Deutsche Bank Markets Research Asia China Property Property Industry China Property Date 22 June 2015 Industry Update Share price pullbacks not deep enough for lower-quality names Be selective, sector valuations not yet back to attractive levels ________________________________________________________________________________________________________________ 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) 124/04/2015. Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Foo Leung Research Associate (+852) 2203 6239 foo.leung@db.com Top picks CSCEC (601668.SS),CNY8.07 Buy COLI (0688.HK),HKD27.45 Buy China Resources Land (1109.HK),HKD24.70 Buy Greentown China (3900.HK),HKD10.12 Buy Joy City Property (0207.HK),HKD2.23 Buy Source: Deutsche Bank Companies Featured CSCEC (601668.SS),CNY8.07 Buy COLI (0688.HK),HKD27.45 Buy China Resources Land (1109.HK),HKD24.70 Buy Greentown China (3900.HK),HKD10.12 Buy Joy City Property (0207.HK),HKD2.23 Buy Longfor (0960.HK),HKD12.04 Buy Franshion (0817.HK),HKD3.03 Buy Sino Ocean (3377.HK),HKD5.33 Buy China Ovs Grand Oceans (0081.HK),HKD3.91 Buy Central China Real Estate (0832.HK),HKD2.28 Buy SHK Properties Ltd (0016.HK),HKD128.80 Buy Hang Lung Properties (0101.HK),HKD23.05 Buy Shimao Property (0813.HK),HKD15.48 Sell Country Garden Holdings (2007.HK),HKD3.39 Sell Yanlord Land (YNLG.SI),SGD1.16 Sell Agile Property (3383.HK),HKD5.22 Sell Gemdale Corp (600383.SS),CNY13.28 Sell Evergrande (3333.HK),HKD4.59 Sell Sunac (1918.HK),HKD9.10 Sell Yuexiu Property (0123.HK),HKD1.68 Sell Source: Deutsche Bank Since mid-May, share prices for 48 listed developers we tracked have fallen by 5% on average, and the sector’s NAV discount has widened from a low point of 24% in early May to 36% now, slightly below the historical average of 33% (from 2006 to now). In our view, as the latest property market recovery (mainly volume rebound but no ASP increases for most cities) is different from those in 2006-7, 2009-10 and 2012-13, when we saw simultaneous increases in sales volume and ASPs for most of the cites, the sector as a whole is unlikely to trade back to the valuation levels prevailing during those previous bull markets. Sunac, Evergrande, Shimao, Country Garden, Yuexiu still look unattractive On our analysis, despite the latest share price corrections, the following stocks are still trading at NAV discounts that are better than their historical averages: Country Garden, Evergrande, KWG, Shimao, Sunac, and Yuexiu, and hence, in our view, their valuations are now unattractive. As a reference, we also see CCRE, Greentown, Longfor, Sino Ocean and Yanlord trading at NAV discounts that are above their respective historical averages, but we believe better-than-average valuations are warranted given their structural and/or fundamental upgrades (like transformation into a state-owned developer for Greentown). Buy on weakness: COLI, Franshion, COGO, CR Land now at attractive valuation On the other hand, we see Vanke, COLI, Franshion and R&F now trading at NAV discounts that are close to their respective historical averages. We believe COLI and Franshion, given their fundamental changes (like enhanced growth profile after latest asset injection from CSCEC), deserve better-than-average NAV discounts. Lastly, we see Agile, COGO, CR Land now trading at NAV discounts below their historical averages, presenting good opportunities to pick up CR Land, COGO, especially given stronger-than-peer growth in 5M15. Potential further A-share market consolidation could weigh on valuations In the past week (Jun 15-19), the SH Comp Index has fallen 13% – the biggest correction in the latest A-share bull market since 2014. While it is difficult to tell how long the correction could take, looking at big corrections during the past A-share bull market in 2007, we found three rounds of corrections of 15, 17%, and 22%. With a high of 5,178 for SH Comp in this bull market so far, if the latest correction is to have the same magnitude of correction as in the 2007 bull market, the SH Comp could see further downside of 2-10% from the current level before stabilizing. And before the A-share market stabilizes, we could see further share prices consolidation for the property stocks. Be selective; SOE reforms and asset securitization are new investment theses Our top picks are based