(HK) China Property Sector - Series of tightening policies delay purchase decisions

In Singapore, this research report or research analyses may only be distributed to Institutional Investors, Expert Investors or Accredited Investors as defined in the Securities and Futures Act, Chapter 289 of Singapore. www.dbsvickers.com Refer to important disclosures at the end of this report ed-SGC/ sa- PY Series of tightening policies delay purchase decisions • Tier I cities saw May sales volume fall below 2008 trough levels, but prices fell only slightly due to changes to product mix; most developers are still hesitant to cut prices • Continuous tightening could cause more buyers to remain sidelined; sales volume will remain low • No near-term upside; long funds could buy market leader/commercial plays. COLI (688HK), CRL (1109HK), Franshion (817HK) and SOHO China (410HK) remain our picks. Sales volume fell faster than expected in May. Following the string of tightening measures, sales volume in the key cities we tracked fell 47% MoM and 61% YoY on average. The monthly decline was particularly severe in tier I cities such as Beijing (-63%), Shanghai (-51%), and Shenzhen (-62%). Sales volumes in these cities were 42%- 58% lower than 2008 trough levels. However, prices only fell by an average 6% MoM; this was the result of more mid-end products being sold rather than real price declines. The thirteen developers who reported May sales data saw sales value fall by 17%-79% (average of 45%). Some have undertaken conservative pricing strategies for new launches, but most are still unwilling to cut prices. Continuous tightening might extend correction period. Market is speculating that China might slow its policy efforts to rein in property prices due to the uncertain global economic recovery. Yet, in line with our expectation, the government has not stopped introducing new policies. Recent policy initiatives, including LAT collection and redefinition of 2nd home mortgage, are likely to cause more homebuyers to remain sidelined in anticipation of a price correction. If developers maintain their current pricing strategies, the correction period could last longer than expected. We expect sales volume to stay low for at least 2-3 months before prices start to correct to a reasonable level (20%-30% drop in tier I cities). No near-term upside. We think policy noises will continue to affect share price performance in the near-term. The sector valuation is now at 40% discount to NAV. We view another 10%-15% drop in share prices will offer a better risk/reward profile. Long funds could buy strong/commercial plays on dips. Our top picks remain COLI, CRL, SOHO China, and Franshion. HSI: 19,378 ANALYST Carol Wu · (852) 2863 8841· carol_wu@hk.dbsvickers.com Danielle Wang · (852) 2820 4915· danielle_wang @hk.dbsvickers.com Source: DBS Vickers Recommendation & valuation FY10FNAVPEHK$HK$mxHK$HK$C R Land (110 9 HK)14. 34 72, 222 1 9.5 1 9.8 Buy17.8 4 China Ove rse as(688 HK)14. 40 117, 673 1 3.5 1 5.3 Buy16.7 8 Franshion (817 HK)2. 21 20, 247 2 1.6 4.3 Buy3.0 3 SOHO China (410 HK)4. 03 20, 906 5.7 7.1 Buy4.9 7 Shimao (813 HK)11. 84 41, 963 9.9 1 9.1 Buy13.3 7 C C Land (122 4 HK)2. 43 6, 221 n.a.4.3 Hold2.1 3 Sino-Ocean Land (33 77 HK)5. 66 31, 907 1 3.9 6.8 Hold5.4 4 Shui On Land (272 HK)3. 27 16, 424 1 2.0 6.4 Hold3.8 4 SPG Land (337 HK)3. 02 3, 174 7.2 7.6 Hold3.0 4 Yanlord Land (YLLG SP)1. 58 3, 071 9.7 2.9 Hold 1.7 1 TargetCompanyPri ce Mk t Ca pRec DBS Group Research . Equity 8 June 2010 Hong Kong / China Industry Focus China Property Sector Industry Focus China Property Sector Page 2 May10: Tier I cities sales volumes fell below 2008 trough levels, while tier II cities outperformed. May sales volume in the key cities we tracked fell 47% MoM and 61% YoY on average. The monthly decline was particularly severe in tier I cities such as Beijing (-63%), Shanghai (-51%), and Shenzhen (-62%). Guangzhou was relatively resilient (-35%) due to more end-user driven demand. Tier II cities, except for Hangzhou, outperformed tier I cities. Sales volumes in Chengdu and Wuhan fell 14% and 23% MoM, respectively. Property prices fell due to changes in product mix. Prices fell only 6% MoM on average; this was the result of more mid-end products sold rather than real price cuts. The thirteen developers who disclosed their May sales data saw sales values fall by 17%-79% (average of 45%). Beijing Capital Land, SPG Land, and Greentown witnessed the biggest declines, at 79%, 74%, and 68% MoM. Although some developers have undertaken conservative pricing strategies for new launches, most are still unwilling to cut prices. Stricter definition of ‘2nd home’. China’s Housing Department, PBOC, and CBRC