October 9, 2009 Evergrande Real Estate Group Limited March 1, 2010 ACTION Buy Evergrande Real Estate Group (3333.HK) Return Potential: 29% Scalability potential not priced in; initiate with a Buy rating Source of opportunity Investment Profile We believe that Evergrande’s current valuation does not price in the scalability Low High potential of the company on the back of its: (1) strong balance sheet with optimal Growth Growth Returns * Returns * debt structure post its recent IPO and overseas note issuance; (2) attractive land Multiple Multiple bank portfolio located in 17 key municipalities and provincial capitals throughout Volatility Volatility China, with an average land cost of only 9% of 2009 ASP; (3) a standardized Percentile 20th 40th 60th 80th 100th Evergrande Real Estate Group (3333.HK) operation and product line that helps reduce execution risks during times of rapid Asia Pacific Property Peer Group Average scale expansion; and (4) a seasoned management team that is highly motivated * Returns = Return on Capital For a complete description of the investment profile measures please refer to to achieve its growth targets. We initiate coverage on Evergrande with a Buy the disclosure section of this document. rating and a 12-month NAV-based TP of HK$4.15. Catalyst Key data Current Price (HK$) 3.21 (1) We expect stronger-than-peers property sales performance to be achieved by 12 month price target (HK$) 4.15 Market cap (HK$ mn / US$ mn) 48,150.0 / 6,202.2 Evergrande through: (a) providing affordable, quality-competitive, mid-end Foreign ownership (%) -- properties to capitalize on the fast growing housing upgrade needs of less developed provincial capitals in China, and (b) setting asset turnover rather than 12/08 12/09E 12/10E 12/11E EPS (Rmb) 0.21 0.07 0.52 0.59 margin expansion as the business objective in a policy tightening environment, EPS growth (%) (53.9) (65.8) 630.7 13.9 which we think is practical. (2) We expect a big wave of land bank replenishment EPS (diluted) (Rmb) 0.21 0.07 0.52 0.59 EPS (basic pre-ex) (Rmb) 0.21 0.07 0.52 0.59 from Evergrande given its 2010 completion target of GFA 8mn sqm. With a P/E (X) 13.6 39.7 5.4 4.8 P/B (X) 0.9 3.5 2.2 1.6 possible slowdown in China’s property/land market due to government EV/EBITDA (X) NM 25.4 3.5 2.6 tightening, we believe Evergrande should be able to conclude these land Dividend yield (%) 1.8 0.3 1.8 2.1 ROE (%) 11.8 10.6 50.4 38.7 acquisitions at a favorable, NAV accretive price. Valuation Price performance chart 5.0 80 The stock is currently trading at a 47% discount to our end-2010E NAV estimate of 4.8 75 4.6 70 HK$5.93, 3% below our bear-case NAV estimate of HK$3.21, 5.3X 2010E P/E, vs. 4.4 65 H-share peers’ average 39% discount, 12% premium to our bear-case NAV and 4.2 60 4.0 55 11.5X 2010 P/E. We set our 12-month target price at a 30% discount to end-2010E 3.8 50 NAV, implying 29% upside potential. 3.6 45 3.4 40 3.2 35 3.0 30 Key risks Feb-09 Jun-09 Sep-09 Dec-09 Key risks include execution slippage and a macro hard landing. Evergrande Real Estate Group (L) MSCI China (R) INVESTMENT LIST MEMBERSHIP Share price performance (%) 3 month 6 month 12 month Absolute (21.7) -- -- Asia Pacific Buy List Rel. to MSCI China (15.4) -- -- Source: Company data, Goldman Sachs Research estimates, FactSet. Price as of 2/26/2010 close. Coverage View: Attractive China: Real Estate Yi Wang, CFA Beijing Gao Hua Securities Company Limited and its affiliates do and +86(21)2401-8930 | [email protected] Beijing Gao Hua Securities Company Limited seek to do business with companies covered in its research reports. As Vicky Li a result, investors should be aware that the firm may have a conflict of +86(21)2401-8926 | [email protected] Beijing Gao Hua Securities Company Limited interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For analyst certification, see the end of the text. Other important disclosures follow the Reg AC certification, or contact your investment representative. Beijing Gao Hua Securities Company Limited Investment Research Goldman Sachs (Asia) L.L.C. Equity Research 1 October 9, 2009 Evergrande Real Estate Group Limited Evergrande Real Estate Group: Summary financials Profit model (Rmb mn) 12/08 12/09E 12/10E 12/11E Balance sheet (Rmb mn) 12/08 12/09E 12/10E 12/11E Total revenue 3,606.8 5,410.7 41,346.8 40,857.6 Cash & equivalents 749.7 12,580.4 13,104.4 13,048.6 Cost of goods sold (2,124.4) (3,346.9) (26,560.6) (23,056.5) Accounts receivable 4,790.1 4,490.0 4,041.0 3,636.9 SG&A (1,210.6) (1,649.0) (1,946.9) (2,183.5) Inventory 19,934.2 33,441.4 36,643.2 35,149.2 R&D -- -- -- -- Other current assets 0.0 0.0 0.0 0.0 Other operating profit/(expense) 539.6 1,248.8 50.0 50.0 Total current assets 25,474.0 50,511.8 53,788.6 51,834.7 EBITDA 811.4 1,663.6 12,889.4 15,667.7 Net PP&E 450.1 611.4 771.3 928.9 Depreciation & amortization (24.1) (67.9) (85.7) (103.2) Net intangibles 0.0 0.0 0.0 0.0 EBIT 787.3 1,595.7 12,803.7 15,564.4 Total investments 1,992.3 3,446.8 4,855.0 6,112.5 Interest income 34.5 11.2 188.7 196.6 Other long-term assets 606.2 636.5 668.3 701.8 Interest expense (15.4) (57.2) (70.6) (66.5) Total assets 28,522.6 55,206.5 60,083.3 59,577.9 Income/(loss) from uncons. subs. 0.0 0.0 0.0 0.0 Others 160.0 1.9 19.7 37.2 Accounts payable 4,469.2 3,667.8 4,365.8 4,638.7 Pretax profits 966.4 1,551.7 12,941.5 15,731.7 Short-term loans 6,213.8 8,213.8 6,458.5 1,458.5 Income tax (334.0) (406.8) (4,595.3) (6,231.1) Other current liabilities 4,578.5 26,275.3 19,511.2 15,111.2 Minorities (107.7) (77.8) (549.2) (619.8) Total current liabilities 15,261.5 38,157.0 30,335.6 21,208.4 Long-term debt 4,226.4 4,226.4 9,348.9 9,348.9 Net income pre-preferred dividends 524.8 1,067.1 7,796.9 8,880.7 Other long-term liabilities 451.5 460.6 469.8 479.2 Preferred dividends 0.0 0.0 0.0 0.0 Total long-term liabilities 4,677.9 4,687.0 9,818.7 9,828.1 Net income (pre-exceptionals) 524.8 1,067.1 7,796.9 8,880.7 Total liabilities 19,939.5 42,844.0 40,154.3 31,036.5 Post-tax exceptionals 0.0 0.0 0.0 0.0 Net income 524.8 1,067.1 7,796.9 8,880.7 Preferred shares 0.0 0.0 0.0 0.0 Total common equity 8,261.9 11,963.5 18,980.7 26,973.4 EPS (basic, pre-except) (Rmb) 0.21 0.07 0.52 0.59 Minority interest 321.3 399.1 948.3 1,568.1 EPS (basic, post-except) (Rmb) 0.21 0.07 0.52 0.59 Total liabilities & equity 28,522.6 55,206.5 60,083.3 59,577.9 EPS (diluted, post-except) (Rmb) 0.21 0.07 0.52 0.59 BVPS (Rmb) 3.27 0.80 1.27 1.80 DPS (Rmb) 0.05 0.01 0.05 0.06 RNAV (Rmb mn) -- 64,792.9 76,472.2 -- Dividend payout ratio (%) 23.9 10.0 10.0 10.0 RNAVPS (Rmb) -- 4.32 5.10 -- Free cash flow yield (%) NM 20.5 (2.9) 16.8 Growth & margins (%) 12/08 12/09E 12/10E 12/11E Ratios 12/08 12/09E 12/10E 12/11E Sales growth 13.9 50.0 664.2 (1.2) ROE (%) 11.8 10.6 50.4 38.7 EBITDA growth (58.0) 105.0 674.8 21.6 ROA (%) 2.1 2.5 13.5 14.8 EBIT growth (58.9) 102.7 702.4 21.6 ROACE (%) 4.1 7.7 47.4 38.4 Net income growth (51.5) 103.3 630.7 13.9 Inventory days 2,639.2 2,910.5 481.6 568.3 EPS growth (53.9) (65.8) 630.7 13.9 Receivables days 574.9 313.0 37.7 34.3 Gross margin 41.1 38.1 35.8 43.6 Payable days 744.2 443.7 55.2 71.3 EBITDA margin 22.5 30.7 31.2 38.3 Net debt/equity (%) 112.9 (1.1) 13.6 (7.9) EBIT margin 21.8 29.5 31.0 38.1 Interest cover - EBIT (X) NM 34.7 NM NM Cash flow statement (Rmb mn) 12/08 12/09E 12/10E 12/11E Valuation 12/08 12/09E 12/10E 12/11E Net income pre-preferred dividends 524.8 1,067.1 7,796.9 8,880.7 P/E basic (X) 13.6 39.7 5.4 4.8 D&A add-back 24.1 67.9 85.7 103.2 P/B (X) 0.9 3.5 2.2 1.6 Minorities interests add-back 107.7 77.8 549.2 619.8 EV/EBITDA (X) NM 25.4 3.5 2.6 Net (inc)/dec working capital (4,945.3) 7,707.3 (9,492.0) (2,337.4) Dividend yield (%) 1.8 0.3 1.8 2.1 Other operating cash flow (897.4) 9.0 9.2 9.4 Cash flow from operations (5,186.3) 8,929.2 (1,050.9) 7,275.7 Underlying valuation 12/08 12/09E 12/10E 12/11E Capital expenditures (168.9) (229.2) (245.5) (260.9) Underlying profit (Rmb mn) 474.1 443.8 7,796.9 8,880.7 Acquisitions 0.0 0.0 0.0 0.0 Underlying EPS (Rmb) 0.19 0.03 0.52 0.59 Divestitures 0.0 0.0 0.0 0.0 Others 33.5 (1,484.9) (1,440.1) (1,290.9) Underlying ROE (%) 10.7 4.4 50.4 38.7 Cash flow from investments (135.4) (1,714.1) (1,685.6) (1,551.8) Underlying ROA (%) 1.9 1.1 13.5 14.8 Underlying ROACE (%) 3.8 3.6 47.4 38.4 Dividends paid (common & pref) (0.7) (125.7) (106.7) (779.7) Underlying P/E (X) 15.0 95.4 5.4 4.8 Inc/(dec) in debt 1,078.9 2,000.0 3,367.2 (5,000.0) Underlying dividend payout (%) 26.5 24.0 10.0 10.0 Common stock issuance (repurchase) 3,386.1 2,741.3 0.0 0.0 Underlying EPS growth (%) (26.6) (84.2) 1,656.7 13.9 Other financing cash flows (33.9) 0.0 0.0 0.0 Cash flow from financing 4,430.5 4,615.6 3,260.5 (5,779.7) Total cash flow (891.1) 11,830.7 524.0 (55.7) Note: Last actual year may include reported and estimated data.