China Property – Equity & Bond weekly wrap Industry Overview Equity/Fixed Income | China | Real Estate/Property 26 March 2012 Macro factors dominate again Equity research Raymond Ngai, CFA >> +852 2536 3987 Equities slumped 4.9%, bonds yields widened to 13.19% Research Analyst Merrill Lynch (Hong Kong) Chinese developers’ shares fell another -4.9% w/w last week, after a 2.3% [email protected] decline. Overall stock market sentiment was not too good in the past week, with Matthew Chow, CFA >> +852 2161 7877 some soft macro numbers coming out from the US and Europe; and actually the Research Analyst Merrill Lynch (Hong Kong) HSCEI index was also down 5% w/w last week, on concerns of weaker economic [email protected] growth (as well as speculation over possible political tensions within China.) Sunny Tam, CFA >> +852 2536 3446 Chinese developers’ bond yields also widened another 62bps to an average Research Analyst 13.19% vs 12.57% in the week before. In the past week, macro factors seem to Merrill Lynch (Hong Kong) dominate share/bond prices again. However, looking ahead March sales numbers [email protected] for developers to be released in early April may give more indication as to how Liying Du >> +852 2161 7008 Research Analyst realistic developers’ 2012 sales targets are, and could provide more company Merrill Lynch (Hong Kong) specific drivers for the sector. [email protected] Credit Research Proposal for more property tax pilot cities approved Alwyn Pang, CFA +852 2536 3485 Last week, the National Development and Reform Committee's 2012 Economic Research Analyst Reform Proposals were approved by the State Council. The Proposals included Merrill Lynch (Hong Kong) setting up more property tax pilot cities when "the time is right". We believe rolling [email protected] out property tax is the right direction. The earlier property tax is introduced to a Joyce Liang +852 2536 3817 Research Analyst wider range of cities, the sooner the HPRs could be removed, in our view. Some Merrill Lynch (Hong Kong) are speculating that Guangzhou and Shenzhen could be the new pilot cities, but [email protected] Guangdong government said in early March that the province has not received Convertibles research notice from the central government to consider trial runs for property tax. Rolling Pauline Lau >> +852 2536 3409 out property tax in Beijing may be difficult, too. As such we think the 2nd batch of Research Analyst cities could also include some top tier-2 cities that are also showing signs of Merrill Lynch (Hong Kong) [email protected] having overheated property markets. Equity / bonds recommendation changes We suggest a switch from FRANSH’21 to LNGFOR’16 for a yield pick-up of 1.1% Chart 1: CH Developers bond vs equity indices and a shortening in tenor by 5 years. Post FY11 results, we downgraded FRANSH’21s to UW30% from OW70% as we expect meaningful leveraging is set 150 30 to continue into 2012 given its appetite for land bank expansion; we upgraded 100 20 LNGFOR’16s from OW30% to OW70% as the company demonstrated ability to grow while maintaining B/S discipline. Additionally, we recommend to switch from 50 10 YLLG 9.5% ’17 to KWGPRO 13.25% ’17 for KWG’s lessened refinancing risks and improved debt maturity profile post the issuance of US$400m 5-yr bond (full 0 0 report). On the equity side, we still like Franshion for its quality investment Sep-10 Mar-11 Sep-11 Mar-12 property property and also decent project pipeline for the next 2years, we think they would really need to acquire more land to extend its pipeline to 2014 and CH developers shr px index (LHS) beyond. We expect a 40% earnings CAGR for the next 3 years. We maintain our CH developers bond yield index (RHS) BUY rating on the stock (full report). Source: Bloomberg, BofA Merrill Lynch Global Research c58da9b710df662c >> Employed by a non-US affiliate of MLPF&S and is not registered/qualified as a research analyst under the FINRA rules. Refer to "Other Important Disclosures" for information on certain BofA Merrill Lynch entities that take responsibility for this report in particular jurisdictions. BofA Merrill Lynch does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Refer to important disclosures on page 9 to 12. Analyst Certification on Page 7. Link to Definitions on page 7. 11150710 China Property – Equity & Bond weekly wrap 26 March 2012 China property – Equity/Bond perf Top and bottom performers for the past week and YTD Chart 2: Share price performance for the week of 23,Mar 2012 Chart 3: Chinese developers’ bond price % changes (1 week) CR Land 0% Powerlong 0.29 COLI 0% COLI 0.21 GZI REIT -1% Shui On Land -1% Yuzhou 0.00 Vanke "A" -2% CR Land -0.21 Poly "A" -2% Glorious -0.28 SOHO China -3% Hang Seng Index -3% Shui On Land -0.40 Renhe -3% Roadking -0.54 Agile -4% China Pty Index -5% Longfor -0.75 Shimao -5% Sino Ocean -1.25 Franshion -5% Franshion -1.37 Yuexiu Property -6% Country Garden -6% Hopson -1.74 Longfor -6% Central China -1.76 R&F -6% Evergrande -1.76 Yanlord -6% Kaisa -6% Yanlord -1.79 C C Land -8% KWG -1.82 Hopson -9% Country Garden -1.87 COGO -9% Beijing Cap. Land -9% GZ R&F -2.06 Evergrande -10% Shimao -2.41 Greentown -11% Agile -2.86 Glorious -11% KWG -12% Kaisa -3.02 Sino-Ocean -12% Poly HK -18% -3.50 -3.00 -2.50 -2.00 -1.50 -1.00 -0.50 0.00 0.50 -20% -15% -10% -5% 0% 5% Source: Bloomberg, BofA Merrill Lynch Global Research Source: Bloomberg Chart 4: Share price performance for year-to-date 2012 Chart 5: Chinese developers’ bond price % changes (YTD) KWG 67% Yuzhou 30.00 Greentown 59% R&F 48% Hopson 30.00 Beijing Cap. 36% Glorious 29.20 Yuexiu Property 36% Powerlong 28.10 Yanlord 33% Shui On Land 31% KWG 25.17 COGO 29% Sino Ocean 24.93 Evergrande 28% Franshion 27% GZ R&F 24.38 Agile 26% Evergrande 20.15 Longfor 23% Agile 15.99 Kaisa 20% Shimao 19% Roadking 15.72 GZI REIT 16% Kaisa 15.57 China Pty Index 15% Shimao 15.51 Hopson 14% COLI 13% Yanlord 14.95 Hang Seng Index 12% Country Garden 14.39 C C Land 11% Vanke "A" 9% Central China 13.01 Poly HK 7% Franshion 9.06 Poly "A" 6% Longfor 8.88 SOHO China 5% Country Garden 3% COLI 6.09 CR Land 3% Shui On Land 2.62 Sino-Ocean 1% Renhe -1% CR Land 2.08 Glorious -8% - 5.00 10.00 15.00 20.00 25.00 30.00 35.00 -50% -25% 0% 25% 50% 75% Source: Bloomberg, BofA Merrill Lynch Global Research Source: Bloomberg Chinese developers would see heighted 2 China Property – Equity & Bond weekly wrap 26 March 2012 offshore bond maturity/refinancing in Chart 6: Sector – offshore bonds maturity profile – chart 2014-2016; it is crucial to lengthen the US$ bn debt maturity profile when the window is 6.0 5.4 open. 5.0 4.1 3.6 3.7 4.0 3.0 1.6 1.7 2.0 1.1 1.0 0.5 - 2012 2013 2014 2015 2016 2017 2018 2021 Source: Bloomberg, Company reports, BofA Merrill Lynch Global Research Shui On Land finalizes US$338m syn loan Shui On Land has recently finalized a new 3-year US$338m syndication loan, mainly to refinancing one of their existing US$300m syndication loan due this year. With this syndication loan finalized, the company’s FY12 offshore refinancing is done. Looking ahead the company will have another Rmb7.8bn offshore loans due in 2013, the company is actually actively looking for a spin-off of its commercial properties, which may help improve its overall debt/liquidity profile (full report). Table 1: YTD debt/equity raisings Amount Company Ticker Type Announcement date Tenor Maturity Offer price CCY LC$MM USD equivalent Coupon Discount Shui On Land 272 HK Senior Notes 12-Jan-12 3-year 26-Jan-15 100.00 SGD 250 199 8.00% Shui On Land 272 HK Senior Notes 9-Feb-12 3-year 16-Feb-15 100.00 USD 475 475 9.75% COLI 688 HK Senior Notes 9-Feb-12 5-year 15-Feb-17 99.816 USD 750 750 4.875% Country Garden 2007 HK Placement 1-Mar-12 3.23 HKD 2,183 276 8% CR Land 1109 HK Bilateral loan 12-Jan-12 2-year 12-Jan-14 HKD 1,300 168 CR Land 1109 HK Syn. Loan 22-Feb-12 2-year 22-Feb-14 HKD 300 39 Agile 3383 HK Bilateral loan 6-Mar-12 18 mths 6-Sep-13 HKD 385 50 Agile 3383 HK Senior Notes 13-Mar-12 5-year 20-Mar-17 99.903 USD 700 700 9.875% COGO 81 HK Convertible 13-Mar-12 5-year 21-Mar-17 HKD 2,200 283.9 2% KWG 1813 HK Senior Notes 15-Mar-12 5-year 22-Mar-17 99.12 USD 400 400 13.25% Shui On Land 272 HK Syn. loan 19-Mar-12 3-year 19-Mar-15 USD 338 338 3,678.9 Source: HKEX, Company reports, Bloomberg, BofA Merrill Lynch Global Research 3 China Property – Equity & Bond weekly wrap 26 March 2012 Bonds vs Equity valuations Chart 7: Bond yield vs P/B Chart 8: Bond yield vs P/E 2.0 P/B (X) 16 P/E (X) Longfor 1.8 14 COLI Mingfa 1.6 Low default risk, Country Garden Ev ergrande 12 CR Land normal/rich equity Shui On Land 1.4 Yanlord lti 10 1.2 Longfor CR Land Agile Mingfa 1.0 8 COLI Country Garden Central China Franshion 0.8 Sino Ocean KWG 6 Agile GZ R&F Franshion Yuzhou Hopson Shimao 0.6 Shimao EvergrandeKWG Kaisa Glorious Low default risk, Yanlord Glorious 4 Kaisa 0.4 Shui On LandSino Ocean depressed equity Pow erlong Central China Powerlong 2 0.2 valuation GZ R&F Hopson Bond yield (%) - - Bond yield (%) 0 5 10 15 20 25 0 5 10 15 20 25 30 Source: Bloomberg, BofA Merrill Lynch Global Research Source: Bloomberg, BofA Merrill Lynch Global Research Sector valuation tables Table 2: China Property Valuation Summary Company BofAML BBG BofAML Price Mkt Cap NAV Disc/ P/E (x) P/BV (x) Div.