BNP Paribas Securities Asia research is available on Thomson One, Bloomberg, TheMarkets.com, Factset and on http://equities.bnpparibas.com. Please contact your salesperson for authorisation. Please see the important notice on the back page. CHINA/REAL ESTATE 13 MAY 2010 P/E Yld Company BBG code Rating Share price TP Chgin TP Mkt cap FY1 FY2 FY1 (HKD) (HKD) (%) (USDm) (x) (x) (%) China Overseas Land 688 HK BUY 14.30 17.60 -8.8 15,006 14.1 11.7 1.8 CR Land 1109 HK BUY 13.26 17.30 -10.8 8,547 16.1 13.6 1.6 Shimao Property 813 HK BUY 11.54 14.50 -12.7 5,236 14.6 11.6 2.9 Agile Property 3383 HK BUY 8.27 10.90 -13.5 3,827 9.7 8.1 3.2 Country Garden 2007 HK HOLD 2.10 2.30 -20.7 4,440 11.5 10.4 3.1 Sino-Ocean Land 3377 HK HOLD 5.42 6.20 -19.5 3,905 13.6 11.3 2.1 Guangzhou R&F 2777 HK REDUCE 9.46 8.80 -20 3,918 7.9 7.3 5.7 C C Land 1224 HK REDUCE 2.51 2.20 -15.4 830 64.3 27.3 0.9 Prices as at 12 May 2010; Source: Bloomberg, BNP Paribas estimates INDUSTRY OUTLOOK ÍÎ ƒ We expect the physical market to stabilize by the year-end. ƒ Our FY10E and FY11E earnings are now 10% and 15% below consensus. ƒ Sector valuation looks attractive on a 12-month basis. ƒ Top picks: COLI & Shimao. Downgrade Sino-Ocean to HOLD. Will we see a soft landing? Tight for 6-9 months, year-end recovery The government’s latest measures have so far been effective in cooling the over-heating property market. As a keen-jerk reaction, transaction volume in most major cities has fallen a sharp 20-70% since mid-April 2010. To achieve its goal of controlling property prices, we believe the government will maintain its current policies for another 6-9 months. In the past, transaction volume has normally declined sharply right after the introduction of new measures, followed by price correction and subsequent recovery in transaction volume. We expect volume to decline 45% y-y in the next 2-3 months and recover slowly to around 20% y-y decline by the year-end. Combining with actual transaction volumes in the first four months, we estimate a full-year decline of 20% (previously assumed 10% y-y drop). In terms of ASP, we already factored in a 15% drop by the year-end. In our view, first-tier cities and Hangzhou will be more affected, both in terms of volume and price correction. Adjusting our 2010-11E earnings In Feb 2010, we cut our EPS by 3-11% for 2010E and 7-19% for 2011E for the stocks under our coverage. Despite our earlier caution, we need to further adjust down our forecasts to reflect the recent change in the physical market since mid-April. For developers under our coverage, we lower our EPS by a further 5% in 2010E and 10% in 2011E. On average, our EPS forecasts are 10% below Bloomberg consensus for 2010 and 15% for 2011. Amid an increasingly uncertain market, we believe developers that have a strong execution track record and solid financial position, such as COLI, will outperform and continue to gain market share. Valuation and recommendation After the recent sell-off, the sector now trades at a 31% discount to our revised NAV estimates and 1.6x 2010E P/BV. We cut our target price by 15% on average, as we widen our target discount to NAV (from 7% to 17% for the sector) and lower our NAV estimates. On a 12-month basis, we find the sector’s valuation attractive compared to the historical trading range. Our top picks are COLI (TP: HKD17.6) and Shimao Property (TP: HKD14.5). We downgrade Sino-Ocean Land to HOLD (from Buy), given its loss of SOE premium, over-exposure in Beijing, expensive land acquisition and slow YTD contract sales. As investors might still be concerned about weak volume and price correction in the near term, we do not rule out the possibility that the sector may correct 10-15% in the next 1-2 months. Frank Chen +852 2825 1810 frank.chen@asia.bnpparibas.com Trevor Cheung +852 2825 1179 trevor.cheung@asia.bnpparibas.com Esther Liu +852 2825 1822 esther.liu@asia.bnpparibas.com PREPARED BY BNP PARIBAS SECURITIES ASIA THIS MATERIAL HAS BEEN APPROVED FOR U.S DISTRIBUTION. IMPORTANT DISCLOSURES CAN BE FOUND IN THE DISCLOSURES APPENDIX. FRANK CHEN CHINA REAL ESTATE 13 MAY 2010 2 BNP PARIBAS Roadmap in 2010 and beyond Since July 2009, China’s central government has become alert about potential asset bubble in the property market and has been reiterating its intention to control property prices. However, the measures introduced before April 2010 didn’t seem to work well. Property prices contin