PROPERTY | NOVEMBER 25, 2016

CHINA RESOURCES LAND | 1109 HK A trailblazer in cross-market consolidation

To acquire 20.9% in Enterprise (600675 SH) Outperform (maintained)

Access to GFA2.8m sq.m prime land at low cost Current price: Target: Minimal balance sheet impact HK$19.00  HK$28.12 (as at 25 Nov 2016) (maintained) Establishing an A-share platform. On 23 Nov, CR Land announced it would be acquiring a 20.9% stake (1.4b shares) in Trading data China Enterprise (600675 SH) for RMB7.3b or RMB5.23 per share. The acquisition price is at par with the average trading price of China 52-week range HK$16.50 – 23.80 Enterprise in the past 20 trading days before trading was Market capital (ordinary)(m) HK$131,690/US$16,883 suspended in Jun 2016. Shares outstanding (m) 6,931 A strategic acquisition. We view the acquisition as strategic in Free float (%) 38.7 nature. Upon completion, CR Land would gain board seats and 3M avg. daily T/O (m share) 14.9 would be in position to assist in improving China Enterprise’s 3M avg. daily T/O (US$ m) 39.8 managerial quality. A likely priority would be lowering the funding Expected 12-month return (%) 48 cost of China Enterprise, which was as high as 12.8% in 2015. This Source: Bloomberg, CCBIS could be accomplished by leveraging CR Land’s access to low- cost capital. In our view, the acquisition paves the way for future Price vs HSI cooperation between CR Land and SASAC, China

Enterprise’s controlling shareholder. A more concrete outcome of 1.5 the deal is that it gives CR Land access to GFA2.8m sq.m of prime 1.4 location land bank owned or to be owned by China Enterprise at an effective cost of around RMB18k per sq.m, a very attractive 1.3 price relative to current market rates. Finally, ownership of China 1.2 Enterprise would give CR Land an A-share listed platform, which 1.1 opens door to more structural possibilities. 1.0 Minimal balance sheet impact. The RMB7.3b is to be paid in cash 0.9 upon completion of the deal expected in mid-2017. We believe 0.8 the impact on the balance sheet will be minimal as CR Land would 0.7 account for the acquisition using the equity method. Overall, we view the acquisition positively and reiterate our Outperform rating 0.6 Jan-15 Jun-15 Dec-15 Jun-16 Nov-16 on CR Land. We leave our HK$28.12 target price and forecasts unchanged pending further details of the China Enterprise HSI CR Land (1109 HK) acquisition due next year, including all the necessary approvals. Source: Bloomberg, CCBIS Key risks to our forecasts are policy risk and current risk.

Forecast and valuation Stock performance

Year to 31 Dec 2014 2015 2016F 2017F 2018F Performance over 1M 3M 12M Revenue (HK$ m) 89,705 103,393 107,600 127,181 148,623 Absolute -5.5 -8.0 -12.6 YoY (%) 25.7 15.3 4.1 18.2 16.9 Relative (%) to HSI -1.9 -7.6 -13.6 Core net profit (HK$ m) 11,558 14,076 15,650 17,893 22,656 Source: Bloomberg, CCBIS YoY (%) 24.0 21.8 11.2 14.3 26.6 F.D. core EPS (HK$) 1.8 2.1 2.3 2.6 3.3 Frank Miao, CFA YoY (%) 10.7 17.7 8.5 14.3 26.6 Core P/E (x) 10.7 9.1 8.4 7.4 5.8 (852) 3911 8246 DPS (HK$) 0.51 0.59 0.63 0.72 0.92 [email protected]

Dividend yield (%) 2.7 3.1 3.3 3.8 4.8

P/B (x) 1.1 1.0 0.9 0.8 0.7 ROAE (%) 12.1 12.8 12.9 13.2 14.9

Net debt/equity (%) 37.6 17.1 35.4 30.3 10.3

Source: Bloomberg, CCBIS

Analyst certifications and other important disclosures on last page 1

8998285/21311/20161129 10:08 LAND (1109 HK) | November 25, 2016

To acquire 20.9% stake in china enterprise

On 23 Nov 2016, CR Land (1109 HK, Outperform) announced that it had conditionally agreed to acquire a 20.9% stake in China Enterprise (600675 SH, Not Rated), a Shanghai- based property developer and investment property operator under Shanghai SASAC, for RMB7.3b or RMB5.23 per share. This is at par with the average closing price of China Enterprise in the previous 20 trading days. The shares are subject to a lock-up period of 36 months. CR Land believes the share acquisition would strengthen its leading position in the China property space by replenishing its land bank at low cost.

The acquisition is an integral part of China Enterprise’s restructuring plan under the SOE mixed ownership reform framework put forth by the State Council and implemented by Shanghai SASAC. China Enterprise’s restructuring plan is to take place in two steps:

First, China Enterprise is to acquire 14 projects from parent Shanghai Land for RMB18.5b, of which 85% will be funded by share issuance. Total GFA for the14 projects is approximately 2m sq.m and will cover six Chinese cities, mainly in the Yangtze River Delta region (YRD). Book cost of the 14 projects is RMB6.7b. Over 50% of the GFA to be acquired is located in Shanghai.

Upon completion of the first step, China Enterprise would own GFA 2.8m sq.m of land bank. Development properties for sale account for GFA2.2m sq.m, of which over 50% is located in Shanghai and rest in other YRD cities. The remaining projects are mainly investment properties held for rental income and located in Shanghai.

The second step entails China Enterprise issuing 1.8b shares at RMB5.23 per share to six strategic investors. Shares of China Enterprise have been under trading suspension since 24 Jun 2016 due to pending restructuring. The issuance price is at par with the average closing price of the 20 trading days prior to suspension.

Share price of China Enterprise vs SHOMP Breakdown of GFA to be injected in China Enterprise

1.0

+11.2% 0.9 Development Non-Shanghai property in Projets Shanghai 38% 0.8 38%

0.7

0.6 Invement proeprty in Shangahi 24% Shangahi Enterprise SHCOMP Index Source: Bloomberg, CCBIS Source: CCBIS

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Details of projects currently under China Enterprise

* GFA 2015 operational data City District Equity Type Stage 000 sq.m Sales (RMB m) ASP (RMB psm) GPM* (%) Shanghai Baoshan 100.0 Service apartment Com 79.7 851.8 22,183 36.2 Shanghai Jiading 87.5 Residential UC 62.2 845.6 16,646 50.1 Shanghai Xuhui 71.0 Service apartment UC 148.5 3,321.9 61,517 66.3 Shanghai Songjiang 94.5 Service apartment Com 60.6 1,052.9 21,186 47.8 Shanghai Pudong 87.5 Service apartment Com - 460.0 23,000 19.2 Shanghai Pudong 87.5 Villa UC 65.1 151.7 27,081 39.3 Shanghai Pudong 93.0 Residential Com 38.8 153.7 22,597 65.7 Helie Street 71.6 Residential UC 196.5 607.9 10,373 25.1 Jiangyin Chengjiang Street 45.9 Service apartment Com 67.1 459.0 9,161 39.2 Jiangyin Shengang Street 95.0 Service apartment Com 134.0 61.7 5,367 -10.4 Total/average 852.5 7,966.2 21,911 37.8 * Com = complete, UC = under construction Source: Bloomberg, CCBIS

Changes in shareholding of China Enterprise

Before restructuring After Shanghai land injection After new share issuance m shares % held m shares % held m shares % held 地产集团 Shanghai Land 687.1 36.8 3,697.3 75.8 3,697.3 55.2 华润商业 CR Land - - - - 1,398.7 20.9 平安不动产 Pingan - - - - 118.1 1.8 平安磐海汇富 Pingan Qinghaihuifu - - - - 27.2 0.4 中远海运资产 Zhongyuanhaiyun Asset - - - - 90.8 1.4 合享投资 Hexiang Investment - - - - 90.8 1.4 金投基金 Jintou Fund - - - - 90.8 1.4 其他流通股东 Other shareholders 1,179.9 63.2 1,179.9 24.2 1,179.9 17.6 合计 Total 1,867.1 100.0 4,877.3 100.0 6,693.7 100.0 Source: Bloomberg, CCBIS

Assuming relevant approvals are obtained, CR Land would account for the acquisition using the equity method and may not consolidate contracted sales of China Enterprise into CR Land for reporting purposes. The entire RMB7.5b will be paid in cash at completion, expected in mid-2017. We anticipate no impact on CR Land’s financials for FY16F and only minimal balance sheet impact in FY17F.

The share acquisition is part of the Shanghai municipal government’s push for mixed- ownership reform of SOEs in Shanghai. CR Land took a holistic approach to evaluating this opportunity and believes that the most valuable asset of China Enterprise is its land reserves, most of which are located in prime locations in and around Shanghai.

CR Land will help China Enterprise beef up its internal controls and execution. An immediate step would be to lower the funding cost of China Enterprise, which was as high as 12.8% in 2015. It would accomplish this by leveraging CR Land’s access to low cost capital. In our view, acquisition of China Enterprise paves the way for future cooperation between CR Land and Shanghai SASAC, the ultimate controlling shareholder of China Enterprise.

Overall, we view the acquisition positively and reiterate our Outperform rating on CR Land. We leave our HK$28.12 target price and forecasts unchanged pending further details of the China Enterprise acquisition due next year, including all the necessary approvals. Key risks to our forecasts are policy risk and current risk.

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Market capitalization comparison, RMB m P/B comparison (x)

160,000 6

140,000 5 120,000

100,000 4

80,000 3 60,000 2 40,000

20,000 1

- -

CR Land Shanghai Enterprise CR Land Shanghai Enterprise Source: Bloomberg, Company data, CCBIS Source: Bloomberg, Company data, CCBIS

12-month forward P/E, CR Land 12-month forward P/B, CR Land

14 1.5

13 1.4 1.3 12 1.2 11 1.1 10 1.0 9 0.9 8 0.8 7 0.7

6 0.6

P/E Average P/E +1 stdev -1 stdev P/B Average P/B +1 stdev -1 stdev Source: Bloomberg, Company data, CCBIS Source: Bloomberg, Company data, CCBIS

Historical NAV discount for CR Land

70%

60%

50%

40%

30%

20%

10%

0%

Jun-10

Jun-11

Jun-12

Jun-13

Jun-14

Jun-15

Jun-16

Apr-11

Apr-12

Apr-13

Apr-14

Apr-15

Apr-16

Feb-11

Feb-12

Feb-13

Feb-14

Feb-15

Feb-16

Oct-10

Oct-11

Oct-12

Oct-13

Oct-14

Oct-15

Oct-16

Aug-10

Aug-11

Aug-12

Aug-13

Aug-14

Aug-15

Aug-16

Dec-10

Dec-11

Dec-12

Dec-13

Dec-14 Dec-15

NAV discount Average discount +1 stdev -1 stdev Source: Bloomberg, CCBIS

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China Resources Land | 1109 HK – financial summary

Profit and loss Balance sheet

FYE 31 Dec (HK$ m) 2014 2015 2016F 2017F 2018F FYE 31 Dec (HK$ m) 2014 2015 2016F 2017F 2018F Property development 81,759 93,536 96,021 113,620 132,340 Cash and equivalents 42,989 44,703 21,153 23,782 54,014 Rental income 5,482 6,655 7,736 8,950 10,749 Pledge dep., restrict. cash 1,869 1,172 1,289 1,418 1,560 Construction 2,463 3,202 3,843 4,612 5,534 Receivables 27,590 27,564 35,833 43,000 51,600 Property under dev’ment 152,864 150,547 193,851 214,470 212,615 Revenue 89,705 103,393 107,600 127,181 148,623 Inventory 33,538 37,793 41,778 46,381 47,393 COGS (62,351) (71,095) (73,676) (86,905) (100,841) Other current assets 9,628 16,889 20,142 24,045 28,729 Gross profit 27,353 32,298 33,924 40,276 47,782 Total current assets 268,477 278,668 314,045 353,095 395,911 Other income 478 1,633 1,264 – – PPE/investment property 86,201 95,478 104,950 116,017 127,619 Operating expenses (5,324) (6,312) (8,317) (9,201) (9,013) JVs and associates 3,551 10,527 13,678 17,144 19,143 EBIT 22,507 27,619 26,872 31,075 38,768 Other non-current assets 4,050 4,562 5,110 5,762 6,536 Total non-current assets 93,802 110,568 123,739 138,923 153,298 Net financial income(exp) (170) 1 (80) (184) (245) Total assets 362,279 389,235 437,784 492,019 549,208 JVs and associates 62 298 856 1,559 1,951 Other 4,967 4,602 5,299 5,829 6,412 Short-term borrowings 21,219 6,369 6,369 6,369 6,369 Profit before tax 27,366 32,520 32,947 38,280 46,887 Presale deposit 127,181 147,632 179,346 212,717 245,120 Tax (10,745) (13,143) (13,426) (15,952) (19,654) Other current liabilities 16,052 28,709 24,291 28,164 32,658 Total profit 16,621 19,378 19,521 22,328 27,233 Total current liabilities 164,452 182,710 210,006 247,250 284,147 Long-term borrowings 67,682 62,007 67,857 67,857 67,857 Minority interest (1,338) (1,850) (731) (1,035) (853) Other non-current liabilities 13,023 12,693 13,813 15,045 16,400 Net profit attributable to 15,283 17,527 18,790 21,293 26,381 Total non-current liabilities 80,704 74,701 81,670 82,902 84,257 shareholders Total liabilities 245,156 257,411 291,677 330,152 368,404 Extraordinary items (3,725) (3,452) (3,140) (3,400) (3,724) Core profit 11,558 14,076 15,650 17,893 22,656 Share capital 583 693 693 693 693 Reserves & retained profits 105,048 114,273 127,824 142,548 160,633 Reported EPS (HK$) 2.34 2.59 2.71 3.07 3.81 Shareholders' equity 105,631 114,966 128,518 143,241 161,326 Diluted EPS (HK$) 2.34 2.59 2.71 3.07 3.81 Minority interest 11,492 16,858 17,590 18,625 19,478 Core EPS (HK$) 1.77 2.08 2.26 2.58 3.27 Total equity 117,123 131,824 146,107 161,866 180,804 Dividend (HK$ m) 3,335 3,975 4,382 5,010 6,344 Total equity and liabilities 362,279 389,235 437,784 492,019 549,208

Dividend per share (HK$) 0.51 0.59 0.63 0.72 0.92

Cash flow Ratios

FYE 31 Dec (HK$ m) 2014 2015 2016F 2017F 2018F FYE 31 Dec 2014 2015 2016F 2017F 2018F Profit before tax 27,366 32,520 32,947 38,280 46,887 Growth (%) Amortization and depr. 451 428 520 458 503 Revenue 25.7 15.3 4.1 18.2 16.9 Financial charge adj. (661) (924) (1,089) (1,105) (1,122) EBITDA 35.8 22.2 (2.3) 15.1 24.5 Non-cash items adjusted (4,712) (4,666) (5,635) (6,931) (7,860) EBIT 36.1 22.7 (2.7) 15.6 24.8 Change in working capital (5,788) 25,119 (25,803) 6,327 30,030 Net profit 4.0 14.7 7.2 13.3 23.9 Tax paid (8,718) (11,070) (13,426) (15,952) (19,654) Core net profit 24.0 21.8 11.2 14.3 26.6 Other 381 494 649 832 863 Operating cash flow 8,318 41,902 (11,837) 21,909 49,648 Profitability (%) Gross margin 30.5 31.2 31.5 31.7 32.1 Disposal of fixed assets (1,996) (837) (3,240) (3,640) (3,432) EBITDA margin 25.6 27.1 25.5 24.8 26.4 Capex (1,012) (11,522) (3,151) (3,466) (1,999) EBIT margin 25.1 26.7 25.0 24.4 26.1 Investment (12,078) (16,059) (3,969) (4,410) (4,903) Net margin 17.0 17.0 17.5 16.7 17.8 Net interest received (paid) 623 924 1,089 1,105 1,122 Core net margin 12.9 13.6 14.5 14.1 15.2 Other 174 (434) – – – Tax rate 39.3 40.4 40.7 41.7 41.9 Investment cash flow (14,289) (27,929) (9,271) (10,410) (9,212) Interest coverage (x) Change in borrowings 20,337 (11,081) 5,850 – – EBIT coverage 6.1 6.6 6.9 8.1 10.0 Equity issues – 10,058 – – – Cash coverage 12.2 11.0 5.7 6.5 14.4 Amount due 5,353 (3,646) – – – Cash to short-term debt 2.1 7.2 3.5 4.0 8.7 Dividend paid (2,616) (3,440) (3,975) (4,382) (5,010) Other (2,036) (967) (4,317) (4,488) (5,194) Returns & leverage (%) Financing cash flow 21,038 (9,077) (2,442) (8,870) (10,204) ROAA 3.6 3.7 3.8 3.8 4.4 Change in cash flow 15,067 4,896 (23,550) 2,629 30,232 ROAE 12.1 12.8 12.9 13.2 14.9 ST debt to total debt 23.9 9.3 8.6 8.6 8.6 Cash & equivalents, begin 28,194 42,989 44,703 21,153 23,782 Payout ratio 21.8 22.7 23.3 23.5 24.0 Forex (272) (3,182) – – – Cash & equivalents, end 42,989 44,703 21,153 23,782 54,014 Liquidity (x) Current ratio 1.6 1.5 1.5 1.4 1.4 Free cash flow (4,772) 14,320 (18,958) 14,033 42,746 Quick ratio 0.5 0.5 0.4 0.4 0.5

Source: Company, CCBIS

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Rating definitions: Outperform (O) – expected return > 10% over the next twelve months Neutral (N) – expected return between -10% and 10% over the next twelve months Underperform (U) – expected return < -10% over the next twelve months

Analyst certification: The author(s) of this document, hereby declare that: (i) all of the views expressed in this document accurately reflect his personal views about any and all of the subject securities or issuers and were prepared in an independent manner; and (ii) no part of any of his compensation was, is, or will be directly or indirectly related to the specific recommendations or views expressed in this document; and (iii) he receives no insider information/non-public price-sensitive information in relation to the subject securities or issuers which may influence the recommendations made by him. The author(s) of this document further confirm that (i) neither he nor his respective associate(s) (as defined in the Code of Conduct for Persons Licensed by or Registered with the Securities and Futures Commission issued by the Hong Kong Securities and Futures Commission) has dealt in or traded in the securities covered in this document within 30 calendar days prior to the date of issue of this document or will so deal in or trade such securities within 3 business days (as defined in the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) after the date of issue of this document; (ii) neither he nor his respective associate(s) serves as an officer of any of the companies covered in this document; and (iii) neither he nor his respective associate(s) has any financial interests in the securities covered in this document.

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