On the threshold of a new era

Please refer to page 39 for important disclosures and analyst certification, or on our website www.macquarie.com/research/disclosures. HONG KONG 3900 HK Outperform Price (at 05:19, 14 Apr 2015 GMT) HK$8.53 Valuation HK$ 18.35 - DCF 12-month target HK$ 10.27 Upside/Downside % +20.4 12-month TSR % +25.1 Volatility Index High GICS sector Real Estate Market cap HK$m 18,434 Market cap US$m 2,471 Free float % 28 30-day avg turnover US$m 10.4 Number shares on issue m 2,161 Investment fundamentals Year end 31 Dec 2014A 2015E 2016E 2017E Revenue m 32,049 25,623 20,264 28,048 EBIT m 5,604 3,871 2,577 4,500 EBIT growth % -14.8 -30.9 -33.4 74.6 Reported profit m 2,072 3,403 3,684 4,062 Adjusted profit m 3,379 3,403 3,674 4,062 EPS rep Rmb 0.96 1.57 1.70 1.87 EPS rep growth % -52.1 64.2 8.2 10.3 EPS adj Rmb 1.56 1.57 1.69 1.87 EPS adj growth % -12.7 0.7 7.9 10.6 PER rep x 7.2 4.4 4.0 3.7 PER adj x 4.4 4.4 4.0 3.7 Total DPS Rmb 0.00 0.31 0.34 0.38 Total DPS growth % nmf nmf 8.0 10.6 Total div yield % 0.0 4.6 5.0 5.5 ROA % 4.5 3.2 2.3 4.2 ROE % 13.1 12.1 11.8 12.0 EV/EBITDA x 6.7 6.6 7.3 6.0 Net debt/equity % 76.7 62.6 42.4 4.4 P/BV x 0.6 0.5 0.5 0.4 Source: FactSet, Macquarie Research, April 2015 (all figures in HKD unless noted) Analyst(s) Wilson Ho, CFA +852 3922 3248 wilson.ho@macquarie.com David Ng, CFA +852 3922 1291 david.ng@macquarie.com 14 April 2015 Macquarie Capital Securities Limited Greentown On the threshold of a new era A new life in sight We initiate on Greentown China with an Outperform rating and TP of HK$10.27. We see Greentown is now at a crossroads, with the dissolution of the Shanghai Sunac-Greentown platform a likely event over the next few months and the new management from China Communications Construction Company Group (CCCG), which has acquired a 24.9% stake of Greentown following the termination of Sunac’s purchase, set to bring changes to its growth strategy. We believe the sale of the project interests in the Shanghai JV platform (assuming Rmb15.5b as proposed by Sunac) could significantly lower GRTN’s net gearing, which could help improve its capital structure as well as acquire new projects with good returns, including projects owned by CCCG. The SOE background of CCCG is likely to help GRTN to lower financing costs and potentially upgrade its credit rating. Moreover, we believe the multiple easing measures passed recently, including mortgage relaxation, should benefit GRTN’s product mix which mainly targets housing upgraders. We forecast GRTN’s 2015 contracted sales at Rmb65b, vs its target of Rmb60b. Sales could grow 14% YoY in 2016E and reach a new high of Rmb80b in 2017E. We expect GRTN’s profits to grow at a 6% CAGR over 2015-2017E, with profits from JCE projects set to increase significantly. The stock is trading at 4.4x FY15E PER, at a 54% discount to NAV. Initiate with Outperform. A pioneer in innovative business models GRTN achieved an average 17% ROE over the past three years, which is higher than the peer average of 13%. Despite numerous calls by the sector for a change in business model amongst the property developers in China, we found that GRTN is one of the very few that has started practising these new models, including partnerships, “a small stake for a larger control” (小股操盘) and asset-light initiatives. Most importantly, it has achieved good results. The benefit of these models is to help companies find new growth drivers, maintaining a high ROE as the high growth period of the traditional property development business has likely passed. Negatives mostly priced in The stock has been one of the worst performers in the sector, down 17% over the past one year, vs the sector average of a 5% gain. At 0.54x 2014 PBR, we believe these negatives have been mostly priced in, because 1) GRTN’s current valuation is below the 0.84x PBR that CCCG paid to acquire a 24% stake in GRTN in December 2014, and 2) is slightly below Wharf’s (4 HK) acquisition cost for the GRTN stake (0.55x) which it paid in June 2012. 3) GRTN is also the cheapest stock among the top 10 developers, vs the average of 1.3x PBR. 4) GRTN would likely be a winner in any rate cutting cycle, with its core profit for FY15E–17F likely to increase by 5-8% with every 1ppt decrease in financing cost. In the past two monetary policy cycles, GRTN’s share price delivered a strong run as the rate cutting cycle began. Initiate with Outperform, TP HK$10.27, NAV HK$18.35 The stock is trading at a 54% discount to NAV, and 4.4x FY15E PER. Key risks include 1) poor sales execution and cooperation with CCCG, 2) slower-than-expected market recovery, and 3) a delay in asset injections from CCCG. Macquarie Research Greentown 14 April 2015 2 Inside On the threshold of a new era 3 An industry pioneer 6 Financial analysis 8 Bull bear case analysis 12 Seeing through the balance sheet 14 Extended DuPont analysis 16 A brief history of Greentown 19 A rate-cut beneficiary 25 Key assumptions 26 Valuatio