansion Shanghai 16% 45,866 7,339 54 7,321 26% Dec-14 Keyuan Rd. Plot Chongqing 100% 128,273 128,273 552 4,304 26% Dec-14 Chunjiang City Hangzhou 100% 141,512 141,512 848 5,990 28% Dec-14 Fengtai Kandan Plot Beijing 17% 51,613 8,516 93 10,976 23% Jan-15 Emerald Legend Beijing 50% 53,666 26,833 584 21,765 24% Feb-15 Mentougou Newtown plot Beijing 17% 109,446 18,606 209 11,220 26% Feb-15 Taipingzhuang plot Beijing 25% 18,004 4,501 159 35,330 25% Feb-15 Chunjiang Central Xiamen 49% 346,694 169,880 1,386 8,161 27% Feb-15 Oriental Glorious Yard Shanghai 28% 33,515 9,384 68 7,246 25% Mar-15 Amber Garden Shanghai 30% 119,179 35,754 194 5,436 25% Apr-15 For Colourful Life Chongqing 100% 108,487 108,487 417 3,842 33% Jul-15 Daxing Yinghai plot Beijing 50% 184,339 92,170 1,359 14,741 22% Jul-15 Glory Villa Chongqing 50% 836,635 418,318 1,291 3,085 25% Jul-15 Central Courtyard Hangzhou 100% 241,422 241,422 1,279 5,300 22% Aug-15 Chunjiang Central Nanjing 51% 495,006 252,453 2,510 9,941 26% Aug-15 Longfor Mansion Suzhou 50% 217,107 108,554 1,380 12,710 25% Aug-15 The Honor of City Hangzhou 10% 323,691 32,369 206 6,379 25% Sep-15 Jasper Sky Chengdu 51% 312,479 159,364 572 3,589 25% Sep-15 South Dongba plot Beijing 34% 206,613 70,248 1,511 21,513 22% Sep-15 Chunjiang Land Xiamen 51% 350,045 178,523 2,366 13,253 24% Sep-15 Shunyi New Town plot Beijing 20% 251,602 50,320 287 5,695 22% Sep-15 Shunyi Renhe plot Beijing 26% 123,097 32,005 203 6,357 24% Nov-15 West Lake Sandun plot Hangzhou 30% 120,416 36,125 213 5,892 29% Dec-15 Jiading Jiangqiao plot Shanghai 100% 216,856 216,856 4,829 22,269 25% Dec-15 Longquan plot Chengdu 50% 356,035 178,018 285 1,603 28% Dec-15 Xingyi II plot Hangzhou 100% 152,552 152,552 1,465 9,608 23% Total 10,722,417 7,625,755 53,124 6,966

Source: Company, Daiwa forecasts

Overall property development gross margin expected to remain stable Based on our view that the major contract sales and revenue contribution from its projects in core cities should carry satisfactory gross margins, we believe that Longfor will maintain its gross margin at the current level over our forecast horizon.

Longfor’s gross margin for its property development business looks to have bottomed out at 25.7% in 2014 before recovering to 26.2% in 2015. Our forecasts call for its property development gross margin to remain at similar levels of 26.1% in 2016, 26.2% in 2017, and 26.4% in 2018. Set against our expectation of a downtrend in margins for the China developers in general, we believe that Longfor’s stable gross margin will outperform that of many of its peers.

Longfor Properties (960 HK): 11 April 2016

Longfor: gross margin for property development 50% 40.30% 39.70% 40%

27.00% 30% 25.70% 26.20% 26.10% 26.20% 26.40%

20%

10%

0% 2011 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

Longfor Properties (960 HK): 11 April 2016

Rapidly growing recurring income 4.8m sq m of investment properties 1.5m sq m currently under operations 62% YoY rise in 2015 rental income 3 retail properties with a As at end-2015, Longfor had an investment property portfolio with a GFA of 4.8m sq m, of total GFA of 398,600 sq which 1.9m sq m had been completed and was in operation, 1.2m sq m was under m are scheduled to development, and 1.7m sq m was in the planning stage. These investment properties are commence operations in largely retail properties and are located in 10 cities, with the majority in Chongqing (37%), 2016 followed by Chengdu (15%), Beijing (10%), Hangzhou (10%) and Shanghai (8%).

The company’s completed investment properties of 1.5m sq m GFA (excluding car parks) generated rental income of CNY1,415m in 2015, compared with CNY483m in 2012. In 2015, Longfor’s investment property portfolio achieved 61.5% YoY growth in rental income, largely attributable to the first full-year rental income contributions from Chongqing Times Paradise Walk II, Chengdu Times Paradise Walk I, Beijing Changying Paradise Walk, Xi’an Daxing Starry Street, as well as first-time rental income contributions from Hangzhou Jinsha Paradise Walk and Chengdu Jinnan Paradise Walk. Excluding contribution from the above-mentioned retail properties, the company’s rental income would have increased by 21.6% YoY to reach CNY1,035m.

Longfor: operating statistics of investment properties Project City Stake GFA Occupancy rate Gross rental income (CNY ‘000) (sq m) 2015 2014 % 2015 2014 % North Paradise Walk Chongqing 100% 120,778 100.0% 98.7% 1.3% 387,885 352,243 10.1% West Paradise Walk Chongqing 100% 76,031 99.1% 99.9% -0.8% 151,909 131,258 15.7% Times Paradise Walk I Chongqing 100% 160,168 95.9% 92.7% 3.2% 230,362 166,114 38.7% Times Paradise Walk II Chongqing 100% 154,460 92.1% 66.5% 25.6% 79,168 202 39092.1% North Paradise Walk Chengdu 100% 215,536 86.6% 79.1% 7.5% 94,394 59,976 57.4% Times Paradise Walk I Chengdu 100% 61,989 87.2% 78.6% 8.6% 21,339 3,978 436.4% Changying Paradise Walk Beijing 100% 221,286 91.8% 86.8% 5.0% 182,664 14,266 1180.4% Jinsha Paradise Walk Hangzhou 100% 151,135 99.6% - - 44,420 - - Jinnan Paradise Walk Chengdu 100% 91,638 92.9% - - 18,142 - - Paradise Walk subtotal 1,253,021 96.0% 95.6% 0.4% 1,210,283 728,037 66.2% Crystal Castle Chongqing 100% 16,161 100.0% 97.2% 2.8% 20,823 21,858 -4.7% Three Thousands Mall Chengdu 100% 38,043 98.4% 93.7% 4.7% 29,561 22,919 29.0% Chunsen Starry Street Chongqing 100% 54,618 83.9% 82.3% 1.6% 28,126 25,144 11.9% Fairy Castle Chongqing 100% 29,413 100.0% 100.0% 0.0% 11,428 11,236 1.7% Summer Palace Starry Street Beijing 98.5% 6,320 100.0% 100.0% 0.0% 18,120 15,144 19.7% U-City I Chongqing 100% 15,516 93.4% 94.7% -1.3% 12,056 7,072 70.5% Daxing Starry Street Xi'an 100% 44,227 91.7% 92.2% -0.5% 34,870 6,790 413.5% Others - - - - - 17,818 7,215 147.0% Starry Street subtotal 204,298 95.0% 93.7% -3.0% 172,802 117,378 47.2% MOCO Chongqing 100% 29,104 100.0% 99.2% -0.3% 32,102 30,906 3.9% MOCO subtotal 29,104 100.0% 99.2% -0.3% 32,102 30,906 3.9% Total 1,486,423 95.9% 95.5% 0.5% 1,415,187 876,321 61.5%

Source: Company, Daiwa Note: Parking lots excluded

More retail properties expected to commence operations in 2016-17 In 2015, Longfor commenced operations for only 2 retail properties, Hangzhou Jinsha Paradise Walk and Chengdu Jinnan Paradise Walk, with a total GFA (excluding car parks) of 242,773sq m. In 2016-17, more of its retail properties are scheduled to commence operations. In 2016, the company is anticipating around 398,600 sq m of retail properties will start operations at 3 retail properties, namely Beijing Time Paradise Walk, Shanghai Hongqiao Paradise Walk and Chongqing Time Paradise Walk Phase III. In 2017, Longfor expects another 4 retail properties to commence operations, adding about 544,328sq m GFA to its completed investment property portfolio. These 4 retail properties are Chongqing Hometown Phase II, Suzhou Time Paradise Walk, Hangzhou Binjiang Paradise Walk and Chongqing U-City Phase II.

Longfor Properties (960 HK): 11 April 2016

Longfor: investment property pipeline

Source: Company Note: Parking lots excluded

By end-2017, the company estimates that its operating GFA of investment properties would reach around 2.5m sq m, double the 1.2m sq m GFA of investment properties as at end- 2014 and 5 times the size of its investment property portfolio as at end-2012.

Longfor: operating GFA of investment properties (m sqm) 3 2.5

1.9 2 1.5 1.2

1 0.8 0.5

0 2012 2013 2014 2015 2016E 2017E Source: Company, Daiwa forecasts Note: Parking lots excluded

Rental income should continue to see growth of 23-40% YoY in 2016-18 For 2016, we forecast a 39.6% YoY rise in Longfor’s rental income to CNY1,976m, following on from the 61.5% YoY increase in 2015. We expect the company to continue to see decent rental income growth of 32.6% YoY to CNY2,620m in 2017 and 22.6% YoY to CNY3,212m in 2018 as new malls begin operations.

Longfor Properties (960 HK): 11 April 2016

Longfor: rental income from investment properties We expect YoY rental- (CNYm) 3,500 3,212 income growth of 40% in 3,000 2016, 33% in 2017 and 2,620 23% in 2018 2,500 1,976 2,000 1,415 1,500 876 1,000 635 483 500

0 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

Rental income should fully cover interest expenses in 2018 In 2015, Longfor’s rental income of CNY1,415m accounted for around 0.5x of its interest expense of CNY2,988m during the year. We forecast this ratio to increase to 0.7x in 2016, 0.9x in 2017 and 1.0x in 2018. by 2018, the company’s rental income should cover all its finance costs during the year, on our forecasts.

Longfor: rental income as a ratio of interest expenses Our forecasts call for 1.2 1.0x Longfor’s rental income 1.0 to fully cover its interest 0.9x expenses by 2018 0.8 0.7x

0.6 0.5x

0.4 0.3x 0.2x 0.2x 0.2

0.0 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

Continuing to focus on tier-1 and core tier-2 cities for property investment Longfor plans to continue expanding its investment property portfolio as a way of: 1) enhancing the stability of its revenue and profit, and 2) weathering short-term market volatility in the residential property market. Its relatively high gross margin of 70-75% for property investment should also help improve its overall profitability, in our view. Meanwhile, the company plans to continue to focus on tier-1 and core tier-2 cities for its property investment business, targeting transportation hubs within these cities.

Longfor Properties (960 HK): 11 April 2016

Sound financial management Well-managed gearing, debt structure and borrowing costs Stable gearing over the past few years Net gearing expected to stay below the 60% level in 2016-18 Longfor’s net debt level has gone up substantially over the past few years from CNY9,440m in 2011 to CNY34,106m in 2015. Nonetheless, the company’s net gearing ratio as at end-2015 was still at a comfortable level of 54.6%. Over 2016-18, we forecast Longfor’s net debt to rise further, reaching CNY37,644m in 2016 (+10.4% YoY), CNY41,214m in 2017 (+9.5% YoY) and CNY46,189m in 2018 (+12.1% YoY). In terms of net gearing, we estimate this to remain at a comfortable level of 54.9% in 2016 (+0.3pp), 54.8% in 2017 (-0.1pp) and 55.8% in 2018 (+1.0pp).

Compared with its China property peers’ average net gearing of 60% as at end-2015, Longfor’s net gearing of 55% is relatively healthy and is one of the lower among our tracked China property companies.

Longfor: net debt and net gearing We expect Longfor’s net (CNYm) 80,000 80% gearing to stay below 57.9% the 60% level in 2016-18 57.1% 54.6% 54.9% 54.8% 55.8% 60,000 60% 43.7% 39.2% 41,214 46,189 37,644 40,000 34,106 40% 28,705 23,027 20,000 14,226 20% 9,440

0 0% 2011 2012 2013 2014 2015 2016E 2017E 2018E Net debt Net gearing (RHS)

Source: Company, Daiwa forecasts

China property companies: end-2015 net gearing ratio 160% 124% 120% 105% 94% 69% 73% 73% 76% 80% 58% 59% 59% 60% 61% 63% 64% 48% 55% 55% 40% 40% 19% 23% 24% 7% 0% COLI COGO Longfor Joy City CR Land CR Evergrande China Vanke China Sunac SOHO China Poly Property Poly CIFI Holdings CIFI China Jinmao Dalian Wanda Dalian Agile Property Agile KWG Property KWG Country Garden Country Yuexiu Property Shimao Property Shimao Guangzhou R&F Guangzhou Greentown China Greentown Sino-Ocean Land Sino-Ocean

Beijing Capital Land Capital Beijing Source: Companies, Daiwa

Minimal impact on earnings from CNY depreciation 50% of foreign currency debt hedged at low cost Currently, one of the market’s major concerns about China developers is their non-CNY debt exposure, which makes their earnings vulnerable to a depreciation of the CNY. Longfor is one of the few China developers to have hedged its non-CNY debt before the CNY started to depreciate.

As at end-2015, Longfor had a total debt of CNY52.3bn, of which 71% or CNY36.9bn was denominated in CNY, while 15% or CNY7.8bn was denominated in USD and the remaining

Longfor Properties (960 HK): 11 April 2016

14% or CNY7.5bn was denominated in HKD. Around CNY7.7bn or 50% of its total foreign currency debt of CNY15.3bn is already hedged. The company started hedging its foreign currency debt 3 years ago and the cost back then was less than 1%. Its hedging cost now has increased to around 2%.

Owing to Longfor’s potential declining proportion of foreign currency debt and the hedging of a considerable percentage of this debt, we believe the P&L impact of CNY depreciation would be minimal for the company.

Longfor: debt structure by currency type 100% 10% 90% 15% 13% 19% 14% 80% 15% 20% 23% 28% 11% 70% 60% 50% 40% 70% 71% 30% 65% 64% 62% 20% 10% 0% 2011 2012 2013 2014 2015 CNY USD HKD

Source: Company, Daiwa

Average borrowing cost on a downtrend We anticipate declining Longfor saw its weighted average borrowing cost peak at 10.78% in 2012, before falling to average borrowing costs 6.58% in 2013, 6.40% in 2014 and 5.74% in 2015. In 2016, we anticipate a decline in the for Longfor average borrowing cost to 5.30% to factor in all 5 interest-rate cuts in 2015, our in-house forecasts of more interest-rate cuts in 2016 and its domestic bond issuance at a lower finance cost. We assume slightly lower average borrowing costs of 5.10% in 2017 and 5.00% in 2018.

Longfor: weighted average borrowing cost 8% 6.72% 6.40% 6.58% 6.40% 5.74% 6% 5.30% 5.10% 5.00%

0% 2011 2012 2013 2014 2015 2016E 2017E 2018E

Source: Company, Daiwa forecasts

Dividend payout raised to 30% in 2015 Longfor plans to Thanks to its prudent financial management and healthy financials, Longfor has been maintain a dividend increasing its dividend payout over the past few years (2014: 25% of core profit; 2013: payout of 25-30% of core 20% of core profit). In 2015, the company raised its dividend payout to 30% of core profit, profit and it expects to maintain the payout ratio at 25-30%.

Favourable credit ratings given by credit rating agencies Among the best overall credit rating among non-SOE China developers With Longfor’s stable net gearing of below 60% in the past few years, its well-managed debt structure and declining average borrowing cost, the company has been assigned favourable credit ratings by credit rating agencies.

Longfor Properties (960 HK): 11 April 2016

Moody’s has assigned a Ba1 corporate family rating to Longfor with a stable ratings outlook, and recently mentioned that the company is one of only 2 China developers to exhibit the strongest credit profiles among the 38 monitored high-yield China developers.

Meanwhile, Standard & Poor’s in October 2015 revised its rating outlook on Longfor from stable to positive and affirmed its BB+ corporate credit rating on the company. The ratings of both Moody’s and Standard & Poor’s are one tier below investment grade and are the best ratings among the listed non-SOE China developers.

In January 2016, Fitch Ratings for the first time assigned a Long-Term Issuer Default Rating and foreign-currency senior unsecured rating of BBB- to Longfor with a stable ratings outlook. This identifies Longfor as an investment-grade company in terms of its offshore credit rating.

Longfor Properties (960 HK): 11 April 2016

Stable earnings growth Earnings outlook Lower recognised GFA offset by higher recognised ASP in 2016 In 2016, we forecast a 2.5% YoY decline in Longfor’s recognised GFA to 4.7m sq m. However, we expect the lower recognised GFA to be offset by 19.9% YoY growth in recognised ASP to CNY11,120/sq m. Overall, we look for a 16.9% YoY increase in the company’s property development revenue to CNY52,609m in 2016. The major projects to be booked on the top line would include Jade Mansion in Beijing, Rose and Gingko Mansion in Beijing, Hongqiao Paradise Walk in Shanghai, Times Paradise Walk in Suzhou, First Avenue in Chongqing and also, Chunjiang Central in Hangzhou.

In 2017, we forecast a 3.3% YoY decline in the company’s recognised GFA to 4.6m sq m. However, again, this lower recognised GFA would be offset by a 11.2% YoY increase in recognised ASP, leading to 7.6% YoY growth in property development revenue to CNY56,597m during the year, on our forecasts.

In 2018, we estimate recognised GFA of 4.7m sq m (+2.2% YoY) for Longfor, while the recognised ASP rises by 8.3% YoY to CNY13,398/sq m, thanks to increased bookings of higher-ASP projects in core cities. We forecast the company’s property development revenue during the year to be CNY62,648m, up 10.7% Yo Y.

As at the end of 2015, Longfor had unbooked contract sales of around CNY55,300m, which are due to be booked in 2016 and thereafter.

Longfor: recognised GFA and ASP ('000 sqm) (CNY/sqm) 4,851 4,731 5,000 4,512 4,577 4,676 20,000 4,131 4,000 13,930 13,398 16,000 10,925 11,120 12,366 3,000 2,512 9,738 9,275 12,000

2,000 1,678 10,727 8,000

1,000 4,000

0 0 2011 2012 2013 2014 2015 2016E 2017E 2018E Recognized GFA Recognized ASP (RHS)

Source: Company, Daiwa forecasts

Longfor: property development revenue We look for YoY growth (CNYm) in property development 80,000 revenue of 17% in 2016, 62,648 56,597 8% in 2017 and 11% in 60,000 52,609 49,289 2018 44,993 40,224 40,000 26,946 23,376 20,000

0 2011 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

Rental income to continue seeing strong growth in 2016-18 In 2016, we forecast a 39.6% YoY rise in Longfor’s rental income to CNY1,976m following the strong 61.5% YoY increase in 2015 (due to the full-year rental income contribution from

Longfor Properties (960 HK): 11 April 2016

Chongqing Time Paradise Walk II, Chengdu Time Paradise Walk I, Beijing Changying Paradise Walk, Xi’an Daxing Starry Street, and first-time rental income contribution from newly commenced Hangzhou Jinsha Paradise Walk and Chengdu Jinnan Paradise Walk). We expect the company to continue to see decent rental income growth of 32.6% YoY to CNY2,620m in 2017 and 22.6% YoY to CNY3,212m in 2018, on the commencement of operations at new malls.

Longfor: rental income from investment properties (CNYm) 3,500 3,212

3,000 2,620 2,500 1,976 2,000 1,415 1,500 876 1,000 635 483 500

0 2012 2013 2014 2015 2016E 2017E 2018E Source: Company, Daiwa forecasts

Steady growth in revenue and core profit in 2016-18 We forecast double-digit As we expect growth in Longfor’s property development revenue and rental income for YoY core profit growth in each of 2016, 2017 and 2018, we forecast around 9-17% annual growth in total revenue to 2016-18 reach CNY55,701m in 2016 (+17.4% YoY), CNY60,445m in 2017 (+8.5% YoY) and CNY67,212m in 2018 (+11.2% YoY).

In 2016, we expect to see slightly lower growth in Longfor’s core net profit (excluding valuation gains on investment properties) of 16.3% YoY (to CNY8,079m) than its revenue. Meanwhile, we forecast core profit of CNY9,050m in 2017 (+12.0% YoY) and CNY10,006m in 2018 (+10.6% YoY).

Longfor: revenue and core net profit (CNYm) 80,000 67,212 60,445 55,701 60,000 50,991 47,423 41,510 40,000 27,893 24,093 20,000 8,079 9,050 10,006 4,500 5,400 6,207 6,610 6,947 0 2011 2012 2013 2014 2015 2016E 2017E 2018E Revenue Core net profit

Source: Company, Daiwa forecasts

Steady gross and core net margins As a result of a steady sales contribution from its core cities, where gross margins should We believe Longfor’s stay stable, and rapidly increasing rental income with high gross margins, we expect stable gross margin Longfor’s overall gross margin to remain steady in 2016-18. We forecast its gross margin trend of 27-28% in 2016- to stay at about the same level as 2015, at 27.5% in 2016 (+0.1pp), 27.3% in 2017 (-0.2pp) 18 to outperform that of and 27.5% in 2018 (+0.2pp). Management aims to maintain an above-25% gross margin many of its peers for its property development business over our forecast horizon.

Alongside potentially stable gross margins in 2016-18, we look for a generally steady core net margin for Longfor over the period, at 14.5% in 2016 (-0.1pp), 15.0% in 2017 (+0.5pp)

Longfor Properties (960 HK): 11 April 2016

and 14.9% in 2018 (-0.1pp). The increase in Longfor’s core net margin in 2017 would be largely attributable to a decline in net profit attributable to minority interests during the year.

Longfor: gross margin and core net margin 50% 40.5% 40.1% 40%

27.8% 27.4% 27.5% 27.3% 27.5% 30% 26.5%

20%

18.7% 19.4% 10% 15.0% 15.0% 14.9% 13.0% 14.6% 14.5%

0% 2011 2012 2013 2014 2015 2016E 2017E 2018E Gross margin Core net margin (RHS)

Source: Company, Daiwa forecasts

Longfor Properties (960 HK): 11 April 2016

Valuation Initiating with a Buy (1) call and TP of HKD13.29 Our NAV estimate and target discount to NAV NAV is our preferred approach to valuing property companies We regard NAV as the best method to value property companies, as it is based on the market value of a company’s property assets. Moreover, property companies typically trade at a discount to their appraised NAV to reflect: 1) capabilities on project execution and property sales, as well as their long-term sales growth potential, 2) market risk and diversification, and 3) corporate risk (eg, corporate governance and financial position).

We value Longfor’s end-2016 NAV at HKD18.98/share We use a WACC of Based on Longfor’s existing landbank of 34.9m sq m, we estimate an end-2016 total GAV 10.91% in our GAV of CNY157,616m by discounting estimated future net cash flow to be generated using a calculation for Longfor WACC of 10.91%. The company’s development properties account for 59% of GAV, and its investment properties account for the remaining 41%.

Assuming end-2016 net debt of CNY37,644m and outstanding land premium of CNY14,000m, we calculate an end-2016 NAV of CNY105,973m. Based on an outstanding share capital of 5,863m shares, as at end-2015, we derive an NAV per share of CNY18.08 or HKD18.98 for Longfor.

Our end-2016 NAV assumption of HKD18.98 has factored in Daiwa’s forecast that the CNY will be at 7.50 against the USD at the end of 2016.

Longfor: WACC Rate assumptions Risk-free rate 2.91% Risk premium 13.00% Beta 0.8 Cost of equity 13.31% Cost of debt 5.3% Debt/assets 30% WACC 10.91%

Source: Daiwa forecasts

Longfor Properties (960 HK): 11 April 2016

Longfor: NAV breakdown Longfor’s development (CNY m) End-2016 NAV % of GAV properties and Development properties: Chongqing 11,110 7.0 investment properties Beijing 7,350 4.7 account for 59% and Shanghai 8,433 5.4 41% of its end-2016 total Hangzhou 5,970 3.8 Yantai 13,151 8.3 GAV, respectively Shenyang 5,844 3.7 Nanjing 6,239 4.0 Chengdu 4,449 2.8 Xiamen 3,946 2.5 Dalian 3,224 2.0 Yuxi 3,742 2.4 Xi'an 2,900 1.8 Suzhou 2,344 1.5 Guangzhou 2,071 1.3 Quanzhou 2,897 1.8 Wuxi 1,141 0.7 Ningbo 1,068 0.7 Changzhou 1,197 0.8 Changsha 1,903 1.2 Qingdao 805 0.5 Shaoxing 930 0.6 Yixing 822 0.5 Foshan 425 0.3 Jinan 365 0.2 Development property NAV 92,327 58.6 Investment properties: Beijing 19,572 12.4 Chongqing 20,577 13.1 Shanghai 12,754 8.1 Hangzhou 7,177 4.6 Chengdu 2,398 1.5 Suzhou 1,696 1.1 Xiamen 599 0.4 Wuxi 308 0.2 Xi'an 69 0.0 Changzhou 139 0.1 Investment property NAV 65,290 41.4 GAV 157,616 100.0 Net debt (37,644) Outstanding land premium (14,000) NAV 105,973 Shares (m) 5,863 NAV/Share (CNY) 18.08 NAV/Share (HKD) 18.98

Source: Daiwa forecasts

We apply a 30% discount to NAV Based on our NAV estimate of HKD18.98/share for Longfor and its share price of HKD11.24 as of 8 April, the stock is trading at a 40.8% discount to NAV. Currently, we apply a 20% target NAV discount to the large-cap stated-owned China developers under our coverage (COLI: 688 HK, HKD24.05, Buy [1]; and CR Land: 1109 HK, HKD19.56, Buy [1]) and a 50% target NAV discount to our covered mid-cap China developers (Guangzhou R&F: 2777 HK, HKD10.98, Buy [1]; and KWG: 1813 HK, HKD5.18, Buy [1]). Given that Longfor is a non-SOE mid-to-large cap developer of premium quality, we think that a 30% target NAV discount is justified for the stock.

The stock has historically traded at a premium to many of its peers due to Longfor’s reputation as one of the few non-SOE developers to have demonstrated good sales execution ability and solid financials. Hence, at a time when the operating environment is becoming more difficult for China developers, we think Longfor deserves a narrower NAV discount compared with its peers, after taking into account its early return to the upper-tier cities, its land acquisitions in upper-tier cities at reasonable cost, its ability to maintain profitability amid a more difficult operating environment, its rapidly growing investment property portfolio and its prudent financial management. We believe that these combined qualities of Longfor’s are rare among China developers, especially non-SOE developers.

Longfor Properties (960 HK): 11 April 2016

Initiate coverage with a Buy (1) rating and target price of HKD13.29 Applying a 30% target discount to Longfor’s end-2016E NAV per share of HKD18.98, we arrive at our target price of HKD13.29, which translates into a 2016E PER of 8.0x and a 2017E PER of 7.2x. With the stock trading at HKD11.24 (8 April), our target price of HKD13.29 implies 18.2% upside potential. We initiate with a Buy (1) rating on Longfor.

Peer comparison Above-sector-average ROE and ROA We assign a higher 2016E ROE and ROA for Longfor relative to its peers, as we expect the company to display superior execution ability and profitability. On our and consensus 2016 estimates, our ROE of 13.9% is higher than the sector average of 12.9% and our ROA of 4.2% is higher than the sector average of 3.4%.

Valuation inexpensive compared with large-cap peers Longfor’s current NAV In terms of valuation comparison with peers, Longfor’s 2016E PER of 6.8x is below the discount of 40.8% is sector average of 7.2x (on both our and the consensus forecasts). Nonetheless, our 2016 narrower than the peer PBR forecast of 0.9x for Longfor is above the sector average of 0.7x. In terms of NAV average of 55.8% but discounts, Longfor’s discount of 40.8% is much narrower than its peers’ average discount similar to the large-cap of 55.8% (on our forecasts). However, compared with large-cap peers like COLI and CR peer 42.8% discount Land, which are trading at an average 42.8% NAV discount (on our forecasts), Longfor’s NAV valuation does not look expensive.

China property companies: peer comparison Target Market 2016E 2016E 2015 2015 2016E 2016E Discount Company Ticker Rating price cap ROE ROA PER PBR PER PBR NAV to NAV (HKD) (USDm) (%) (%) (x) (x) (x) (x) (HKD) (%) Agile Property* 3383 HK Not rated - 2,191 7.5 2.5 5.8 0.4 5.0 0.4 n.a - COGO 81 HK Buy 6.15 741 19.0 4.8 6.8 0.5 2.0 0.3 15.20 (83.4) COLI 688 HK Buy 30.90 30,441 16.3 7.5 8.6 1.2 7.9 1.2 38.60 (37.7) China Resources Land 1109 HK Buy 30.05 17,475 13.2 4.1 9.3 1.2 8.5 1.1 37.56 (47.9) China Vanke* 2202 HK Not rated - 26,467 19.2 3.9 9.5 1.7 8.2 1.5 n.a - Country Garden* 2007 HK Not rated - 8,834 14.3 2.9 5.8 0.9 5.7 0.8 n.a - Dalian Wanda Commercial Properties* 3699 HK Not rated - 27,603 10.8 3.5 13.7 1.0 8.6 0.9 n.a - Evergrande Real Estate* 3333 HK Not rated - 9,942 12.5 1.5 6.6 1.3 8.7 1.0 n.a - Greentown China* 3900 HK Not rated - 1,631 8.4 1.8 10.2 0.4 4.7 0.4 n.a - Guangzhou R&F 2777 HK Buy 12.90 4,544 18.1 4.6 5.1 0.7 3.8 0.6 25.80 (57.4) Joy City 207 HK Buy 1.52 2,348 1.9 0.8 47.9 0.5 26.0 0.5 3.04 (58.2) KWG Property 1813 HK Buy 7.41 2,047 12.8 3.6 4.9 0.6 4.3 0.5 14.82 (65.0) Longfor Properties 960 HK Buy 13.29 8,484 13.9 4.2 7.8 1.0 6.8 0.9 18.98 (40.8) Shimao Property* 813 HK Not rated - 4,879 13.5 3.2 5.1 0.6 4.4 0.6 n.a - Sino-Ocean Land* 3377 HK Not rated - 3,535 8.2 2.7 7.4 0.5 6.4 0.5 n.a - Sunac China* 1918 HK Not rated - 2,270 17.3 3.0 4.5 0.8 4.2 0.7 n.a - Average 12.9 3.4 9.9 0.8 7.2 0.7 (55.8)

Source: Bloomberg forecasts for non-rated stocks, Daiwa forecasts for the others; based on prices as of 8 April 2016 Note: * denotes those companies for which we do not have figures as we do not cover them

Share-price performance and NAV discount Share price has outperformed peers in past year In the past month (9 March-8 April), the share prices of the China property companies have fallen by 0.5% on average, lagging the 1.7% increase in the HSCEI index. During the past month, Longfor’s share price has risen by 6.6%, outperforming its peers. In the past year also, Longfor’s share price has outperformed its peers. Its share price has gone down by 1.9% compared with a year ago, versus the 18.1% overall decline for the China property players.

Longfor Properties (960 HK): 11 April 2016

Longfor: share price (HKD) 20

0 Jan-10 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-16

Source: Bloomberg, Daiwa

Current NAV discount below 2010-15 mean discount Longfor is now trading Currently, Longfor is trading at a 40.8% discount to our end-2016 NAV estimate of at a 40.8% discount to HKD18.98. Compared with its 2010-15 valuation, Longfor’s current discount of 40.8% is our NAV estimate, below lower than its 2010-15 mean discount of 37.5%. This indicates that its current valuation is its 2010-15 mean inexpensive. discount of 37.5% Longfor: historical discount to NAV (%) (10)

(20) +1SD -29.0% (30)

(40) Mean -37.5%

(50) -1SD -46.0%

(60) 2010 2011 2012 2013 2014 2015 2016

Source: Bloomberg, Daiwa

Longfor Properties (960 HK): 11 April 2016

Risks

Housing demand slows as economy deteriorates Key risks: 1) slower Since 2011 when home purchase restrictions (HPR) were introduced in China, the property housing demand amid market has been largely supported by first-home buyers. In 2014, the HPR was removed in a deterioration in the most China cities and many upgraders have since entered the market. Despite slower economy, 2) more growth in the overall economy in 2015, we observe that demand for housing from these property tightening first-time buyers and upgraders is still holding up well, with nationwide home sales up 17% measures in upper-tier and 49% YoY in 2015 and 2M16, respectively. However, with overall growth in the China cities, and 3) economy set to slow in 2016 and beyond, we are concerned that housing demand will start competition over land to slow, which would drag down contract sales for China developers, including Longfor, in plots and rising land the years to come. prices in upper-tier cities Further property tightening measures in upper-tier cities As a result of the hot property market and quickly rising home prices in some upper-tier cities in the past year, property tightening measures were recently introduced in some cities (ie, Shanghai, Shenzhen, Suzhou and Nanjing). If home prices continue to rise in the upper-tier cities, we see a possibility of further tightening measures being introduced in cities where tightening measures are in place or in other cities. Given Longfor’s large landbank exposure in the upper-tier cities, its sales performance could be affected if this happens.

Intense competition in upper-tier cities over land plots As many developers have expressed the intention of expanding their property businesses in upper-tier cities, where housing demand-supply dynamics are more balanced and margins are generally higher, competition over quality land plots has become more intense. Consequently, land costs have been pushed higher and a downtrend in gross margins seems highly likely. Longfor could face the same problems of higher land costs and lower margins in the upper-tier cities when it has to replenish its landbank in these cities.

Delays in new project launches, which could affect Longfor’s contract sales performance With 34.9m sq m GFA of total landbank on hand and 47% located in its 9 core cities, Longfor’s saleable resources is more than sufficient to support our annual contract sales growth forecasts of 13.9% YoY in 2016 and 12.1% YoY in 2017 for the company. Nonetheless, there is always a possibility that its project launches will be delayed due to the delayed issuance of pre-sales permits by housing authorities or internal decisions at Longfor to push back projects. Under these circumstances, the company’s contract sales performance would be affected and our sales growth forecasts might not be realised.

Longfor Properties (960 HK): 11 April 2016

Appendix I: company background Mid-range to high-end property developer 34.9m sq m landbank in 24 cities Largest landbank Longfor Property was established by Chairman Wu Yajun in Chongqing in 1993. It focuses exposure to Yantai on property development, commercial operation and property management. Since the (21%), Chongqing (19%), development of its first residential project in Chongqing in 1997, Longfor has launched Chengdu (6%), Beijing more than 100 projects and expanded outside of Chongqing into the Bohai Rim, Western (5%), Hangzhou (5%) and China, the Yangtze River Delta, Pearl River Delta and Central China. In 2002, the company Shenyang (5%) developed its first commercial project, Chongqing North Paradise Walk, and extended the Paradise Walk brand into Beijing, Shanghai, Chengdu, Suzhou, Hangzhou, Wuxi and Changzhou. As at end-2015, Longfor had 83 residential projects, 32 shopping malls and car parks. It had a total landbank of 34.9m sq m GFA in 24 cities.

Longfor: corporate milestones 1993 Chairman Wu Yajun established the predecessor of Longfor 1995 Entered property sector 1997 Developed its first residential project Longfor Garden in Chongqing 2001 Developed the first villa project in Chongqing 2002 Grand opening of Chongqing North Paradise Walk, entered commercial property sector 2005 Entered Beijing and Chengdu 2006 Developed the first official building in Chongqing 2007 Entered Shanghai and Xi'an Launched its first project in Beijing 2008 Contract sales exceeded CNY 10bn Launched its first project in Shanghai 2009 Entered Wuxi, Changzhou, Shenyang, Hangzhou and Qingdao Listed in Hong Kong in November 2009 2010 Entered Dalian, Yantai and Yuxi Grand opening of Chengdu Three Thousands Mall 2011 Entered Ningbo 2012 Grand opening of Chongqing Times Paradise Walk Entered Shaoxing, Xiamen and Quanzhou 2013 Launched the Chengdu North Paradise Walk Entered Suzhou, Kunming, Changsha and Jinan 2014 Total launched shopping malls number reached 14 Entered Foshan, Nanjing and Guangzhou 2015 Grand opening of Chengdu Jinnan Paradise Walk and Hangzhou Jinsha Paradise Walk

Source: Company, Daiwa

Largest landbank exposure in Pan Bohai Rim and Western China Of Longfor’s total landbank, 36% is located in the Pan Bohai Rim, 32% in Western China, 21% in the Yangtze River Delta, 9% in Southern China and the remaining 3% in Central China. The company has the largest landbank exposure in Yantai (21%), followed by Chongqing (19%), Chengdu (6%), Beijing (5%), Shenyang (5%), Hangzhou (5%), Xi’an (4%) and Quanzhou (4%).

Longfor Properties (960 HK): 11 April 2016

Longfor: landbank breakdown as at end-2015 Region City Total GFA % Attributable GFA % (sq m) (sq m) Pan Bohai Rim Beijing 1,652,215 5% 699,257 2% Shenyang 1,894,739 5% 1,894,739 6% Qingdao 791,933 2% 791,933 3% Yantai 7,242,554 21% 7,242,554 24% Jinan 353,325 1% 353,325 1% Dalian 744,910 2% 410,048 1% Sub-total 12,679,676 36% 11,391,856 37% Yangtze River Delta Shanghai 1,193,072 3% 1,048,918 3% Wuxi 847,523 2% 847,523 3% Changzhou 990,546 3% 990,546 3% Hangzhou 1,736,571 5% 1,252,918 4% Shaoxing 176,161 1% 176,161 1% Ningbo 515,859 1% 479,327 2% Suzhou 777,212 2% 394,207 1% Nanjing 923,446 3% 625,743 2% Sub-total 7,160,390 21% 5,815,343 19% Central China Changsha 865,144 2% 865,144 3% Southern China Xiamen 902,473 3% 554,138 2% Quanzhou 1,325,637 4% 1,325,637 4% Guangzhou 349,097 1% 174,548 1% Foshan 366,304 1% 293,116 1% Sub-total 2,943,511 8% 2,347,439 8% Western China Chongqing 6,762,226 19% 5,997,089 20% Chengdu 2,243,236 6% 1,912,103 6% Xi'an 1,416,554 4% 1,416,554 5% Yuxi 790,407 2% 790,407 3% Sub-total 11,212,423 32% 10,116,153 33% Total 34,861,144 100% 30,535,935 100%

Source: Company, Daiwa

Longfor: map of landbank

Source: Daiwa

Longfor Properties (960 HK): 11 April 2016

Property development accounts for largest proportion of revenue, but property investment business is up and coming Of Longfor’s total revenue of CNY47,423m in 2015, its property development business made up the largest proportion of 94.9% (CNY44,993m). Its property investment business achieved revenue of CNY1,415m (3.0%), while its property management business saw revenue of CNY1,015m (2.1%) in 2015. Even though the company’s property investment business is still very small compared with its property development business, we think it is up and coming given its expected rapid rental income growth in the following years. We estimate rental income from investment properties of CNY1,976m (+40% YoY) in 2016, CNY2,620m (+33% YoY) in 2017 and CNY3,212m (+23% YoY) in 2018. They would account for 3.5% of total revenue in 2016, 4.3% in 2017 and 4.8% in 2018.

Longfor: revenue breakdown by business (CNYm) 80,000 67,212 60,445 55,701 60,000 50,991 47,423 41,510 40,000 27,893 24,093 20,000

0 2011 2012 2013 2014 2015 2016E 2017E 2018E Property development Property investment Property management and others

Source: Company, Daiwa forecasts

Experienced management team Longfor has a well-organised and experienced property development management team. Most have been with the company for a long time and have extensive experience in operations, management or the property-development business.

Management profile Position Brief introduction Wu Yajun Founder, Chairman and executive director Madam Wu joined Longfor in 1994 since its establishment and was appointed as executive director in December 2007. She is also a member of the Remuneration Committee and Investment Committee of the group and a representative of the National Peoples’ Congress, Standing Committee of the All-China Federation of Industry & Commerce and vice-chairperson of the Federation of Industry & Commerce of Chongqing Municipality. Shao Mingxiao CEO and executive director Mr Shao is the Chief Executive Officer and a member of the Investment Committee of Longfor. He has joined the company for nearly 10 years and was appointed as executive director in June 2011. He obtained Master’s degree in Economics from Renmin University of China in 1992. Prior to joining Longfor, he had held various management positions in property sector. Yan Jianguo Vice President and executive director Mr Yan is the Vice President of the group and a member of the Investment Committee of the company. He joined Longfor in 2014 and was appointed as executive director on January 2015. He has extensive experience in general management in property sector prior to joining Longfor. Zhao Yi CFO and Executive director Mr Zhao joined the company in 2006 and was appointed as executive director on March 2015. He is the chief financial officer of Longfor and a member of the Investment committee. He is a member of China Institute of Certified Publish Accountants and has rich experience in financial management.

Source: Longfor, Daiwa

Longfor Properties (960 HK): 11 April 2016

Longfor: development property landbank summary Completed GFA GFA Under GFA Under Expected Project City Type Stake Total GFA Unsold Development Planning completion year (sq m) (sq m) (sq m) (sq m) U -City Chongqing Res/Commercial 100.0% 515,238 89,482 425,756 - 2017 Bamboo Grove Chongqing Res/Commercial 50.0% 480,397 122,048 209,352 148,997 2017 Hill Top’s Garden Chongqing Res/Commercial 100.0% 434,100 72,976 162,330 198,794 2019 La Defense Chongqing Res/Commercial 100.0% 1,029,484 - 594,572 434,912 2020 Chunsen Land Chongqing Res/Commercial/Office 100.0% 244,265 27,575 28,255 188,435 2018 Times Paradise Walk Chongqing Res/Commercial 100.0% 250,021 33,453 137,388 79,180 2020 Hometown Chongqing Res/Commercial 100.0% 85,693 20,422 65,271 - 2016 1st Avenue Chongqing Res/Commercial/Office 51.0% 448,418 - 229,059 219,359 2018 Keyuan Rd. Plot Chongqing Res/Commercial 100.0% 139,940 - - 139,940 2017 For Colourful Life Chongqing Res/Commercial 100.0% 108,487 - - 108,487 2017 Longfor Ideal City Chongqing Res/Commercial 100.0% 2,420,472 789 808,401 1,611,282 2021 Glory Villa* Chongqing Res/Commercial 50.0% 836,635 - - 836,635 - Jinnan Paradise Walk Chengdu Res/Commercial 100.0% 128,722 14,014 114,708 - 2016 Jinnan Walk Time Chengdu Res/Commercial 100.0% 101,445 - 101,445 - 2016 Times Paradise Walk Chengdu Res/Commercial 100.0% 799,476 102,203 582,545 114,728 2021 Jade Town Chengdu Res/Commercial 100.0% 63,914 11,750 23,380 28,784 2019 Century Peak View Chengdu Res/Commercial 100.0% 280,852 52,065 146,937 81,850 2018 Hometown Chengdu Res/Commercial 100.0% 148,979 - 57,668 91,311 2017 Peace Hill County Chengdu Res/Commercial 100.0% 254,836 48,422 - 206,414 2019 Jasper Sky* Chengdu Res/Commercial 51.0% 312,479 - - 312,479 - Longquan plot* Chengdu Res/Commercial 50.0% 356,035 - - 356,035 - Great Wall Chinoiserie Beijing Res/Commercial 60.0% 239,111 - 67,718 171,393 2019 Jade Mansion Beijing Res/Commercial 50.0% 139,478 - 139,478 - 2017 Times Paradise Walk Beijing Res/Commercial 100.0% 43,419 5,886 37,533 - 2015 Rose and Gingko Mansion Beijing Res/Commercial/Office 34.0% 302,202 - 237,301 64,901 2017 Fengtai Kandan Plot Beijing Res/Commercial/Office 16.5% 56,350 - - 56,350 2016 Mentougou Newtown Plot Beijing Res/Commercial 17.0% 113,563 - - 113,563 2017 Emerald Legend Beijing Res/Commercial 50.0% 54,149 - - 54,149 2017 Taipingzhuang plot Beijing Res/Commercial 25.0% 18,004 - - 18,004 2017 Hou Sha Yu Beijing Res/Commercial 100.0% 161,806 - - 161,806 2018 Daxing Yinghai plot* Beijing Res/Commercial 50.0% 184,339 - - 184,339 - South Dongba plot* Beijing Res/Commercial 34.0% 206,613 - - 206,613 - Shunyi Newtown plot* Beijing Res/Commercial 20.0% 251,602 - - 251,602 - Shunyi Renhe plot* Beijing Res/Commercial 26.0% 123,097 - - 123,097 - Banyan Bay Yantai Res/Commercial 100.0% 6,625,453 43,509 257,008 6,324,936 2020 Yangma Island B Plot Yantai Res/Commercial 100.0% 696,147 - - 696,147 2018 River Bank Mansion Shanghai Res/Commercial 100.0% 41,784 - 41,784 - 2015 The Glorious City Shanghai Res/Commercial 100.0% 108,982 - - 108,982 2017 The Mansion Shanghai Res/Commercial 16.0% 45,866 - 45,866 - 2016 Amber Garden Shanghai Res/Commercial 30.0% 109,197 - 109,197 - 2017 Oriental Glorious Yard Shanghai Res/Commercial 28.0% 32,422 - 32,422 - 2017 Hongqiao Paradise Walk Shanghai Res/Commercial/Office 100.0% 129,579 - 106,782 22,797 2017 North Paradise Walk Shanghai Res/Commercial/Office 100.0% 207,531 - 191,460 16,071 2018 Jiading Jiangqiao plot* Shanghai Res/Commercial 100.0% 216,856 - - 216,856 - Starry Street Xi'an Res/Commercial 100.0% 76,000 - 76,000 - 2015 Chianti Xi'an Res/Commercial 100.0% 995,411 43,095 180,905 771,411 2018 Pittosporum Tobira Xi'an Res/Commercial 100.0% 175,655 - 175,655 - 2016 Hometown Xi'an Res/Commercial 100.0% 228,871 - 88,633 140,238 2018 Chang’an Wonder Xi'an Res/Commercial 100.0% 58,537 - - 58,537 2018 Aerospace Town B plot* Xi'an Res/Commercial 100.0% 228,883 - - 228,883 - Rose and Ginkgo Valley Wuxi Res/Commercial 100.0% 107,567 23,244 - 84,323 2017 Jiu Shu Wuxi Res/Commercial 100.0% 291,773 18,962 42,753 230,058 2019 Quiet tale Wuxi Res/Commercial 100.0% 179,731 89,231 - 90,500 2020 Mountain Top Garden Wuxi Res/Commercial 100.0% 242,060 18,394 45,549 178,117 2022 Sunshine City Changzhou Res/Commercial 100.0% 69,638 64,069 - 5,569 2016 Dragon City Changzhou Res/Commercial 100.0% 538,417 45,859 272,522 220,036 2019 Original Courtyard Changzhou Res/Commercial 100.0% 239,368 100,437 - 138,931 2017 Times Paradise Walk Suzhou Res/Commercial/Office 51.0% 379,999 - 356,535 23,464 2020 Longfor Mansion* Suzhou Res/Commercial 50.0% 217,107 - - 217,107 - Rose and Ginkgo Villa Ⅰ Shenyang Res/Commercial 100.0% 56,757 16,834 39,923 - 2018 Rose and Ginkgo Villa Ⅱ Shenyang Res/Commercial 100.0% 394,385 19,931 37,067 337,387 2018 Chianti Shenyang Res/Commercial 100.0% 513,686 57,850 - 455,836 2018 Longfor Hometown Shenyang Res/Commercial 100.0% 353,223 10,897 42,017 300,309 2018 Pittosporum Tobira Shenyang Res/Commercial 100.0% 115,160 8,751 57,749 48,660 2016 Fairy Castle Shenyang Res/Commercial 100.0% 184,995 29,288 155,707 - 2016 Tangning One Shenyang Res/Commercial 100.0% 297,911 698 163,640 133,573 2019 Jinhai Road plot* Shenyang Res/Commercial 100.0% 378,295 - - 378,295 - Baisha Project Qingdao Res/Commercial 100.0% 214,547 14,070 75,334 125,143 2019 Rose and Gingko Coast Qingdao Res/Commercial 100.0% 226,426 46,931 88,459 91,036 2020 Original Qingdao Res/Commercial 100.0% 94,224 6,584 87,640 - 2016 Peace Hill County Qingdao Res/Commercial 100.0% 249,374 2,887 133,716 112,771 2018 Glorious Palace Qingdao Res/Commercial 100.0% 300,355 23,713 120,381 156,261 2019 Rose and Ginkgo Town Hangzhou Res/Commercial 100.0% 77,348 31,431 45,917 - 2017

Longfor Properties (960 HK): 11 April 2016

Longfor: development property landbank summary (continued) Completed GFA GFA Under GFA Under Expected Project City Type Stake Total GFA Unsold Development Planning completion year Mingjing Tai Hangzhou Res/Commercial 100.0% 268,082 - 268,082 - 2016 Chunjiang Central Hangzhou Res/Commercial/Office 100.0% 250,581 - 53,563 197,018 2019 Direct Mansion Hangzhou Res/Commercial 51.0% 50,161 - 50,161 - 2016 Chunjiang City Hangzhou Res/Commercial 40.0% 139,035 - 139,035 - 2017 Central Courtyard* Hangzhou Res/Commercial 100.0% 241,422 - - 241,422 - The Honor of City* Hangzhou Res/Commercial 10.0% 323,691 - - 323,691 - West Lake Sandun plot* Hangzhou Res/Commercial 30.0% 120,416 - - 120,416 - Xingyi II plot* Hangzhou Res/Commercial 100.0% 152,552 - - 152,552 - Shaoxing Hometown Shaoxing Res/Commercial 100.0% 394,695 19,969 374,726 - 2016 Paradise Seasons Yuxi Res/Commercial 100.0% 790,407 - - 790,407 2019 Crystal Town Kunming Res/Commercial 100.0% 30,331 30,331 - - 2015 Crystal Town Dalian Res/Commercial 100.0% 199,372 32,041 167,331 - 2016 Rose and Ginkgo Villa Dalian Res/Commercial 100.0% 124,443 72,782 - 51,661 2017 Longhe II Dalian Res/Commercial 50.0% 669,724 - - 669,724 2018 Chianti Ningbo Res/Commercial 100.0% 202,323 52,588 - 149,735 2017 Rose and Ginkgo Coast Ningbo Res/Commercial 100.0% 389,225 38,585 234,532 116,108 2017 Celebrity Life Ningbo Res/Commercial 100.0% 64,830 - 64,830 - 2015 Yinzhou Newtown plot* Ningbo Res/Commercial 20.0% 45,664 - - 45,664 - Island in the City Xiamen Res/Commercial 100.0% 398,599 17,160 260,821 120,618 2018 Chunjiang Central Xiamen Res/Commercial 49.0% 272,425 - - 272,425 2018 Chunjiang Land* Xiamen Res/Commercial 51.0% 350,045 - - 350,045 - Ascension to the Throne Quanzhou Res/Commercial 100.0% 1,370,849 40,480 174,094 1,156,275 2018 Glorious Mansion Changsha Res/Commercial 100.0% 1,140,649 - 449,352 691,297 2018 MingJing Tai Jinan Res/Commercial 100.0% 349,111 - 276,260 72,851 2018 Chunjiang Land Foshan Res/Commercial 46.0% 366,304 - 171,896 194,408 2018 Longfor Mansion Guangzhou Res/Commercial 50.0% 349,097 - 47,505 301,592 2018 Chunjiang Center Nanjing Res/Commercial/Office 100.0% 429,609 - 138,383 291,226 2019 Chunjiang Central* Nanjing Res/Commercial 51.0% 495,006 - - 495,006 - Total 1,621,686 10,110,289 25,279,814

Source: Company, Daiwa Note: * denotes the projects newly acquired in 2H15. The details for the rest of the projects are as at end-June 2015 as their end-2015 details are not yet available.

Longfor: investment property landbank summary GFA Under GFA Under Expected Project City Stake Total GFA Completed GFA Development Planning completion year (sq m) (sq m) (sq m) (sq m) North Paradise Walk Chongqing 100% 146,262 146,262 - - In operation Fairy Castle Chongqing 100% 29,413 29,413 - - In operation Crystal Castle Chongqing 100% 35,087 35,087 - - In operation West Paradise Walk Chongqing 100% 111,654 111,654 - - In operation MOCO Chongqing 100% 29,104 29,104 - - In operation Times Paradise Walk I Chongqing 100% 218,569 218,569 - - In operation Times Paradise Walk II Phase 1 Chongqing 100% 257,113 257,113 - - In operation Times Paradise Walk II Phase 2 Chongqing 100% 114,523 - - 114,523 2020 Times Paradise Walk III Chongqing 100% 74,112 - 74,112 - 2016 U-City I Chongqing 100% 31,271 31,271 - - In operation U-City II Chongqing 100% 144,885 - 101,885 43,000 2017 Chunsen Starry Street Chongqing 100% 54,618 54,618 - - In operation Hometown Paradise Walk Chongqing 100% 197,766 - 103,499 94,267 2017 Longfor Ideal City Chongqing 100% 336,015 - - 336,015 2018 Three Thousands Mall Chengdu 100% 38,043 38,043 - - In operation North Paradise Walk Chengdu 100% 215,536 215,536 - - In operation Times Paradise Walk Chengdu 100% 352,706 61,989 - 290,717 2019 Jinnan Paradise Walk* Chengdu 100% 92,192 92,192 - - In operation Summer Palace Starry Street Beijing 98.5% 6,320 6,320 - - In operation Changying Paradise Walk Beijing 100% 300,192 300,192 - - In operation Times Paradise Walk Beijing 100% 154,037 - 154,037 - 2016 Hongqiao Paradise Walk Shanghai 100% 246,284 - 172,645 73,639 2016 North Paradise Walk Shanghai 100% 147,748 - 96,803 50,945 2018 Xi'an MOCO Xi'an 100% 53,267 53,267 - - In operation Blue Lake Wuxi 100% 127,069 - - 127,069 2018 Wuxi Splendor Paradise Walk Wuxi 100% 117,714 - - 117,714 2018 Dongjing 120 Project II Changzhou 100% 174,328 - - 174,328 2018 Longcheng Paradise Walk Changzhou 100% 144,312 - 144,312 - 2018 Jinsha Paradise Walk* Hangzhou 100% 246,995 180,645 - 66,350 In operation Binjiang Paradise Walk Hangzhou 100% 215,201 - 158,067 57,134 2017 Times Paradise Walk Suzhou 51% 265,820 - 190,553 75,267 2017 Chunjiang Central Xiamen 49% 85,000 - - 85,000 2018 Total 4,763,156 1,861,275 1,195,913 1,705,968

Source: Company, Daiwa Note: * denotes the retail projects that commenced operations in 2H15. The details for the retail projects that have not yet commenced operations are as at end-June 2015 as their end-2015 details are not yet available.

Longfor Properties (960 HK): 11 April 2016

Appendix II: residential market in Longfor’s core cities

Residential property sales and ASP in Beijing Residential property sales and ASP in Shanghai (CNY m) (CNY/sqm) (CNY m) (CNY/sqm) 300,000 30,000 600,000 25,000

20,000 200,000 20,000 400,000 15,000

10,000 100,000 10,000 200,000 5,000

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Residential sales ASP (RHS) Residential sales ASP (RHS)

Source: CREIS, Daiwa Source: CREIS, Daiwa

Residential property sales and ASP in Guangzhou Residential property sales and ASP in Shenzhen (CNY m) (CNY/sqm) (CNY m) (CNY/sqm) 200,000 20,000 250,000 40,000

200,000 150,000 15,000 30,000

150,000 100,000 10,000 20,000 100,000

50,000 5,000 10,000 50,000

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Residential sales ASP (RHS) Residential sales ASP (RHS)

Source: CREIS, Daiwa Source: CREIS, Daiwa

Residential property sales and ASP in Chongqing Residential property sales and ASP in Chengdu (CNY m) (CNY/sqm) (CNY m) (CNY/sqm) 150,000 12,000 120,000 12,000

9,000 100,000 80,000 8,000

6,000

50,000 40,000 4,000 3,000

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Residential sales ASP (RHS) Residential sales ASP (RHS)

Source: CREIS, Daiwa Source: CREIS, Daiwa

Residential property sales and ASP in Hangzhou Residential property sales and ASP in Xiamen (CNY m) (CNY/sqm) (CNY m) (CNY/sqm) 120,000 30,000 80,000 25,000

100,000 25,000 20,000 60,000 80,000 20,000 15,000 60,000 15,000 40,000 10,000 40,000 10,000 20,000 20,000 5,000 5,000

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Residential sales ASP (RHS) Residential sales ASP (RHS)

Source: CREIS, Daiwa Source: CREIS, Daiwa

Longfor Properties (960 HK): 11 April 2016

Residential property sales and ASP in Suzhou Residential property sales and ASP in Nanjing (CNY m) (CNY/sqm) (CNY m) (CNY/sqm) 200,000 15,000 200,000 16,000

150,000 150,000 12,000 10,000

100,000 100,000 8,000

5,000 50,000 50,000 4,000

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Residential sales ASP (RHS) Residential sales ASP (RHS)

Source: CREIS, Daiwa Source: CREIS, Daiwa

Longfor Properties (960 HK): 11 April 2016

Appendix III: housing inventory situation in Longfor’s core cities

Inventory and inventory duration in Beijing Inventory and inventory duration in Shanghai (m sqm) (No. of months) (m sqm) (No. of months) 16 20 16 16

12 15 12 12

8 10 8 8

4 5 4 4

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Inventory Inventory duration Inventory Inventory duration

Source: CREIS, Daiwa Source: CREIS, Daiwa

Inventory and inventory duration in Guangzhou Inventory and inventory duration in Shenzhen (m sqm) (No. of months) (m sqm) (No. of months) 16 16 5 15

4 12 12 12

3 9 8 8 2 6

4 4 1 3

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Inventory Inventory duration Inventory Inventory duration

Source: CREIS, Daiwa Source: CREIS, Daiwa

Inventory and inventory duration in Chongqing Inventory and inventory duration in Chengdu (m sqm) (No. of months) (m sqm) (No. of months) 20 12 10 18

8 15 15 9 12 6 10 6 9 4 6 5 3 2 3

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Inventory Inventory duration Inventory Inventory duration

Source: CREIS, Daiwa Source: CREIS, Daiwa

Inventory and inventory duration in Hangzhou Inventory and inventory duration in Xiamen (m sqm) (No. of months) (m sqm) (No. of months) 5 30 4 15

4 25 12 3 20 3 9 15 2 2 6 10 1 3 1 5

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Inventory Inventory duration Inventory Inventory duration

Source: CREIS, Daiwa Source: CREIS, Daiwa

Longfor Properties (960 HK): 11 April 2016

Inventory and inventory duration in Suzhou Inventory and inventory duration in Nanjing (m sqm) (No. of months) (m sqm) (No. of months) 10 12 8 20

8 9 6 15

6 6 4 10 4

3 2 5 2

0 0 0 0 2010 2011 2012 2013 2014 2015 2010 2011 2012 2013 2014 2015 Inventory Inventory duration Inventory Inventory duration

Source: CREIS, Daiwa Source: CREIS, Daiwa

Longfor Properties (960 HK): 11 April 2016

Daiwa’s Asia Pacific Research Directory HONG KONG SOUTH KOREA Takashi FUJIKURA (852) 2848 4051 [email protected] Sung Yop CHUNG (82) 2 787 9157 [email protected] Regional Research Head Pan-Asia Co-head/Regional Head of Automobiles and Components; Automobiles; Kosuke MIZUNO (852) 2848 4949 / [email protected] Shipbuilding; Steel (852) 2773 8273 Mike OH (82) 2 787 9179 [email protected] Regional Research Co-head Banking; Capital Goods (Construction and Machinery) John HETHERINGTON (852) 2773 8787 [email protected] Iris PARK (82) 2 787 9165 [email protected] Regional Deputy Head of Asia Pacific Research Consumer/Retail Rohan DALZIELL (852) 2848 4938 [email protected] SK KIM (82) 2 787 9173 [email protected] Regional Head of Product Management IT/Electronics – Semiconductor/Display and Tech Hardware Kevin LAI (852) 2848 4926 [email protected] Thomas Y KWON (82) 2 787 9181 [email protected] Chief Economist for Asia ex-Japan; Macro Economics (Regional) Pan-Asia Head of Internet & Telecommunications; Software – Internet/On-line Game Junjie TANG (852) 2773 8736 [email protected] Kevin JIN (82) 2 787 9168 [email protected] Macro Economics (China) Small/Mid Cap Jonas KAN (852) 2848 4439 [email protected] Head of Hong Kong and China Property TAIWAN Cynthia CHAN (852) 2773 8243 [email protected] Rick HSU (886) 2 8758 6261 [email protected] Property (China) Head of Regional Technology; Head of Taiwan Research; Semiconductor/IC Design Leon QI (852) 2532 4381 [email protected] (Regional) Banking (Hong Kong/China); Broker (China); Insurance (China) Christie CHIEN (886) 2 8758 6257 [email protected] Anson CHAN (852) 2532 4350 [email protected] Banking; Insurance (Taiwan); Macro Economics (Regional) Consumer (Hong Kong/China) Steven TSENG (886) 2 8758 6252 [email protected] Jamie SOO (852) 2773 8529 [email protected] IT/Technology Hardware (PC Hardware) Gaming and Leisure (Hong Kong/China) Christine WANG (886) 2 8758 6249 [email protected] Dennis IP (852) 2848 4068 [email protected] IT/Technology Hardware (Automation); Pharmaceuticals and Healthcare; Consumer Power; Utilities; Renewables and Environment (Hong Kong/China) Kylie HUANG (886) 2 8758 6248 [email protected] John CHOI (852) 2773 8730 [email protected] IT/Technology Hardware (Handsets and Components) Head of Hong Kong and China Internet; Regional Head of Small/Mid Cap Helen CHIEN (886) 2 8758 6254 [email protected] Kelvin LAU (852) 2848 4467 [email protected] Small/Mid Cap Head of Automobiles; Transportation and Industrial (Hong Kong/China) Brian LAM (852) 2532 4341 [email protected] INDIA Punit SRIVASTAVA (91) 22 6622 1013 [email protected] Transportation – Railway; Construction and Engineering (China) Jibo MA (852) 2848 4489 [email protected] Head of India Research; Strategy; Banking/Finance Saurabh MEHTA (91) 22 6622 1009 [email protected] Head of Custom Products Group Thomas HO (852) 2773 8716 [email protected] Capital Goods; Utilities

Custom Products Group SINGAPORE Ramakrishna MARUVADA (65) 6499 6543 [email protected] PHILIPPINES Bianca SOLEMA (63) 2 737 3023 [email protected] Head of Singapore Research; Telecommunications (China/ASEAN/India) Utilities and Energy Royston TAN (65) 6321 3086 [email protected]

Oil and Gas; Capital Goods David LUM (65) 6329 2102 [email protected] Banking; Property and REITs Shane GOH (65) 64996546 [email protected] Small/Mid Cap (Singapore) Jame OSMAN (65) 6321 3092 [email protected] Telecommunications (ASEAN/India); Pharmaceuticals and Healthcare; Consumer (Singapore)

Longfor Properties (960 HK): 11 April 2016

Daiwa’s Offices Office / Branch / Affiliate Address Tel Fax DAIWA SECURITIES GROUP INC HEAD OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6753 (81) 3 5555 3111 (81) 3 5555 0661 Daiwa Securities Trust Company One Evertrust Plaza, Jersey City, NJ 07302, U.S.A. (1) 201 333 7300 (1) 201 333 7726 Daiwa Securities Trust and Banking (Europe) PLC (Head Office) 5 King William Street, London EC4N 7JB, United Kingdom (44) 207 320 8000 (44) 207 410 0129 Daiwa Europe Trustees (Ireland) Ltd Level 3, Block 5, Harcourt Centre, Harcourt Road, Dublin 2, Ireland (353) 1 603 9900 (353) 1 478 3469

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DAIWA INSTITUTE OF RESEARCH LTD HEAD OFFICE 15-6, Fuyuki, Koto-ku, Tokyo, 135-8460, Japan (81) 3 5620 5100 (81) 3 5620 5603 MARUNOUCHI OFFICE Gran Tokyo North Tower, 1-9-1, Marunouchi, Chiyoda-ku, Tokyo, 100-6756 (81) 3 5555 7011 (81) 3 5202 2021

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Longfor Properties (960 HK): 11 April 2016

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This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person.

Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.

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Japan Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc. Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc. Investment Banking Relationship Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK). *Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.

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Longfor Properties (960 HK): 11 April 2016

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Research Analyst Conflicts For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.

Research Analyst Certification For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.

The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report. "1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months.

Disclosure of investment ratings Rating Percentage of total Buy* 66.9% Hold** 19.7% Sell*** 13.5% Source: Daiwa Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 March 2016. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings.

Additional information may be available upon request.

Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law (This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)

If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items. • In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction. • In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan. • For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements. • There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements. • There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us. • Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.

When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.

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