Deutsche Bank Markets Research Asia China Property Property Industry China Property Date 19 April 2017 Industry Update 2016 results review: positive sector outlook with strong earnings visibility Positive sector outlook ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 083/04/2017. Jeffrey Gao, CFA Research Analyst (+852 ) 2203 6256 jeffrey.gao@db.com Jason Ching, CFA Research Analyst (+852 ) 2203 6205 jason.ching@db.com Stephen Cheung, CFA Research Analyst (+852 ) 2203 6182 stephen-a.cheung@db.com Foo Leung Research Associate (+852 ) 2203 6239 foo.leung@db.com Companies Featured CIFI (0884.HK),HKD2.95 Buy Future Land Development Hol (1030.HK),HKD2.29 Buy Logan (3380.HK),HKD4.52 Buy Guangzhou R&F (2777.HK),HKD13.50 Buy COLI (0688.HK),HKD23.10 Buy China Resources Land (1109.HK),HKD22.20 Buy Source: Deutsche Bank Our TPs are derived from a discount to NAV estimate, which values existing landbank based on a SOTP methodology. The key upside risk is better-than-expected sales with higher ASP. Potential credit tightening (especially on mortgage loans) will be the key downside risk for the sector going forward. Although the physical market may turn relatively weak due to further policy / credit tightening in 2Q17E and share prices may be under short-term pressure after the strong rally YTD, we remain positive on the sector outlook on a 12-month horizon. For the 20 stocks we cover, we expect: 1) >20% contracted sales growth in 2017E, supported by rich saleable resources, 2) 20% earnings CAGR with gross margin expanding to 28%, 3) healthier balance sheets with lower gearing (57% on average) and less completed inventories, and 4) 5-6% dividend yields with 35% payout ratios. >20% sales growth; saleable resources may beat expectations The developers we cover on average target 20% contracted sales growth in 2017E (Country Garden, Sunac and Future Land target >30%), despite the high base last year (+54% y-y in 2016). Although national property sales may record a single-digit y-y decline, we believe the aggressive sales targets of the listed developers will be exceeded, given their rich saleable resources (+23% y-y on average). Also, given their aggressive land acquisitions amid strong sales last year (the land premium accounts for 55% of total sales vs. 40% in 2016 and 31% in 2014), we believe their announced saleable resources are conservative using the latest ASP and including the latest land banking. 20% earnings CAGR with gross margin expanding to ~28% in FY17-18E After 14% earnings growth in FY16, we expect the sector to deliver a 20% earnings CAGR in the next two years, given: 1) a high lock-in ratio of ~70%, 2) high-teens revenue growth driven by strong contracted sales last year, and 3) sector gross margin expanding to 27.6%/28.2% due to a higher ASP in 2016 and lower average financing costs (sector average of 5.6% in 2016 vs. 6.9% in 2015 and 7.9% in 2014) to take effect from late 2016. In particular, we believe small caps will continue to outperform the sector with >25% earnings growth (e.g. 29%/23% for CIFI, 29%/26% for Logan and 120%/28% for Future Land). Better balance sheet with lower gearing and less inventory In addition to strong earnings growth prospects, sector balance sheets have also improved: 1) net gearing dropped to 57% on average (vs. 67% in FY15) due to strong sales and a high cash collection rate (80-90% on average), 2) short-term debt % accounts for 27% of total debt on average (vs. 25% in FY15 and 30% in FY14), and 3) completed inventories only grew 2% amid strong sales in 2016, accounting for 22% of sales (vs. 27% in FY15 and 28% in FY14). Recommendations: sector may re-rate further after correction; quality small caps to outperform; credit tightening is the key risk We expect a further sector re-rating on a 12-month horizon, with quality small caps likely to outperform the sector (trading at 7.6x FY17E P/E, 39% discount to NAV), with higher growth and a significant improvement in balance sheets, although share prices may be under short term pressure after a strong rally YTD. We like CIFI, Future Land, Logan and GZ R&F among small and mid caps, which may outperform, although we still like COLI and CR Land for their strong fundamentals. We sugges