PREPARED BY NON-US BROKER-DEALER(S): BNP PARIBAS SECURITIES (ASIA) LTD THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. ANALYST CERTIFICATION AND IMPORTANT DISCLOSURES CAN BE FOUND AT APPENDIX ON PAGE 59 An ecosystem in the making n A unique business model to tap into structural trends Optics Valley Union (OVU) has a unique business model focused on developing and operating business parks with industry themes. In contrast to residential developers, OVU derives most revenue from selling business parks (80% in 2013). Its parks are equipped with integrated facilities and services, and OVU aims to create ecosystems where residents interact with each other as well as work. n Working with the government to create economic growth OVU’s business complements the Chinese government’s aim to promote restructuring and upgrading of industries and to develop a ‘new urbanisation’ concept. The government’s proactive support (eg, by ensuring availability of competitive funding sources) is attracting established enterprises to the parks (eg, Lenovo), bringing both employment and investment opportunities to local cities. n Stable contracted sales CAGR of 37% over 2013-16E We estimate a contracted sales CAGR of 37% to RMB4.8b in 2016 from a low base of RMB1.4b in 2013, driven by demand from industry clustering, higher R&D spend, increased outsourcing activity and innovation by SMEs. We expect core profit to more than double to RMB0.78b in 2016, from RMB0.32b in 2013. n Initiate at BUY with a target price of HKD1.07 We set our HKD1.07 TP at a 65% discount to our 2014E NAV of HKD3.06/share, implying 39% upside. OVU is trading at a 75% NAV discount and a 2014E P/E of just 4.6x. Other commercial players are on average trading at a 51% NAV discount and >10x 2014E P/E. Wholesale mall players are trading at 4-7x 2014E P/E (Exh 71 & 72). Competitive sources of funding supported by the government (%) 2008 2009 2010 2011 2012 2013 Optics Valley na na 5.90 6.80 7.40 7.50 Agile 7.90 5.90 7.90 8.30 8.70 7.90 CR Land 5.40 2.90 2.40 3.60 3.80 3.80 COLI 6.50 3.40 3.50 3.40 3.60 3.70 Country Garden 11.40 7.60 7.80 10.00 9.40 8.50 Evergrande 23.60 9.80 9.30 9.60 10.60 9.30 Greentown 11.00 9.80 9.00 10.40 8.90 8.00 Sources: Companies’ data; BNP Paribas 27 JUNE 2014 INITIATION 59CHINA / REAL ESTATE OPTICS VALLEY UNION 798 HK BUY TARGET PRICE HKD1.07 CLOSE HKD0.77 UP/DOWNSIDE +39.0% PRIOR TP HKD CHANGE IN TP % HOW WE DIFFER FROM CONSENSUS MARKET RECS TARGET PRICE (%) NA POSITIVE NA EPS 2014 (%) NA NEUTRAL NA EPS 2015 (%) NA NEGATIVE NA Ronney Cheung ronney.cheung@asia.bnpparibas.com +852 2825 1812 Wee Liat Lee weeliat.lee@asia.bnpparibas.com +852 2825 1105 Our research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://eqresearch.bnpparibas.com/index. Please contact your salesperson for authorisation. Please see the important notice on the back page. KEY STOCK DATA YE Dec (RMB m) 2013A 2014E 2015E 2016E Revenue 1,966 3,535 4,638 5,599 Rec. net profit 317 542 656 784 Recurring EPS (RMB) 0.11 0.14 0.16 0.20 EPS growth (%) 41.1 17.8 21.2 19.4 Recurring P/E (x) 5.4 4.6 3.8 3.2 Dividend yield (%) 4.0 4.4 5.3 6.3 EV/EBITDA (x) 4.8 4.1 3.9 3.5 Price/book (x) 1.2 0.8 0.6 0.5 Net debt/Equity (%) 90.8 67.8 67.8 66.2 ROE (%) 27.5 23.2 18.4 18.3 Share price performance 1 Month 3 Month 12 Month Absolute (%) 0.0 Relative to country (%) 0.1 - - Next results August 2014 Mkt cap (USD m) 397 3m avg daily turnover (USD m) 0.3 Free float (%) 25 Major shareholder Huang Liping (47.7%) 12m high/low (HKD) 0.83/0.73 3m historic vol. (%) 36.0 ADR ticker - ADR closing price (USD) - Issued shares (m) 4,000 Sources: Bloomberg consensus; BNP Paribas estimates (44)(34)(24)(14)0.000.200.400.600.801.00Mar-14(%)(HKD)Optics Valley UnionRel to MSCI China Optics Valley Union 798 HK Ronney Cheung 2 BNP PARIBAS 27 JUNE 2014 Investment thesis We initiate coverage of Optics Valley Union (OVU) with a BUY rating and a target price of HKD1.07, set at a 65% discount to our 2014E NAV of HKD3.06/share, offering 39% upside potential from current levels. Founded in Wuhan, OVU is primarily engaged in the development and operation of business parks with distinctive industry themes for its customers, which range from leading multinational corporations and financial institutions to SMEs. OVU currently has a total land bank of 7.2m sqm, of which 65% is located in Wuhan, 11% in Qingdao and the rest in Ezhou, Huangshi, Hefei and Shenyang. Catalysts 1) Better-than-expected contracted sales, especially from key projects such as Creative Capita: we forecast a sharp 103% y-y growth to RMB2.8b in 2014 (2013: RMB1.4b) and 34% y-y growth to RMB3.8b in 2015, and another 28% y-y growth to RMB4.8b in 2016. 2) Solid core net profit growth: we estimate a three-year CAGR of 26%