Deutsche Bank Markets Research Rating Buy Asia China Property Company COLI Date 19 August 2015 Results Faster growth with lower risks; more positive 2H15 sales outlook Reuters Bloomberg Exchange Ticker 0688.HK 688 HK HKG 0688 ADR Ticker ISIN CAOVY US1694032012 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (HKDm) 82,469.1 119,997.0 133,583.9 160,849.0 186,992.7 Reported NPAT (HKDm) 23,043.7 27,679.8 28,512.8 35,016.3 41,681.1 DB EPS FD (HKD) 2.32 3.39 3.16 3.55 4.23 PER (x) 9.8 6.2 7.2 6.4 5.4 Yield (net) (%) 2.1 2.6 2.6 2.8 3.3 Source: Deutsche Bank estimates, company data Reiterating Buy; new target price HK$30.3; COLI continues to outperform peers ________________________________________________________________________________________________________________ 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. Price at 18 Aug 2015 (HKD) 22.90 Price target - 12mth (HKD) 30.30 52-week range (HKD) 32.45 - 19.98 HANG SENG INDEX 23,475 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 Key changes Price target 31.99 to 30.30 ↓ -5.3% Net profit (FYE) 28,566.9 to 28,512.8 ↓ -0.2% Source: Deutsche Bank Price/price relative 1620242832368/132/148/142/15COLIHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute -14.4 -20.5 0.4 HANG SENG INDEX -7.6 -14.9 -5.9 Source: Deutsche Bank COLI's strong 1H15 results (high core net profit growth, stable and high gross margins, strong balance sheet and a surprising upward revision of its 2015 sales target) reaffirm our positive view on COLI. We think it will continue to deliver stronger earnings growth with better margins and lower risks than its peers, given recent China property market conditions (industry growth is slowing or turning negative). Also, with COLI's very low net gearing (13%) and high cash in HKD/USD (over HK$24bn), we believe concern over the RMB depreciation impact on its offshore debts was overdone. 1H15 core net profit up 20% YoY with high margins; sales target also raised For 1H15, core net profit was HK$13.63bn, up 20.3% YoY – in line with our expectations, yet slightly ahead of market consensus. Overall gross margin was 32.2% in 1H15, similar to 32.3% in 1H14, while gross margin from property development remained satisfactory vs. 1H14. Core net margin in 1H15 was 21.1%, up slightly from 20.9% in 1H14. Revenue rose 19.5% to HK$64.85bn, while rental income rose 23.4% YoY to HK$920m, reaffirming our view that COLI’s IP portfolio is growing at a fast pace. Net book value at end-1H15 was HK$19/share. An interim DPS of HK$0.2 was declared, flat YoY. With strong contracted sales in 7M15 (sales value up 16% YoY and volume 30% YoY), COLI raised its 2015 sales target from HK$168bn to HK$180bn. Net gearing fell to 13.4%; concern over RMB depreciation overdone COLI’s net gearing fell from 28% at end-2014 to 13.4% at end-1H15, while average borrowing cost was 4.3% – both data points among the lowest in the industry. Interest cover in 1H15 was 9.9x vs. 11.1x in 1H14. At end-1H15, total debt was HK$103.65bn – 31.8% denominated in HKD, 46.5% in USD, and 19.4% in RMB. The total bank/cash balance was HK$78.61bn, of which 30.6% or HK$24.05bn is HKD/USD cash. The HKD/USD cash balance may be used to pay interest cost and the principal of outstanding USD/HKD debt, suggesting the immediate impact of RMB depreciation on COLI’s USD/HKD debt is less significant than what the market expected. Attractive valuations at 33% NAV discount and 7x 2015E P/E; risks Our new TP of HK$30.30 (from HK$31.99) is based on a 10% discount to our estimated NAV of HK$33.66 (down from HK$35.55), mainly in further adjusting our assumption of RMB exchange rate movement to a RMB/USD rate of 6.9 by end-2016. Despite this, we think COLI’s valuations are attractive, and we see potential positive surprises from additional policy support on the property markets in Tier-2/3 cities. Risks: unexpected economic and policy volatility. 19 August 2015 Property COLI Page 2 Deutsche Bank AG/Hong Kong Model updated:16 August 2015 Running the numbers Asia China Property COLI Reuters: 0688.HK Bloomberg: 688 HK Buy Price (18 Aug 15) HKD 22.90 Target Price HKD 30.30 52 Week range HKD 19.98 - 32.45 Market Cap (m) HKDm 18