China Real Estate:Caution:Entering a period of lower risk appetite

Disclosures & Disclaimer This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it. Issuer of report: The Hongkong and Shanghai Banking Corporation Limited View HSBC Global Research at: https://www.research.hsbc.com MiFIDII–ResearchIsyouraccessagreed?CONTACT us today  Risk appetite to dwindle towards year end; it’s an opportunity to lock in strong gains, but there’s still upside in select names  High growth expectations suggest a strong possibility of disappointment if sales momentum is not maintained  Our top picks are Buy-rated COLI and Longfor; we downgrade China Jinmao, GZ R&F, Joy City and KWG to Hold Taking a breather: After a record-breaking nine months, the outlook for the sector has now become more mixed. We think some stocks have overshot, while others still offer upside. China’s property stocks are up an average of 95%, outperforming the HSI (up 28%), representing the sector’s strongest ever performance for this three-quarter period. The rally has been driven by stronger-than-expected sales, but we see tightening mortgage conditions as a risk that could derail momentum. We now expect risk appetite to dwindle towards year-end. In terms of valuation, our coverage universe, excluding commercial property plays, trades at 7.9x 2018e PE, a 38% NAV discount, close to one standard deviation (1 SD) above the historical mean. Possibility of disappointment amid exceptionally high growth expectations: The one thing that stands out from the interim 2017 results season is that developers remain optimistic, as they have provided ambitious guidance on growth. In our view, there is significant risk of disappointment if contracted sales are unable to keep up with the strong YTD momentum, especially going into 2018. Tweak earnings and NAV estimates after marking to market project average selling prices: We also narrow the target discount of Agile (3383 HK), Longfor (960 HK), Shui On Land (272 HK), Sino-Ocean (3377 HK) and SOHO China (410 HK) to reflect improved operational performance YTD. This results in an average 16% increase in our target prices for our coverage universe. Select opportunities remain – we still prefer Buy-rated COLI (688 HK) and Longfor (960 HK): While we are striking a more cautious tone, we think upside remains in select names. We like COLI as it is a quality laggard, while Longfor has continued to demonstrate an ability to scale up while maintaining competitive profitability. On the other hand, we downgrade four stocks to Hold on valuation – China Jinmao (817 HK), GZ R&F (2777 HK), Joy City (207 HK) and KWG (1813 HK) (apart from GZ R&F, they are all consensus Buys). Despite the strong share price performance, the average estimated 2017 dividend yield for our coverage universe is 4.1% vs 3.4% in HSI. Tightened liquidity remains a key risk that could impact contracted sales momentum. 21 September 2017 Michelle Kwok* Head of Real Estate Research, Asia Pacific The Hongkong and Shanghai Banking Corporation Limited michellekwok@hsbc.com.hk +852 2996 6918 Jizhou Dong*, CFA Analyst The Hongkong and Shanghai Banking Corporation Limited jizhou.dong@hsbc.com.hk +852 2996 6629 Albert Tam* Associate The Hongkong and Shanghai Banking Corporation Limited albert.p.h.tam@hsbc.com.hk +852 2822 4395 Simon Sin* Associate The Hongkong and Shanghai Banking Corporation Limited simon.k.c.sin@hsbc.com.hk +852 2996 6514 * Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/ qualified pursuant to FINRA regulations China Real Estate EQUITIES REAL ESTATE China Caution: Entering a period of lower risk appetite  EQUITIES ● REAL ESTATE 21 September 2017 2 Figure 3: Valuation summary Ticker Rating Price (HKD) Target price (HKD) Upside/ (Downside) (%) Mkt Cap (USD bn) 3M ADTV (USDm) NAV (HKD/ share) (Disc)/ Prem (%) FY16a PE (x) FY17e PE (x) FY18e PE (x) FY17e Yield (%) FY16a PB (x) Agile 3383 HK Hold 12.44 12.00 (4) 6.2 15.9 23.9 (48) 16.3 10.3 8.5 4.2 1.1 COLI 688 HK Buy 28.45 33.40 17 39.9 77.2 37.2 (24) 9.2 8.5 7.1 3.5 1.4 CRL 1109 HK Buy 27.20 32.20 18 24.2 38.2 40.3 (33) 11.6 10.3 9.1 2.9 1.6 CG 2007 HK Reduce 14.24 6.50 (54) 38.9 64.9 8.7 64 27.5 18.7 14.3 2.0 4.2 China Jinmao 817 HK Hold 4.34 4.05 (7) 5.9 17.6 9.0 (52) 20.7 9.4 8.1 6.3 1.6 GZ R&F 2777 HK Hold 20.45 19.20 (6) 8.4 22.8 38.4 (47) 9.3 6.5 5.3 6.1 1.4 Joy City 207 HK Hold 1.50 1.40 (7) 2.7 1.9 4.5 (67) 66.8 19.9 17.0 2.5 0.7 KWG 1813 HK Hold 9.21 8.30 (10) 3.7 13.1 27.5 (67) 8.8 6.8 5.5 5.9 1.1 Longfor 960 HK Buy 21.80 25.40 17 16.5 14.9 39.0 (44) 15.1 12.4 10.1 2.8 1.9 Shimao 813 HK Buy 17.46 20.60 18 7.6 13.6 34.4 (49) 8.9 7.4 6.1 4.3 1.1 Shui On 272 HK Hold 2.09 2.30 10 2.2 4.1 7.7 (73) 14.0 11.0 9.6 1.9 0.4 Sino-Ocean 3377 HK Buy 5.73 7.10 24 5.5 8.9 14.1 (59) 15.6 10.2 8.5 3.3 0.9 SOHO China 410 HK Hold 5.10 4.90 (4) 3.4 6.9 12.3 (59) 56.8 50.4 53.0 7.9 0.7 Yanlord (SGD) YLLG SP Buy 1.63