MORGAN

STANLEY

RESEARCH

ASIA/PACIFIC

Morgan Stanley Asia Limited+

Brian Y Leung
Brian.Leung@morganstanley.com +852 2848 5220

Jacky Chan
Jacky.K.Chan@morganstanley.com +852 2848 5973

Angus Chan, CFA October 25, 2013 Industry View In-Line
Angus.Kon.Chan@morganstanley.com +852 2848 5259

China Property
Asia Insight: Is 2014 Another Robust Year?
We expect 2014 contracted sales growth to be flat while policy risk is on the rise given the strong ASPs. We downgrade our industry view to In-Line. We favor stocks with greater exposure to the mass market segment of non-top-tier cities; Vanke, CG and Shimao are our top picks. Industry view downgraded to In-Line: We are less optimistic than consensus about the contracted sales and ASP outlook in 2014; we expect flat growth amid the increased policy risk and steady demand. MSCI China Real Estate index has outperformed MSCI China by 15% in the last 12 months. The average share price upside of our coverage universe has narrowed to 11%. Favor non-HPR/mass-market: We are more skeptical about tier-one cities given the 56% jump in land sales volume YTD and heightened policy risk amid the surge in ASPs. Demand-supply in lower-tier cities should continue to improve; we think there could be a third consecutive year of zero growth/decline in land sales in 2013, bringing down inventory-turnover. 17% contracted sales growth in 2014: We expect our coverage universe to continue to gain market share but they may only achieve half of the 34% YTD contracted sales growth (or 17%) in 2014 on the back of a 1ppt improvement in the sell-through rate to 67%. Investment recommendation. Our top picks are Vanke, CG and Shimao, which have higher exposure of 30-83% to lower-tier cities, improving execution with over 70% forecast 2014 sell-through rate, and above-average 2014 contracted sales growth of 19-23%. They trade at 2014e P/Es of 5.6x to 8x, and 34-44% discount to NAV. What if the market swings: Agile, KWG, Longfor, R&F and Yuexiu are the major beneficiaries in sales, SOL, Poly, Vanke and Yuexiu in profit and NAV under a more accommodative market backdrop. COLI, CRL, Vanke and CG are more resilient to a worsening environment.
What Changed
Industry View: China Property Attractive to In-Line

Share Rec Prices

Prior Target

New Target

Target % Chg

Agile CG COGO COLI CRL GZ R&F KWG Longfor Poly Property Shimao Sino Ocean Soho China Yuexiu Prop. Yuexiu REIT Vanke A

OW OW UW EW EW EW OW OW UW OW UW EW OW OW OW

9.3 5.5 9.3 24.3 22.8 13.5 5.1 13.2 4.8 19.9 4.9 6.8 2.2 3.8 9.2

13.10 5.00 8.50 22.30 23.80 12.70 6.10 17.30 4.70 22.30 4.10 6.50 3.63 5.30 14.00

12.00 6.20 8.00 22.50 23.20 12.60 6.10 15.90 4.30 23.00 4.10 6.50 3.30 5.00 13.00

-8% 24% -6% 1% -3% -1% 0% -8% -9% 3% 0% 0% -9% -6% -7%

Source: Datastream, Company Data, Morgan Stanley Research

Morgan Stanley does and seeks to do business with companies covered in Morgan Stanley Research. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of Morgan Stanley Research. Investors should consider Morgan Stanley Research as only a single factor in making their investment decision.

For analyst certification and other important disclosures, refer to the Disclosure Section, located at the end of this report.
+= Analysts employed by non-U.S. affiliates are not registered with FINRA, may not be associated persons of the member and may not be subject to NASD/NYSE restrictions on communications with a subject company, public appearances and trading securities held by a research analyst account.

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RESEARCH

October 25, 2013 China Property

Key Changes & Investment Summary
What’s Changed?
Industry view downgraded to In-Line from Attractive: We have been positive toward the sector, expecting new home sales to recover and balance sheets to improve. MSCI China Real Estate Index has outperformed MSCI China by 15% in the past 12 months. However, the sharp rise in ASP, which is likely to trigger tighter enforcement of property austerity measures, especially in the top-tier cities, and the surge in sales volume drives us to turn more cautious than consensus towards the sector’s 2014 outlook. Projects in top-tier cities and the high-end ones will be exposed to higher policy risk than the non-HPR (home purchase restriction) and mass-market ones. We expect new home sales growth to be flat in 2014, and that of our coverage universe to halve to 17% from 34% YTD September 2013. The sector has re-leveraged with higher net gearing and asset-to-equity, which may cause balance sheets to deteriorate further and increases liquidity risk. The weighted average TP upside of our coverage universe has narrowed to 11%. Thus, we downgrade the industry view to In-Line from Attractive.
Exhibit 1

Earnings & NAV fine-tuned: We have made minor adjustments of 0-3% to our 2013-2015 net profit estimates for most of the stocks in our coverage universe to reflect changes in the development schedules and mark-to-market YTD contracted sales. Our biggest upward revision (+11-15%) is to CG’s 2014 and 2015 net profit estimates on the back of its stronger than expected contracted sales achieved YTD. Sino Ocean’s net profit estimates have been adjusted to reflect its capital restructuring. We have lowered Sino Ocean Land’s EPS estimates by 2-4% to factor in its new share issuance and Perpetual Convertible Securities redemption, and Yuexiu Property by 5-8%, as we think that its margins may moderate further amid the rising contributions from lower-tier cities. We have also raised the Forward NAV of our coverage universe marginally by 3%. The biggest jump in Forward NAV also comes from Country Garden (+28%) to reflect NAV accretion through land acquisitions, the latest ASP changes and stronger than expected contracted sales. SOL’s Forward NAV is lowered by 4% on the back of the dilutive new share issue. New target NAV discount metrics, TP cut 2% on average: We continue to value China property developers based on discount to NAV. However, we are introducing a scenario-weighted average approach to reflect the impact of the non-stock specific macro and sector factors that may swing a stock’s valuations (please refer to the Valuation Methodology section for more details) amid the volatile macro and policy outlook. Thus, we have cut the TP of our coverage universe by an average of ~2%. We have lowered our PTs for Agile, Vanke, Longfor, Yuexiu Property, COGO, Poly and Yuexiu REIT by more than 5%, as we have raised the target discount to NAVs to reflect the higher financial leverage taken on by the developers and the risk of a sluggish macro environment that may drag commercial properties’ rental growth. Country Garden is, again, the exception, as we raise our PT by 24% to HK$6.2/sh as a result of the earnings and NAV upgrades.

MSCI China REI vs MSCI China Index 24 months
210

190

170

150

130

110

90 MSCI China Real Estate 70 MSCI China

50 Oct-11 Dec-11 Feb-12 Apr-12 Jun-12 Aug-12 Nov-12 Jan-13 Mar-13 May-13 Jul-13 Sep-13

Source: Bloomberg, Morgan Stanley Research

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October 25, 2013 China Property

Exhibit 2

2013E-2015E Net Profit Changes
Old Net Profit Net Profit 2013E New Net Profit 2013E % Chg Old Net Profit 2014E New Net Profit 2014E % Chg Old Net Profit 2015E New Net Profit 2015E % Chg

Agile CG COGO COLI CRL GZ R&F KWG Property Longfor Poly Prop Shimao Sino Ocean * SOHO China Yuexiu Prop Yuexiu REIT Vanke Average

4,785 7,910 2,541 19,044 8,667 5,042 2,283 6,249 2,673 6,490 2,314 2,742 1,851 268 14,973

4,870 8,294 2,541 19,099 8,746 5,328 2,283 6,302 2,711 6,625 2,519 2,829 1,753 268 14,973

2% 5% 0% 0% 1% 6% 0% 1% 1% 2% 9% 3% -5% 0% 0% 2%

5,473 9,248 2,630 21,940 9,989 5,439 2,692 7,237 3,361 7,573 2,846 1,418 2,266 386 17,957

5,729 10,310 2,630 22,442 10,213 5,887 2,770 7,148 3,412 7,788 3,410 1,466 2,146 386 17,981

5% 11% 0% 2% 2% 8% 3% -1% 1% 3% 20% 3% -5% 0% 0% 4%

5,936 10,904 2,835 24,827 12,236 5,699 2,889 8,579 3,843 8,848 3,504 1,146 2,785 461 20,871

6,143 12,488 2,835 26,223 12,166 6,538 3,027 8,561 3,789 8,895 4,012 1,238 2,573 461 21,259

3% 15% 0% 6% -1% 15% 5% 0% -1% 1% 14% 8% -8% 0% 2% 4%

Source: Morgan Stanley Research, * Sino Ocean: restated numbers (excludes distribution) and are subject to EGM approval on its proposed capital restructuring.

Exhibit 3

2013E-2015E EPS Changes
Old EPS MW EPS 2013E New EPS 2013E % Chg Old EPS 2014E New EPS 2014E % Chg Old EPS 2015E New EPS 2015E % Chg

Agile CG COGO# COLI# CRL# GZ R&F KWG Property Longfor Poly Prop# Shimao SOL SOHO China Yuexiu Prop Yuexiu REIT# Vanke Average

1.39 0.43 1.00 2.33 1.49 1.58 0.79 1.15 0.73 1.87 0.41 0.48 0.20 0.11 1.36

1.41 0.45 1.00 2.34 1.50 1.67 0.79 1.15 0.74 1.91 0.41 0.50 0.19 0.11 1.36

1.8% 4.9% 0.0% 0.3% 0.9% 5.7% 0.0% -0.4% 1.4% 2.1% 1.3% 3.2% -5.3% 0.0% 0.0% 1.0%

1.59 0.51 1.03 2.68 1.71 1.70 0.93 1.33 0.92 2.18 0.48 0.25 0.24 0.16 1.63

1.66 0.57 1.03 2.74 1.75 1.84 0.96 1.30 0.94 2.25 0.47 0.26 0.23 0.16 1.63

4.7% 11.5% 0.0% 2.3% 2.2% 8.2% 2.9% -2.6% 1.5% 2.8% -2.0% 3.4% -5.3% -0.1% 0.1% 2.0%

1.72 0.60 1.11 3.04 2.10 1.78 1.00 1.58 1.05 2.55 0.58 0.20 0.30 0.19 1.90

1.78 0.69 1.11 3.21 2.09 2.05 1.05 1.56 1.04 2.56 0.56 0.22 0.28 0.19 1.93

3.5% 14.5% 0.0% 5.6% -0.6% 14.7% 4.8% -1.6% -1.4% 0.5% -3.8% 8.0% -7.6% -0.1% 1.9% 2.6%

Source: Morgan Stanley Research, # HKD * Sino Ocean: restated numbers (excludes distribution) and are subject to EGM approval on its proposed capital restructuring.

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October 25, 2013 China Property

Exhibit 4

Forward NAV and Target Price changes
Old Fwd NAV New Fwd NAV Fwd NAV % Chg Old Target Dis (Prem.) New Target Dis (Prem.) Target Disc. Change Old Rec New Rec Old Target New Target Target % Chg

Agile CG COGO COLI CRL GZ R&F KWG Longfor Poly Property Shimao Sino Ocean Soho China Yuexiu Prop. Yuexiu REIT Vanke A Simple Average

26.14 6.63 12.07 26.21 27.97 28.28 15.21 21.52 11.68 34.20 10.32 9.87 5.57 NA 15.93

25.73 8.46 12.13 27.33 28.82 28.31 15.27 20.66 11.86 35.42 10.30 10.01 5.66 NA 16.16

-2% 28% 0% 4% 3% 0% 0% -4% 2% 4% 0% 1% 2% NA 1% 3%

50% 25% 30% 15% 15% 55% 60% 20% 60% 35% 60% 35% 35% NA 10%

55% 25% 35% 20% 20% 55% 60% 25% 65% 35% 60% 35% 40% NA 20%

5% 0% 5% 5% 5% 0% 0% 5% 5% 0% 0% 0% 5% NA 10%

OW OW UW EW EW EW OW OW UW OW UW EW OW OW OW

OW OW UW EW EW EW OW OW UW OW UW EW OW OW OW

13.10 5.00 8.50 22.30 23.80 12.70 6.10 17.30 4.70 22.30 4.10 6.50 3.63 5.30 14.00

12.00 6.20 8.00 22.50 23.20 12.60 6.10 15.90 4.30 23.00 4.10 6.50 3.30 5.00 13.00

-8% 24% -6% 1% -3% -1% 0% -8% -9% 3% 0% 0% -9% -6% -7% -2%

Source: Morgan Stanley Research

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October 25, 2013 China Property

Where are we different?
Tighter policy, not looser: The market appears relatively optimistic about the property policy and 2014 physical market outlook following the robust YTD new home sales growth of 34%, rise in land costs, and the government’s commitment to achieve stable economic growth. The aggressive bids for land in top-tier cities, whose physical markets are more vulnerable to tighter enforcement of the property austerity measures, reflect that some developers may even believe a relaxation is on the way. However, we think that the central government’s objective to keep property prices stable remains intact. The upward momentum of ASP, especially in the top-tier cities, is likely to accelerate till year-end due to the tail effect but will further raise the policy risk and lead to tighter enforcement of the property austerity measures. Henan Zhengzhou’s tighter enforcement of its HPR included raising the age of eligible homebuyers to 21 from 18. Slower pre-sales permit approvals and tighter ASP control on new sales launches attributed to the fall in sales volume in Guangzhou during the past month, Media reports (HKET, 21 Oct 2013) also suggest that Shenzhen is considering reducing the loan-to-asset ratio for a second home mortgage to 30%. Heightened policy risk for tier-one cities in 2014: The market and developers favor tier-one exposure following the 40% surge in YTD new home sales and 23% rise in volume. However, as mentioned above, top-tier cities are more exposed to policy risk, which has been rising. ASPs of four tier-one cities are up 20% YoY YTD, while eleven other top-tier cities are up more than 10%. But possible tighter enforcement
Exhibit 6

of the austerity measures implemented by the local governments may undermine new home sales and disrupt the new launch schedule. Moreover, top-tier cities may see less supply shortage in 2014 given the 56% YoY YTD September jump in residential land area sold, as compared to the 23% rise in new home sales volume, indicating a rise in supply next year. The over-supply situation in lower-tier cities, however, should begin to improve on the back of the fall in land sales for three consecutive years.
Exhibit 5

70 City Property Prices by Tier
170

160

Tier-1 Tier-2 Tier-3

150

140

130

120

110

100 Jul-05

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13

Source: NBS, CEIC, Morgan Stanley Research

Cities with ASP >10% YoY in Sep vs Company GAV %
By GAV Rank City New Res ASP YoY Yuexiu By GAV KWG By GAV R&F By GAV CRL By GAV Vanke By GAV COLI By GAV SOL By GAV Shimao By GAV Agile By GAV Poly By GAV Longfor By GAV COGO By GAV

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Beijing Shanghai Guangzhou Shenzhen Xiamen Nanjing Zhengzhou Shenyang Fuzhou Nanchang Taiyuan Changsha Yueyang Wuhan Urumqi Total

20.6% 20.4% 20.2% 20.1% 16.5% 14.5% 12.7% 12.7% 12.3% 11.5% 11.3% 10.8% 10.8% 10.5% 10.0%

0% 0% 57% 0% 0% 0% 0% 10% 0% 0% 0% 0% 0% 7% 0% 74%

4% 14% 39% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 57%

11% 4% 21% 0% 0% 3% 0% 0% 0% 0% 3% 0% 0% 0% 0% 43%

13% 6% 0% 10% 1% 1% 0% 6% 1% 0% 2% 3% 0% 2% 0% 43%

6% 5% 4% 4% 2% 2% 1% 4% 2% 0% 1% 3% 0% 6% 0% 41%

8% 5% 4% 2% 1% 5% 0% 10% 0% 0% 0% 2% 0% 1% 0% 38%

25% 5% 0% 1% 0% 0% 0% 2% 0% 0% 0% 0% 0% 1% 0% 34%

5% 3% 2% 0% 4% 4% 0% 4% 4% 0% 0% 1% 0% 6% 0% 33%

0% 3% 15% 0% 0% 7% 0% 2% 0% 0% 0% 0% 0% 0% 0% 27%

0% 12% 5% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% 6% 0% 26%

9% 5% 0% 0% 1% 0% 0% 6% 0% 0% 0% 1% 0% 0% 0% 21%

16% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 16%

Source: CEIC, Company Data, Morgan Stanley Research

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October 25, 2013 China Property

More conservative TP upside: Policy risk may limit new home sales volume growth and the ASP outlook in 2014; we now forecast flat growth for both volume and ASP, decelerating sharply from 24% YoY and 9% YoY YTD September, respectively. Although we still expect our coverage universe to gain market share and achieve 17% YoY growth in 2014 contracted sales on the back of 14% rise in sellable resources and 1ppt improvement in the sell-through rate to 67%, our

forecast for contracted sales growth is half of the YTD September 2013 growth of 34% YoY. Moreover, our new 2014-2015 EPS estimates are 4-8% below consensus. Our weighted average TP upside is 11%, which is lower than the consensus’ 18%.

Exhibit 7

Morgan Stanley vs Consensus Estimates
MS / Consensus % Chg Revenue 13E Revenue 14E Revenue 15E Profit 13E Profit 14E Profit 15E EPS 13E EPS 14E EPS 15E

Agile Country Garden COGO COLI CRL China Vanke GZ R&F KWG Longfor Prop Poly Property Shimao Sino-Ocean Land Soho Yuexiu Property Yuexiu REIT Average
Source: Bloomberg, Morgan Stanley Research

-5% -1% 4% -2% 2% 2% -9% 1% 6% -3% 2% 3% -5% 3% 12% 1%

-2% 6% -22% 0% -1% 4% -5% 4% 2% -1% 0% 3% -24% 5% 15% -1%

-2% 11% -27% -5% 2% 1% -16% 4% 6% 1% -4% 2% -3% 2% 15% -1%

0% 1% -12% -2% -5% -4% -3% -3% 0% -2% 4% -8% -17% -4% 3% -3%

4% 5% -29% -4% -9% -4% -6% -1% -3% 3% -3% 2% -32% -7% 2% -6%

-1% 8% -37% -4% -11% -5% -11% -12% -3% 0% -8% -1% -14% -9% 6% -7%

2% 2% -10% -2% -6% -3% -2% -3% 0% -2% 4% -13% -26% -7% 9% -4%

7% 6% -26% -3% -9% -5% -5% 0% -3% 4% -2% -18% -38% -6% 0% -6%

2% 10% -34% -4% -11% -6% -10% -11% -4% 1% -7% -20% -24% -7% -3% -8%

Exhibit 8

Comparison of Morgan Stanley vs Consensus Target Prices
Published Sh Price MS Target BB Target MS vs BB TP MS T Upside BB T Upside

Agile Country Garden China Overseas Grand China Overseas Land China Resources Land GZ R&F KWG Longfor Prop Poly Property Shimao Sino-Ocean Land Soho Yuexiu Prop Yuexiu Real Estate Inv Vanke Simple Average
Source: Bloomberg, Morgan Stanley Research

9.25 5.54 9.23 24.30 22.75 13.46 5.04 13.24 4.84 19.98 4.85 6.85 2.16 3.83 9.17

12.00 6.20 8.00 22.50 23.20 12.60 6.10 15.90 4.30 23.00 4.10 6.50 3.30 5.00 13.00

10.53 5.34 11.87 26.42 25.56 14.74 6.34 15.63 6.04 21.72 5.29 6.71 2.78 4.75 14.59

14% 16% -33% -15% -9% -15% -4% 2% -29% 6% -23% -3% 19% 5% -11% -5%

30% 12% -13% -7% 2% -6% 21% 20% -11% 15% -15% -5% 53% 31% 42% 11%

14% -4% 29% 9% 12% 9% 26% 18% 25% 9% 9% -2% 29% 24% 59% 18%

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Investment Recommendations
Prefer non-HPR/mass-market in 2014: The alleviated inventory problem and relatively low policy risk make the stocks with more lower-tier exposure more attractive than the ones with tier-one exposure in 2014, in our view, especially the developers that focus on the mass-market segment, which should help further sidestep the policy risk and enhance asset churn. Since the execution in lower-tier city projects may diverge widely, we favor developers with improving execution and sell-through rate. Vanke, CG and Shimao are our three top picks. Above-average sellable resources and sales growth: Vanke, CG and Shimao’s non-tier one/two cities exposure is at 30%-83%. Moreover, we expect their 2014 sell-through rate to continue to improve and exceed 70%, ahead of our coverage universe’s 68%. They should also enjoy above-average sellable resources growth at 15%-20% and contracted sales at 19%-23%. Their 2014e P/Es of 5.6x to 8x are also below/at par to our coverage universe average of 8x, and they trade at 34% to 44% discounts to forward NAV.
Exhibit 9

Short-term contracted sales momentum trading: As positive contracted sales momentum has generally led to short-term share price performance, we think that Agile, Shimao, KWG and R&F, which may continue to achieve QoQ contracted sales growth in 4Q13, may see near-term share price outperformance.

GAV Breakdown by Tier
Residential Tier 1 Residential Tier 2 Residential Tier 3 Commercial properties

CG COGO Agile Poly Vanke Shimao GZ R&F COLI CRL SOL Longfor Yuexiu KWG Soho
Source: Company Data, Morgan Stanley Research

0% 14% 13% 18% 21% 6% 27% 17% 7% 28% 12% 48% 34% 0%

16% 4% 15% 35% 43% 36% 25% 56% 46% 51% 58% 37% 19% 0%

83% 82% 61% 42% 36% 30% 30% 26% 15% 14% 14% 13% 10% 0%

1% 0% 11% 5% 0% 28% 18% 1% 32% 8% 16% 2% 37% 100%

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Exhibit 10

China Property: Valuation Comparables
21-Oct-13 Stock Share Rating Price Mkt Cap T/O US$mn US$mn Avg Daily PE12 PE13E PE14E PE 15E Target Price Target Upside Target Disc Fwd NAV/ Shares Disc to Fwd NAV

Vanke A Longfor Shimao CG KWG Yuexiu Prop. Agile COLI CRL SOHO China GZ R&F COGO Poly Property Sino Ocean Yuexiu REIT MS coverage

OW OW OW OW OW OW OW EW EW EW EW UW UW UW OW

9.17 13.24 19.98 5.54 5.04 2.16 9.25 24.30 22.75 6.85 13.46 9.23 4.84 4.85 3.83

14,588 9,292 8,949 13,188 1,881 2,594 4,113 25,614 17,104 4,288 5,594 2,717 2,275 3,725 1,367

149.7 12.4 18.0 13.5 4.9 7.4 12.4 60.8 26.8 7.0 11.5 4.9 10.4 5.6 4.5

8.0 10.5 12.9 12.0 5.8 12.9 5.4 12.6 18.4 9.6 6.8 9.9 7.6 11.0 13.7 10.1

6.7 9.5 8.6 10.0 5.2 9.4 5.4 10.4 15.2 11.3 6.6 8.3 6.5 9.7 27.3 8.6

5.6 8.4 7.3 8.0 4.3 7.7 4.6 8.9 13.0 21.8 6.0 8.0 5.2 8.4 19.8 8.2

4.7 7.0 6.4 6.6 4.0 6.4 4.3 7.6 10.9 25.8 5.4 7.4 4.7 7.1 17.2 7.6

13.00 15.90 23.00 6.20 6.10 3.30 12.00 22.50 23.20 6.50 12.60 8.00 4.30 4.10 5.00

42% 20% 15% 12% 21% 53% 30% -7% 2% -5% -6% -13% -11% -15% 31%

20% 25% 35% 25% 60% 40% 55% 20% 20% 35% 55% 35% 65% 60% N/A

16.2 20.6 35.4 8.5 15.2 5.65 25.7 27.3 28.8 10.0 28.3 12.1 11.9 10.3 N/A

-43% -36% -44% -34% -67% -62% -64% -11% -21% -32% -52% -24% -59% -53% N/A -45%

Source: Datastream, Company Data, Morgan Stanley Research (E) estimates

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October 25, 2013 China Property

Another Robust Year in 2014?
Demand-Supply Trend Favors Lower-tier Cities
New record 2013 sales: YTD national new home sales growth of 34% YoY to Rmb4.54 trillion, or 24% YoY rise in GFA to 754mn sqm, were positive surprises to the market. If the traditional seasonal pattern holds, we think that China may achieve another record commodity residential GFA sold of ~1.2bn sqm and sales of Rmb6.7 trillion in 2013. We believe that the unleashed pent up demand, since the latter half of 2012, especially in the top-tier cities, the overdrawn purchases driven by the State Council Five-Point Statement in 1Q13, and the relatively steady credit availability are the key drivers.
Exhibit 11 Exhibit 12

National Property Data mn sqm
1,600

National GFA Sold National GFA Started National Completed

1,400

1,200

1,000

800

600

400

200

China: National Residential Sales
1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013E

200%

GFA sold - yoy change

Sales - yoy change

200%

150%

150%

Source: CEIC, Morgan Stanley Research E = Morgan Stanley Research Estimates

Exhibit 13
100% 100%

Real Estate Investment: Commodity Residential
YoY %

Real Estate Inv: Residential YoY%
50% 50%

50% 45%

0%

0%

40% 35%

-50%

-50%

30%
-100% Oct-05 Oct-06 Oct-07 Oct-08 GFA sold Oct-09 Oct-10 Oct-11 Sales Oct-12 -100% Oct-13

25% 20% 15% 10% 5%

Source: CEIC, Morgan Stanley Research

Contained investment and new supply: However, we do not expect new commodity residential GFA started in 2013 to break the historical high of 1.46bn sqm recorded in 2011. We think that the real estate investment-to-sales ratio for commodity residential should moderate to about 85% or Rmb6 trillion from over 90% in the last two years, which should be a more sustainable level. Overall land sales YTD is down 3% YoY, which, if it were to continue till year-end, would make 2013 the third consecutive year of decline. Together with the robust sales and the stagnated new construction started, we estimate that the inventory-months of residential property should decline for the first time since 2009 below 30 inventory turnover-months; however, we still expect the absolute inventory level to hit a new high.

0% Jan-05

Jan-06

Jan-07

Jan-08

Jan-09

Jan-10

Jan-11

Jan-12

Jan-13

Source: CEIC, Morgan Stanley Research

Less shortage in top-tier cities, less inventory-month in lower-tier ones: However, the spike in tier-one cities land sales to 50% YoY should help mitigate the underinvestment since the rollout of HPR, which is one of the key reasons of the severe supply shortage and the jump in ASP. The inventory-month in eight major cities bottomed at eight months and has begun to pick up in recent months. Land transactions in lower-tier cities are likely to record a second consecutive year of double-digit declines despite the 24% increase in their YTD August sales volume. These should help set a more favorable demand-supply backdrop for the lower-tier cities in 2014, in our view.

2014E

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Exhibit 14

Exhibit 16

Land Area Purchase: YoY Growth by Tier
Volume YoY Growth 70% 2010 56% 50% 39% 30% 27% 28% 2011 2012 YTD (Sep)

New Home Sales Value Growth by City Tier
50% 40% 30% 30% 21% 20% 14% 13% 8% 4%
-3%

40%

38% 34% 25% 16%

15% 9% 11%

10%

4% -1%

6%

4%

0%

10%

-10% -15% -30%

-4% -7% -14% -13%

0%

-10% -11%

-42% -50% Tier 1 Tier 2 Low-Tier National

-20% -22% -30% Tier 1

2010

2011

2012

YTD (Sep)

Tier 2

Non-Tier

National

Source: CEIC, NBS, Morgan Stanley Research Source: CEIC, NBS, Morgan Stanley Research

Exhibit 15

Exhibit 17

New Home Sales Volume Growth by City Tier
30% 23% 20% 17% 16% 8% 6% 3% 0% 0% -3% -10% 0% 2% 16% 8% 26% 24%

National Inventory Month vs Unsold PUD
GFA ('000sqm)
4,000,000

Inventory Months
40 34 33 30 30 29 30

3,500,000

Res. GFA Sold Est. Unsold PUD Months

35

10%

3,000,000 27 2,500,000

27 25 24 23

25

2,000,000

20

-10%
1,500,000 15

-20%
1,000,000 10

-30% -35% -40% Tier 1 Tier 2

2010

2011

2012

YTD (Sep)

500,000

5

-

0 2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

Non-Tier

National

Source: CEIC, NBS, Morgan Stanley Research

Source: CEIC, Company Data, E = Morgan Stanley Research estimates

Exhibit 18

Historical Inventory Months: Eight Major Cities
3M Avg 25 Major 8 Cities (3MA) Average Inventory Months 20

15

10

5

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13

Source: Soufun, Morgan Stanley Research

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October 25, 2013 China Property

Exhibit 19

GFA Sold by City Tier mn Sqm
1,400

Low-Tier GFA Sold Tier 2 GFA Sold
1,200

Tier 1 GFA Sold

1,000

800 876 739

600 470 400 307 200
111 125 164 126

604

700

742

362

424

190

258 190 184 199

-

78 2005

67 2006

67 2007

43 2008

68 2009

44 2010

40 2011

47 2012

56 2013E

Top-tier cities’ fundamental demand drivers peaked: Urban population growth has been steady. Upgrade demand momentum has peaked and should remain relatively steady at 0.7 sqm per capita per annum. We forecast the overall 2014 new home sales to edge up 2% to 1.2bn sqm with possible downside, especially in the tier one/two cities, given the high base and overdrawn demand in 2013. Demand in tier-one cities has been steady at between 40mn sqm and 68mn sqm in the last five years, or an average of 48mn sqm, which is 14% less than the annualized demand in 2013. Demand in tier-two cities has remained below 200mn sqm in the last four years. Only lower-tier cities have maintained a relatively consistent uptrend in demand at 9.5% CAGR in 2007-2012. Thus, we believe that the lower-tier cities should still be the key demand driver, if any, while tier-one/two demand may remain stable with risk of reverting to their average sales levels.
Exhibit 21

Source: CEIC, Morgan Stanley Research, 13E = YTD annualized

Exhibit 20

GFA Started by City Tier mn Sqm
1,600

Population Growth by Tier City
12.0 Tier 1 Tier 2 Tier 3 10.0

Low Tier GFA Started
1,400

Tier 2 GFA Started Tier 1 GFA Started

1,200
8.0

1,000 1,142 800 981 1,032 1,077
6.0

600 565 400 445 369 617

720

4.0

2.0

200
122 144 172 173 172

254

260

317 228

-

61 2005

54 2006

51 2007

47 2008

41 2009

58 2010

70 2011

47 2012

57
-

2013E

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

Source: CEIC, Morgan Stanley Research, 13E = YTD annualized

Source: CEIC, Company Data, Morgan Stanley Research

Exhibit 22

Urbanization Rate by Tier City
No new policy but enforcement swings per ASP: We expect the policy backdrop to remain steady with no major adjustments to the existing property austerity measures. The property tax will likely be expanded into a few more pilot areas to cover a few more cities although it should continue to cover the newly transacted non-end use/luxury segments. The level of enforcement by local governments may vary according to the local new home sales price change with tighter implementation on strong ASP momentum and loosened execution if the local market becomes weak. The long to medium-term structure reforms, such as nationwide property tax, land and residence registration (Hukou) reforms are unlikely to be rolled out in the near term. The likelihood of further policy shock, e.g. the introduction of HPR and tighter mortgage restrictions in 2011, is low in 2014, in our view.
Urbanization Rate % 100 90 80 70 63.2 60 52.6 50 40 30 20 10 National Tier 1 Cities Tier 2 Cities Low Tier Cities 48.7 88.8

Source: CEIC, China Social Sciences Academy, Morgan Stanley Research

11

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October 25, 2013 China Property

Exhibit 23

Exhibit 25

Completed GFA Per Capita
1.40

M2 Correlated to ASP (MoM)
M2
30 28 2.0% 26

Money Supply M2: YoY Property Price Index: New Constructed: Residential (MoM)

ASP MoM
2.5%

1.20

1.00

24 22 20

MoM ASP % = 0.2% if M2 YoY Growth = 14%

1.5%

0.80

1.0%

0.60
18

0.5%

0.40 Completed GFA per Capita in Tier 1 Cities 0.20 Completed GFA per Capita in Tier 2 Cities Completed GFA per Capita in Low-Tier Cities 2001 Completed GFA per Capita in National 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

16 14

0.0%

-0.5% 12 10 Dec-03

M2 (YoY) Lead ASP (MoM) by 2M with 65% Correlation
Dec-05 Dec-07 Dec-09 Dec-11

-1.0%

Source: CEIC, Morgan Stanley Research

Source: CEIC, Morgan Stanley Research

Flat ASP in 2014: Although we expect the tail effect should boost the national new home sales price to rise further toward year-end, this will set a high base for 2014. Moreover, we expect the seasonal rise in mortgage rate and tighter mortgage availability may begin to undermine the sequential ASP momentum. Our analysis suggests that if M2 were to moderate to 14% in 2014, new home sales prices during the year would likely grow less than 5%.
Exhibit 24

Real Estate Investment Growth Remains Sluggish
Our expected slowdown in 2014 sales growth, the rise in supply in tier-one/two cities, flat growth in overall land sales and the high inventory level in the lower tier cities will continue to contain new construction and investment, in our view. Since we expect land area sold to fall marginally in 2013 and new home sales volume in 2014 to swing within mid-single-digit, we think that 2014 new construction started mainly aims to cover restocking needs and is likely to stay flat. The 2014 real estate investment in commodity residential is likely to be contained by the low sales growth and the investment-to-sales ratio of 85-90%. We expect 2014 real estate investment to grow 7% YoY to Rmb6.5 trillion.
Exhibit 26

70 City Property Prices by Tiers
170

160

Tier-1 Tier-2 Tier-3

150

140

Real Estate Investment per Sales
140%

130

120

120%

110

100%

100 Jul-05

80%

Jul-06

Jul-07

Jul-08

Jul-09

Jul-10

Jul-11

Jul-12

Jul-13
60%

Source: NBS, CEIC, Morgan Stanley Research

40% REI / Sales in Tier 1 Cities REI / Sales in Tier 2 Cities REI / Sales in Low Tier Cities National REI / Sales

20%

0% 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 YTD

Source: CEIC, Morgan Stanley Research. 13E = YTD annualized

12

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RESEARCH

October 25, 2013 China Property

Exhibit 27

National Inventory and Residential Investment
Annual Data (GFA) PUD Res. '000 sqm GFA Sold '000 sqm GFA Completed GFA Starts '000 sqm '000 sqm Undelivered '000 sqm "Inventory" Inventory Months '000 sqm Real Estate Investment RMB mn RE Inv. YoY growth Sales Value RMB mn Sales YoY sales Unsold PUD

2005 2006 2007 2008 2009 2010 2011 2012 2013E 2014E

1,277,476 1,514,987 1,864,550 2,166,714 2,508,042 3,149,426 3,884,386 4,289,640 4,764,545 5,107,660

497,945 543,921 691,038 558,865 852,944 930,516 970,303 984,680 1,181,610 1,205,242

400,045 432,475 477,672 477,497 576,944 612,157 716,923 790,430 913,740 1,045,529

551,851 644,038 787,955 798,891 924,635 1,294,679 1,460,346 1,306,950 1,388,644 1,388,644

172,324 283,771 497,136 578,503 854,503 1,172,862 1,426,241 1,620,491 1,888,362 2,048,075

1,105,153 1,231,217 1,367,414 1,588,210 1,653,539 1,976,564 2,458,145 2,669,149 2,876,183 3,059,585

27 27 24 34 23 25 30 33 29 30

1,076,819 1,361,162 1,801,025 2,208,126 2,561,874 3,403,814 4,430,843 4,937,400 6,084,351 6,516,340

22% 26% 32% 23% 16% 33% 30% 11% 23% 7%

1,498,605 1,703,801 2,532,348 2,042,406 3,815,721 4,395,333 4,861,900 5,346,700 6,736,865 7,215,182

74% 14% 49% -19% 87% 15% 11% 10% 26% 7%

Source: CEIC, Morgan Stanley Research

Aim for Market Share Gain
The stable policy and physical market demand means that market share gain is the key growth driver for developers (Exhibit 28). Given the continuous dominance of the end-user demand amid the HPR and mortgage restrictions, we believe developers are likely to maintain a portfolio with a bias toward the mass-market product to enhance swift capital cycling to boost volume growth and ROE. The better and cheaper access to funding and more efficient management should help the major listed developer continue to gain market share. We expect the top 20 developers and our coverage universe to continue to gain market share at a rate of 2ppts per annum in the near future.

Exhibit 28

Market share of the top 20 developers and MS coverage universe
Contracted Sales RMB bn 1,400 Top 20 listed Developers Top 20 listed Developers as % of National 17% MS Coverage as % of National 15% 15% 1,000 923 738 10% 600 9% 9% 8% 466 400 6% 244 639 8% 6% 4% 2% 2007 2008 2009 2010 2011 2012 YTD Sep 0% 10% 11% 10% 859 12% 14% 12% 12% 12% 20% 19% 18% 16%

1,200

800

226 200

Source: Company Data, CEIC, Morgan Stanley Research

13

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RESEARCH

October 25, 2013 China Property

17% Contracted Sales Growth in 2014
Divergence in Land banking
Country Garden, Longfor, Yuexiu and COGO are the early birds to re-leverage and re-accelerate their land banking at a rate of more than double their sales during 2012, which helped the surge in CG’s contracted sales growth in 2013 and Longfor’s successful product adjustment. We expect Yuexiu Property to lead the 2014 sellable resources growth with 36% increase to Rmb33 bn, followed by COGO’s 31% rise to Rmb34 bn.
Exhibit 29 Exhibit 30

Assets to Equity and Gearing
A/E
4.5 4.0 3.5 57% 3.0 2.7 2.5 40% 2.0 1.5 1.0 20% 36% 37% 30% 2.8 65% 3.0 53% 54% 50%

NDER Assets to Equity Net Gearing
3.7 3.5 65% 3.7 4.1 3.8 64% 3.8 61% 60% 70% 80%

New Land Acquisition as % of Sales
Land Acq. % of Sales 2011 Vol 2012 Vol YTD13 Vol 2011 Value 2012 Value YTD13 Value

0.5 2007 2008 2009 2010 1H11 2011 1H12 2012 1H13

10%

Vanke CG Longfor COLI Agile CRL COGO GZ R&F SOL Poly Shimao KWG Yuexiu

170% 211% 147% 181% 20% 316% 403% 203% 138% 306% 252% 122% 331%

142% 204% 213% 89% 189% 104% 356% 53% 52% 36% 65% 118% 365%

269% 256% 193% 149% 621% 144% 360% 574% 8% 196% 176% 185% 269%

25% 19% 25% 33% 5% 55% 41% n/a 31% n/a 31% 34% 61%

30% 21% 55% 34% 8% 18% 40% 12% 14% 19% 26% 17% 65%

80% 27% 54% 45% 71% 62% 89% 78% 1% 18% 46% 68% 179%

0%

Source: Company Data, Morgan Stanley Research

Exhibit 31

Budget vs YTD Land Banking
Rmb bn

35 30 30 25 20 15 15 10 12 10 10 23

YTD Full-year Budget

Source: Company Data, Morgan Stanley Research

11 6 6 3 3 7 3

Different pace of land bank replenishment: Our coverage universe shows an increasing divergence in their land banking and balance sheet management. The two big cap SOE developers, i.e. COLI and CR Land, have remained relatively conservative and slow in replenishing their land banks, which contains well within their original budget and less than 1.5x of their sales. Sino Ocean continued to focus on the repairing and restructuring of its capital structure but continues to be net land bank depletion. However, Agile, R&F and Vanke have raised their land bank replenishment ratio to well over 2x. Shimao has substantially increased its spending on land purchase, which may triple its original budget.

5 Shimao

3

Source: Company Data, Morgan Stanley Research

14% growth in 2014 sellable resources: We forecast our coverage universe’s 2014 sellable resources to grow 14% YoY to Rmb1.3 trn. However, it ranges from Sino Ocean’s 5% growth to Yuexiu’s 36% increase. Moreover, the split of the sellable resources between new launches, which usually have a higher sell-through rate, and inventory is also spread along a wide spectrum. We estimate that inventory should consist of 25% or less of Vanke, Shimao, CG and COLI’s 2014 sellable resources while R&F, Sino Ocean, Poly and Longfor’s should account for over 40%.

Longfor

Yuexiu

COGO

COLI

Agile

Poly

14

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

67% sell-through rate, 17% contracted sales growth: Our base case scenario assumes a stable policy, economic and credit backdrop with new home sales price to moderate to 0-5% growth, which should underpin a stable sell-through rate. Moreover, since new launches, which usually enjoy a higher

sell-through rate, account for 70% of our coverage universe’s 2014 sellable resources, we expect their average sell-through rate to edge up 2ppts to 67% and 2014 contracted sales to grow 17% YoY to Rmb873 bn.

Exhibit 32

2014E Contracted Sales forecasts
2013E Sell Through AFS (RMB bn) rate 2013E 2013E End-2013E 2014E New Contract Sales Inventory Launches (RMB bn) (RMB bn) (RMB bn) 2014E Total AFS (RMB bn) AFS 14E 2014E Inventory sell-through rate YoY 2014E 2014E 2014E 2014E Effective New launches Sell-through sell-through Contract Sales rate rate YoY (RMB bn)

Agile COLI CR Land CG KWG Longfor GZ R&F SOL Shimao Vanke COGO Poly HK Yuexiu Average

71 160 97 122 27 88 86 73 92 228 26 50 25 1,119

55% 73% 68% 71% 60% 54% 48% 53% 72% 76% 58% 54% 65% 67%

39 116 67 86 16 48 41 38 66 173 15 27 16 748

32 44 31 35 11 40 45 34 26 55 11 23 9 388

52 135 74 105 21 58 54 42 84 212 23 32 25 892

84 179 105 140 32 98 99 77 110 267 34 55 33 1,279

18% 11% 8% 15% 19% 12% 15% 5% 20% 17% 31% 10% 36% 14%

42% 52% 52% 43% 46% 44% 39% 40% 52% 41% 41% 41% 25%

64% 78% 79% 86% 68% 66% 58% 60% 77% 87% 62% 62% 75%

47 129 74 106 20 56 49 39 78 207 19 29 21 873

19% 11% 12% 23% 22% 18% 18% 3% 19% 20% 24% 9% 30% 17%

56% 72% 71% 76% 61% 57% 49% 51% 71% 77% 55% 53% 62% 67%

Source: Company Data, Morgan Stanley Research (E) estimates

Exhibit 33

2014E Cash Flow Estimates
CRL COLI Longfor Agile CG Poly SOL COGO Shimao GZ R&F KWG Vanke Yuexiu

Contracted Sales 14E Cash Collection Ratio Cash inflow from sales Other income Total Cash inflows 14E Land Premium due 13E Construction capex SG&A Taxes Interest expenses Dividends Total Cash outflows 14E Net Cash flows (14E) Land Bank Replenishment (14E) Free Cash Flows
Source: Morgan Stanley Research estimates

74.5 95% 71 4.5 75 (8.7) (34.0) (4.8) (12.0) (2.0) (3.3) (64.8) 10.4 (20.2) (9.7)

128.6 90% 116 0 116 (15.0) (50.0) (2.9) (11.3) (2.2) (3.6) (85.0) 31.1 (37.8) (6.6)

56.3 90% 51 1 51 (5.0) (21.5) (3.1) (7.7) (3.3) (1.2) (41.7) 9.6 (15.2) (5.6)

46.9 79% 37 1 38 (2.0) (19.4) (2.7) (7.5) (3.1) (1.5) (36.2) 2.2 (6.8) (4.6)

106.1 95% 101 101 (47.2) (5.0) (12.1) (4.5) (2.9) (71.6) 29.2 (10.4) 18.7

29.2 95% 28 1 28 (15.0) (2.2) (3.6) (3.6) (0.5) (24.8) 3.6 (6.4) (2.8)

39.4 95% 37 37 (16.9) (2.3) (6.5) (2.8) (0.8) (29.4) 8.0 (10.0) (2.0)

18.6 85% 16 0 16 (10.4) (0.7) (1.9) (0.4) (0.1) (13.6) 2.3 (4.7) (2.3)

78.2 83% 65 65 (4.7) (33.7) (3.6) (4.2) (3.8) (2.3) (52.3) 12.6 (20.5) (7.9)

48.6 90% 44 44 (6.0) (17.2) (4.7) (5.3) (4.3) (2.7) (40.2) 3.5 (6.4) (2.9)

19.6 85% 16.7 0.6 17 (8.9) (1.5) (3.9) (2.4) (1.0)

206.7 90% 186 1.8 188 (8.0) (73.5) (11.0) (7.6) (8.1) (2.3)

20.7 92% 19.1 0.5 20 (10.9) (3.4) (3.0) (2.0) (0.5) (19.8) (0.3) (9.2) (9.5)

(17.6) (110.5) (0.4) (8.1) (8.5) 77 (44.6) 32.8

15

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RESEARCH

October 25, 2013 China Property

The out- and underperformers: We expect Yuexiu, COGO, CG, KWG and Vanke to achieve over 20% contracted sales growth in 2014 and lead their peers. However, since the market has been expecting COGO to record over 30% sales CAGR, if the company were to achieve our forecast of 24% growth, it would still be a disappointment. We forecast Sino Ocean, Poly, COLI and CR Land’s 2014 contracted sales to lag behind with 3%-12% growth under our base case scenario, which is mainly undermined by the slow sellable resources growth. Sino Ocean and Poly will also suffer from the low sell-through rate of its large inventory, which should account for over 40% of their respective 2014 sellable resources.
Exhibit 34

Inventory months carried forward into 2014
14.0

Inventory Months
12 11 10 11 12

12.0

end-2013E end-2012

10.0 8 8.0 6 6.0 4 5 4 6 6 7

What if policy and credit are more relaxed? Although we view this as a low probability scenario, if the property policy and credit environments become more accommodative, e.g. a broad-based relaxation in the enforcement of the home purchase (HPR) and mortgage restrictions, developers’ sell-through rate will be enhanced, especially those with high exposure in the HPR top-tier cities and ample inventory in the high-end and resort segments. We believe that Agile, KWG, Longfor, R&F and Yuexiu should be the major beneficiaries given their below-average sell-through but above-average 2014 contracted sales growth under our base case. Sino Ocean and Poly’s sales, which substantially lag behind their peers in our 2014 contracted sales growth forecasts, may be able to narrow the gap in sales growth with their peers. However, if ASP were to exceed our forecast of 0-5% rise, our earnings and NAV sensitivity tables (Exhibit 37) suggest that Vanke, Yuexiu, Sino Ocean and Poly should enjoy the higher delta in 2014 net profit, while Longfor and Yuexiu have the highest NAV sensitivity.
Exhibit 36

1ppt rise in 2014 sell-through rate
90% 80% 70% 60%
Poly HK

4.0

77%

2013E sell-through 2014E sell-through 76% 74% 71% 69% 62% 61% 57% 55% 51% 52% 54% 52%

2.0

Yuexiu COLI COGO Longfor Vanke Shimao CR Land KWG Agile R&F CG SOL

50% 40% 30% 20% 10% 0% Vanke CG COLI Shimao CRL Yuexiu KWG Longfor COGO Poly R&F Agile SOL

Source: Company Data, Morgan Stanley Research (E) estimates

Exhibit 35

Carried-forward inventory (as % of sellable resources) in 2014
Inventory / Sellable Resources 60% 2013E 2014E 41% 42% 43% 45%

Source: Morgan Stanley Research estimates

50%

40% 40% 31% 30% 21% 20% 23% 24% 26% 31% 33% 34%

10%

In our view, the already high base case sell-through rates of over 70% for COLI, CR Land, Vanke, CG and Shimao should contain their volume improvement even if the physical market backdrop relaxes. The earnings and NAV sensitivities of COLI, CR Land and CG are also shown below. Thus, an across-the-board improvement in ASP may provide a relatively low enhancement to their profit and NAV.
Poly HK Longfor SOL R&F

0% Yuexiu COLI Shimao COGO Vanke CR Land KWG Agile CG

Source: Morgan Stanley Research (E) estimates

16

MORGAN

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RESEARCH

October 25, 2013 China Property

…and if the backdrop deteriorates? We believe that if the property industry policy and credit environments become tighter, other than lower contracted sales, the market should focus on the possible cash flow and liquidity risks. We forecast Vanke, COLI, CR Land and CG to achieve reasonable levels of positive free cash flow in 2014, which should offer more cushion against any adverse developments. The SOE status of

COLI and CR Land, and the investment grade credit rating of Vanke will provide extra comfort to investors. The cash flow of Yuexiu, KWG, Agile, Sino Ocean, Shimao and COGO should be more vulnerable to the deterioration in the market backdrop. However, the SOE background of Yuexiu and COGO may help mitigate their liquidity risk in a tough market.

Exhibit 37

2014 NAV and EPS Sensitivity to ASP in 2104E SOL Yuexiu Poly Shimao R&F COGO Longfor KWG Agile COLI CG CRL Vanke

Forward NAV EPS14E EPS15E Net Profit 14E (mn) Net Profit 15E (mn)

0.7% 4.2% 4.5% 4.2% 4.5%

1.4% 4.5% 4.0% 4.5% 4.0%

1.2% 4.4% 4.8% 4.4% 4.8%

1.2% 2.7% 2.8% 2.7% 2.8%

1.1% 2.3% 2.7% 2.3% 2.7%

1.1% 4.0% 1.5% 4.0% 1.5%

1.4% 3.9% 6.3% 3.9% 6.3%

1.3% 2.8% 3.1% 2.8% 3.1%

1.3% 2.6% 2.9% 2.6% 2.9%

0.8% 2.7% 2.0% 2.7% 2.0%

1.3% 2.7% 3.0% 2.7% 3.0%

0.8% 3.5% 3.5% 3.5% 3.5%

1.3% 4.5% 3.5% 4.5% 3.5%

Source: Morgan Stanley Research estimates

17

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Short-term Momentum in 4Q13
Consensus EPS/TP Fine-tuned
1H13 core net profit rises 24%: Our coverage universe recorded an average of 24% YoY growth in 1H13 underlying net profit with the median at 26%, which was largely in-line with consensus and our expectations. SOHO China recorded the strongest 1H13 underlying net profit growth, up 130% YoY, followed by Shimao’s 61% YoY rise, while Longfor and Agile recorded 18% and 2% YoY declines, respectively.
Exhibit 38

GPM dropped 7.8ppts: Given the weak physical property market and the fall in ASP during 2011/2H2012, pre-LAT gross profit margin fell 7.8ppts to 34.9% although this was widely anticipated. The lower SG&A ratio due to the improved economies of scale and lower land appreciation tax (LAT) helped contain the decline in core net margin to 1.3ppts to 16%. Together with the 36% rise in recognized revenue, our coverage universe’s 1H13 pre-LAT gross profit grew 12% YoY, although it is only 1/3 of the top line’s magnitude and half of the underlying net profit’s. The change in product mix led Yuexiu Property’s GPM to drop 19.7ppts, which was anticipated by us and the market, to 40.9%, although its margins remain one of the highest in the sector, following SOHO China’s 54.1%. CR Land’s 16.2ppts YoY drop in GPM to 31.4% was worse than expected and disappointing, while Longfor’s 14.2ppts YoY drop was consistent with management guidance. Shimao is one of the two developers to record a YoY rise in GPM, improving 1.1ppts to 34.4% as completed stock accounted for a large portion of its low ASP sales in 2011/1H12, which have been recognized and undermined its 2012 margins. The 16% rise in 1H13 ASP to Rmb13,093 from the 2012 level of Rmb11,278 helped enhance its 1H13 GPM.

1H13 Underlying Profit Growth
YoY % 140% 120% 100% 80% 60% 40% 20% 0% -2% -20% -40% -18% 8% 16% 31% 35% 61% 48% 49% 26% 26% 27% 22% 24% 25% 130%

Median

Yuexiu

Longfor

GZ R&F

COGO

Total

KWG

SOL

CG

Poly

CRL

Shimao

Source: Company Data, Morgan Stanley Research

Exhibit 39

Vanke

Soho

COLI

Agile

Gross Margin
Gross Margin 70% 1H12 2H12
60%

Exhibit 40
YoY Change 10%

Contracted ASP vs Gross Margin
RMB/sqm 16,000
14,000

Contracted ASP 1H12 Contracted ASP 1H13 Gross Margin 1H13

Contracted ASP 2H12 Gross Margin 1H12
70%

1H13 YoY Change

5%

60%

50%

0%

12,000 10,000 8,000 6,000 4,000 50%

40%

-5%

30%

-10%

40%

20%

-15%

30%

10%

-20% 2,000

20%

0% COGO CRL KWG Poly SOL CG COLI Shimao Yuexiu Longfor Vanke Soho Agile R&F Avg

-25% COGO CRL KWG Shimao Vanke GZ R&F Yuexiu Total COLI Agile Longfor Poly SOL CG 10%

Source: Company Data, Morgan Stanley Research Source: Company Data, Morgan Stanley Research

18

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STANLEY

RESEARCH

October 25, 2013 China Property

EPS estimates nudged up: As discussed earlier, we have raised our coverage universe’s 2013e recognized sales by 1% and core EPS by 1%. Consensus anticipates higher-than-expected top line in 2013/2014e to compensate for the lower-than-expected margins, to bring core 2013/2014 EPS forecasts flat. However, the lower GPM still undermines NAV and brings our PTs down marginally by ~2%. Shimao has had the biggest upward revision to consensus 2013/2014 core EPS of an average of 10%, followed by CG’s 4% while Yuexiu Property, Agile and COGO’s saw the biggest cuts of 3%-11%. Consensus’ PT adjustments are consistent with the core EPS changes at both ends of the spectrum with Shimao and CG’s PTs revised up by 10% and 7%, respectively, while that of Yuexiu Property has been revised down by 13% and COGO’s cut by 11%, although it is mixed for those in between.
Exhibit 41

Weak correlation between consensus EPS/PT change and share prices: However, the post-results share price performance only shows a weak correlation with consensus EPS/PT adjustments. KWG has been the best performing stock post-interim, outperforming the index by 16% since its interim announcement, followed by Shimao’s 8%. However, Yuexiu and COGO, which are two of the three stocks with over 10% cut to consensus PT, still outperformed the index by 4% and 5%, respectively. Only Sino Ocean, whose consensus PT was cut by 11%, underperformed the index by 4%.
Exhibit 43

Consensus Post-Interim PT Change vs Stock Relative Performance
20%

15%

Post-Results Share Price Rel. Perf.

Consensus Net Profit
Net Profit (Indexed) 120 115 110 105 100 95 90 85 2013E Consensus Net Profit 2014E Consensus Net Profit 120 115 110 105 100 95 90

KWG

10% COGO 5% Yuexiu 0% SOL -5% Agile Longfor R&F Poly COLI CRL Vanke

Shimao

Soho Evergrande

CG

-10% -15%

-10%

-5%

0% Consensus Target Change

5%

10%

15%

Source: Bloomberg Estimates, Datastream, Company Data, Morgan Stanley Research
85

80 80 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13

Exhibit 44

Source: Company Data, IBES, Morgan Stanley Research

Exhibit 42

Consensus 13E Post-Interim EPS % Change vs Post-Results Stock Relative Performance
20%

Consensus EPS Post-Interim Changes
15%
Post-Results Share Price Rel. Perf.

10% 8% 5% 0% -5% -10% -15% COLI Poly SOL 5% 4% 3% 2% 2% 2% 2%

FY13 FY14

15%

KWG

10% COGO 5% Yuexiu 0% Agile R&F Poly -5% CRL Vanke Evergrande Longfor COLISOL CG Soho

Shimao

1% 0% 0% -1% -2% -4%

-13% Yuexiu Prop SOHO Vanke Average Shimao Longfor COGO KWG Agile
-10% -15%

R&F

CRL

CG

-10%

-5%

0%

5%

10%

Consensus 13E EPS Change

Source: Bloomberg Estimates, Datastream, Company Data, Morgan Stanley Research

Source: Bloomberg Estimates, Company Data, Morgan Stanley Research

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October 25, 2013 China Property

Slower 4Q13 Contracted Sales Momentum
Contracted sales still driving share prices: Investors have still been focusing on and rewarding contracted sales growth, in our view. Exhibit 46 shows that Shimao and Country Garden, which achieved the highest 12-month rolling contracted sales growth of 38% YoY and 81% YoY, respectively, have been the two best performing stocks in our coverage universe, rising 28% and 25% YTD.

Exhibit 45

Share Price Performance vs 12M Sales Growth
90% 80% 70% 60% YoY Share Perf 50% 40% 30% 20% 10% 0% -10% -20% -40% Agile Yuexiu R&F COGO SOL CRL COLI KWG Poly Vanke Shimao CG

Policy noises may disrupt sentiment: However, the robust demand and continuous rise in ASP, especially in the top-tier cities, will raise policy risk. Although we do not anticipate the central government to roll out another round of nationwide property austerity measures, local governments may be under increasing pressure to tighten the enforcement of the existing ones, which will undermine home buyers’ sentiment. For example, Zhenzhou has raised the age of eligible homebuyers to 21 from 18, while Shenzhen’s executive vice mayor has urged local officials to strictly implement the property tightening measures. Some Guangzhou developers also noted that the ASP and pre-sale permit control in Guangzhou have been tightened in the past month.
Exhibit 46

70 City Property Prices Breakdown by Tier
170

160

Tier-1 Tier-2 Tier-3

150

Longfor

140

130

-20%

0%

20%

40%

60%

80%

100%

120

Contracted Sales 12M Rolling YoY

110

Source: Datastream, Company Data, Morgan Stanley Research
100 Jul-05 Jul-06 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 Jul-13

Source: NBS, CEIC, Morgan Stanley Research

Exhibit 47

Cities with ASP >10% YoY in Sep vs Company GAV %
By GAV Rank City New Res ASP YoY Yuexiu By GAV KWG By GAV R&F By GAV CRL By GAV Vanke By GAV COLI By GAV SOL By GAV Shimao By GAV Agile By GAV Poly By GAV Longfor By GAV COGO By GAV

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15

Beijing Shanghai Guangzhou Shenzhen Xiamen Nanjing Zhengzhou Shenyang Fuzhou Nanchong Taiyuan Changsha Yueyang Wuhan Urumqi Total

20.6% 20.4% 20.2% 20.1% 16.5% 14.5% 12.7% 12.7% 12.3% 11.5% 11.3% 10.8% 10.8% 10.5% 10.0%

0% 0% 57% 0% 0% 0% 0% 10% 0% 0% 0% 0% 0% 7% 0% 74%

4% 14% 39% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 57%

11% 4% 21% 0% 0% 3% 0% 0% 0% 0% 3% 0% 0% 0% 0% 43%

13% 6% 0% 10% 1% 1% 0% 6% 1% 0% 2% 3% 0% 2% 0% 43%

6% 5% 4% 4% 2% 2% 1% 4% 2% 0% 1% 3% 0% 6% 0% 41%

8% 5% 4% 2% 1% 5% 0% 10% 0% 0% 0% 2% 0% 1% 0% 38%

25% 5% 0% 1% 0% 0% 0% 2% 0% 0% 0% 0% 0% 1% 0% 34%

5% 3% 2% 0% 4% 4% 0% 4% 4% 0% 0% 1% 0% 6% 0% 33%

0% 3% 15% 0% 0% 7% 0% 2% 0% 0% 0% 0% 0% 0% 0% 27%

0% 12% 5% 3% 0% 0% 0% 0% 0% 0% 0% 0% 0% 6% 0% 26%

9% 5% 0% 0% 1% 0% 0% 6% 0% 0% 0% 1% 0% 0% 0% 21%

16% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 16%

Source: CEIC, Company Data, Morgan Stanley Research

20

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October 25, 2013 China Property

Wider mortgage rate and slower drawdown: We expect mortgage approval and drawdown to record seasonal slowdown in 4Q13 amid a relatively stable M2 and loan growth and the exhausted annual mortgage quota, which partly attributes to the possible widening of mortgage rates. This will undermine developer’s 2H13 cash collection and homebuyers may move to the sidelines. However, this will only become more of a concern if the uptrend in mortgage rates prevails in early 2014 amid the availability of the new loan quota, which will threaten the overall new home sales outlook in 2014. We currently expect mortgage rates to remain flat for the coming year. 4Q13 short-term momentum plays: YTD September new home sales have been robust, with growth of 34% YoY to Rmb4.5 bn in value and 24% to 754mn sqm in volume, which is matched by our coverage universe’s 34% YoY growth. However, management’s full-year sales guidance and our estimates suggest that our coverage universe’s 4Q13 sales may further moderate to 19% YoY growth, or fall 3% QoQ, which may contain the share price performance of our coverage universe. Agile, Shimao, KWG, R&F and COGO may continue to achieve positive sequential sales growth in 4Q13 while CG, Poly, Yuexiu, CRL and COLI may record over 5% QoQ decline.
Exhibit 48

Exhibit 49

Contracted Sales YTD YoY (Sept)
140% 120% 100% 80% 60% 40% 20% 0% Shimao Sino-Ocean CR Land Vanke Yuexiu Prop
-14% -23% COGO CG Vanke GZ R&F Shimao KWG Agile Longfor Yuexiu SOL CRL Total COLI

119%

36% 35% 35% 33%

25% 24% 23% 23% 22% 19%

13% 12%

Source: Company Data, Morgan Stanley Research

Exhibit 50

Contracted Sales Estimates: HoH to 2H13E
HoH to 2H13E 70% 60% 50% 40% 30% 20% 10% 0% -10% -20% -30% 21% 16% 14% 13% 6% 6% 2% 0% -3% 56% 44%

China Property: Contract Sales Run-rate
2012 Rmb bn Sales Mgt Target 2013 YTD 2013E Sales 2013 YTD 2013 Sales Run-Rate YTD YoY

Up to Sep2013 R&F Sino-Ocean Vanke Shimao Yuexiu* COLI* KWG Evergrande+ Agile CR Land * Poly Prop COGO Longfor Country Gdn * MS target Average - Up to Sep 2013

32.2 31.1 141.2 46.1 12.3 92.9 12.2 92.3 33.1 52.2 23.4 11.3 40.1 47.6

42.0 35.0 165.0 66.0 16.0 116.3 16.0 100.0 42.0 66.6 26.0 14.0 46.0 62.0

29.5 28.0 128.5 48.1 12.5 91.6 11.9 74.7 25.5 50.7 21.1 10.8 35.3 64.7

70% 80% 78% 73% 78% 79% 75% 75% 61% 76% 81% 77% 77% 104%

24% 19% 33% 35% 13% 22% 36% 27% 23% 35% 23% 12% 25% 119%

Source: Company Data, Morgan Stanley Research

Exhibit 51

Contracted Sales Estimates: QoQ to 4Q13E
4Q QoQ Chg 60% 50% 50% 40% 30% 20% 10% 0% -10% -20% 13% 7% 6% 6% 0% -2% -3% -5% -6%

Poly Prop

Longfor

-10% -12%

78%

32%

-30% -40% GZ R&F COGO CRL Shimao COLI Yuexiu Poly SOL KWG Agile Vanke Longfor -31% CG

Source: Company Data, Morgan Stanley Research, #Revised target +Consensus revenue estimates used, where applicable. * Morgan Stanley target

Source: Company Data, Morgan Stanley Research

COGO

R&F

COLI

Agile

CG

KWG

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October 25, 2013 China Property

Our Valuation Methodology: Weighted Discount to Forward NAV
The NAV Calculation We add the revaluation surplus to shareholders’ equity (book value). The revaluation surplus is deduced by subtracting the book cost of all property assets from our estimated market value of those assets. Current NAV Estimates This consists of the DCF of all existing projects based on the company’s existing land bank using prevailing prices, where available, or our estimated current achievable prices for long-dated projects. We also deduct from our current NAV estimates all the relevant corporate tax charges as well as land appreciation tax (LAT). On the cost side, we assume construction costs according to the product mix offered at the projects. We also assume a fixed level of SG&A cost, the percentage of which may vary from company to company. We assume the construction cycle of a project to be around three years, and most of the projects to begin pre-sales 1-2 years before completion. Forward NAV Estimates This involves rolling forward the DCF by 12 months. Our forward price assumptions are stable property prices across the country for 2013. We do not include any long-term price appreciation factors or forward acquisition assumptions in our forward NAV calculation. We set our price targets by applying a weighted average target discount to our forward NAV estimates. Weighted average target discount to NAV We are introducing a weighted average approach to our target discount to NAV, to reflect the non-stock specific macro factors that could swing the sector’s valuations. We believe macro factors such as fiscal and monetary policies are increasingly important swing factors that could widen/narrow the sector’s discount to NAV. With the presence of Global Monetary Easing, US Fed Tapering, China property policy austerity measures, we believe the sector is increasingly being affected by such macro factors. We therefore apply a 60%/20%/20% probability to our Base/Bear/Bull scenarios to derive our weighted average target discount to NAV, in-line with the probabilities adopted by our China economics team. Base Case discount to NAV We use a ~35% discount to forward NAV as a benchmark for the group. This is roughly equivalent to the ten-year historical average discount to NAV. We use the ten-year period as a reference point, as it was not until 2003 that we began to see the emergence of Chinese property as an industry group from an equities standpoint. We make adjustments to our base case discount to forward NAV for each individual company relative to the valuation benchmark, based on a number of factors: 1) market capitalization, 2) execution track record, 3) geographical exposure, 4) management quality, and 5) financial leverage (all based on a scale of 1-5, with 1 being best). Our company scorecard, which indicates how we allocate the valuation variance, is shown in Exhibit 55. Bear Case Discount to NAV For each individual stock, we adopt a bear case discount to NAVs by benchmarking against the fifth quintile trough valuations reached during previous down-cycles. The bear case discount to NAV for our coverage universe is at 48% on average. Bull Case Discount to NAV For each individual stock, we adopt a bull case discount to NAVs by benchmarking against the first quintile peak valuations reached during previous up-cycles. The bull case discount to NAV for our coverage universe is at 13% on average.
Exhibit 52

China Property: Historical Discount to NAV
Premium 60% China - Historical Disc. to NAV (Market Cap Weighted) Peak at 44%

40%

20%

0% +1SD: -7% -20% Current: 24% China Property Average: -30% -1SD: 53% Trough at 65% Jun-10 Jun-11 Jun-12 Jun-13

-40%

-60% Discount -80% Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Trough at 64% Jun-08 Jun-09

Source: Company data, FactSet, Morgan Stanley Research

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October 25, 2013 China Property

Exhibit 53

China Property Developers: Stock Rating, Forward NAVs and Target Discounts
Fwd Rating NAV Target Price Target Upside

Yuexiu Prop. Vanke A Yuexiu REIT Agile KWG Longfor Shimao CG CRL Soho China GZ R&F COLI Poly Property COGO Sino Ocean
Source: Company Data, Morgan Stanley Research

OW OW OW OW OW OW OW OW EW EW EW EW UW UW UW

5.7 16.2 NA 25.7 15.3 20.7 35.4 8.5 28.8 10.0 28.3 27.3 11.9 12.1 10.3

3.30 13.00 5.00 12.00 6.10 15.90 23.00 6.20 23.20 6.50 12.60 22.50 4.30 8.00 4.10

53% 42% 31% 30% 21% 20% 15% 12% 2% -5% -6% -8% -11% -13% -15%

Exhibit 54

Base Case Discount to NAV: Scorecard
Mkt Name Cap SOE Prem Execution Record Geog. Exposure Mgt. Quality Liquidity Risk Financial Leverage Total Score Overall Rank Target Dis (Prem.)

COLI CRL Vanke A Longfor CG COGO Shimao Soho China Yuexiu Prop. GZ R&F Agile Sino Ocean KWG Poly Property
Source: Morgan Stanley Research

5 5 5 4 4 2 4 3 2 3 3 2 1 1

5 5 4 1 1 4 1 1 4 1 1 3 1 4

4 4 4 3 4 2 2 2 1 2 2 2 1 1

5 5 5 3 3 1 4 2 2 3 3 2 1 1

4 2 5 4 3 3 3 3 2 3 3 1 4 2

4 5 4 3 1 4 2 3 3 3 2 1 2 2

4 5 4 3 3 3 2 4 3 1 1 3 3 1

31 31 31 21 19 19 18 18 17 16 15 14 13 12

1 2 3 4 5 6 7 8 9 10 11 12 13 14

20% 20% 20% 25% 25% 35% 35% 35% 40% 55% 55% 60% 60% 65%

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October 25, 2013 China Property

Exhibit 55

Discount to NAV: Bull-Bear-Base Scenarios
Quartile Target. Disc. Range

Developers GZ R&F CRL KWG Sino Ocean COLI CG Agile Shimao Longfor Vanke A Poly Property COGO Soho China Yuexiu Prop. Yuexiu REIT Weighted avg
Source: Morgan Stanley Research

Prices 13.46 22.75 5.04 4.85 24.30 5.54 9.25 19.98 13.24 9.17 4.84 9.23 6.85 2.16 3.83

Base -55% -20% -60% -60% -20% -25% -55% -35% -25% -20% -65% -35% -35% -40% NA -29%

Bear -75% -40% -75% -75% -35% -40% -67% -61% -40% -50% -75% -45% -50% -74% NA -48%

Bull -46% -5% -50% -50% 0% -10% -40% -20% -7% 0% -55% -25% -25% -20% NA -13%

24

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October 25, 2013 China Property

Agile: Financial Summary
RMB million; Years Ending December 31

Balance Sheet
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Fixed assets Fixed assets 8,822 10,813 12,266 13,060 Land Use Rights / PUD 16,320 17,601 24,122 27,706 Intangible assets 19 61 64 68 Deferred income tax assets 173 280 280 280 Others 308 221 221 221 Current Assets --Prepayment for Land 7,994 2,949 3,244 3,569 Properties under development 32,292 36,264 40,139 46,655 Completed prop held for sale 3,638 7,936 11,140 12,331 Trade and other receivables 4,885 5,922 6,643 7,711 Restricted cash 2,644 3,886 4,149 5,184 Cash and cash equivalent 4,684 5,804 9,483 5,798 Sub-Total 56,137 62,761 74,798 81,248 Total Assets FINANCED BY: Current Liabs Borrowings Advances from customers Trade & other payables Current income tax liabilities Sub-Total L/T Borrowings Deferred income tax liabilities Minority interest Other LT Liab Share capital Reserves Shareholders' Equity

Income Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

14,013 30,224 71 280 221 3,926 51,136 14,332 8,658 7,430 11,172 96,655

81,779 91,737 111,751 122,583 141,464

7,660 6,193 4,857 4,634 13,512 9,815 10,480 13,094 11,650 14,175 17,363 18,668 8,418 9,856 11,239 12,666 41,240 40,039 43,938 49,062

7,590 18,769 20,870 14,178 61,406

Property Sales 22,466 29,328 31,910 36,864 41,433 Property management 339 418 460 506 557 Turnover 22,945 30,074 32,897 38,240 42,974 Cost of sales (10,590) (17,632) (19,815) (24,047) (27,394) Gross Profit 12,354 12,442 13,082 14,193 15,580 Other gains 200 133 140 147 154 Selling and marketing costs (835) (980) (1,117) (1,290) (1,450) Other operating Exp. (982) (1,341) (1,283) (1,522) (1,733) Operating Profit 10,585 10,286 10,821 11,527 12,551 Finance costs 645 (46) 87 100 116 Share of results of JCE 121 (87) 153 322 394 Profit before Taxation 11,350 10,153 11,061 11,950 13,060 Income tax expenses (6,390) (5,384) (4,839) (5,128) (5,533) Minority Interests (1,128) (146) (978) (718) (1,010) Net Profit 4,105 5,000 5,244 6,104 6,517 Underlying Net Profit 4,035 4,868 4,870 5,729 6,143 MW EPS 1.16 1.41 1.41 1.66 1.78

Cash Flow Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

14,372 21,373 28,711 29,667 30,970 1,550 1,753 1,753 1,753 1,753 2,082 2,298 2,787 3,146 3,651 860 661 661 661 661 389 389 389 389 389 21,285 25,224 28,974 33,367 38,095 21,675 25,613 33,901 38,294 43,022

Profit after Tax 5,234 5,147 6,222 6,822 Depreciation & Amortization 68 165 97 117 Other Non-Cash Adj. 708 (821) (767) (1,118) Changes In Work Cap (9,521) (4,138) (8,968) (7,358) Cash Fr Operations (3,511) 352 (3,416) (1,538) Disposal Of Fixed Assets 0 0 0 Cap. Expenditures/Prop Add (1,155) (1,812) (1,453) Decrease In Investments 0 0 0 Increase In Investments 0 0 0 Other Investing Activities 279 (379) 87 Cash Fr Investing Activities (876) (2,191) (1,366) 0 (794) 0 0 100 (694)

7,527 141 (1,301) (1,981) 4,387 0 (952) 0 0 116 (837) (1,536) 2,955 1,303 0 0 (880) 1,843

Key Ratios
Ratio Analysis 2011 2012 2013E 2014E 2015E

Net Debt to Equity Asset to Equity ROE Asset Turnover Asset Turnover (Contract Sales) Gross Margins (Pre-LAT) Gross Margin (Post-LAT) Operating Margin Net Margin

80% 85% 377% 358% 19% 19% 28% 33% 29% 35% 54% 41% 36% 31% 46% 34% 18% 16%

71% 330% 14% 29% 34% 40% 31% 33% 15%

74% 64% 320% 329% 15% 14% 31% 30% 38% 39% 37% 36% 30% 29% 30% 29% 15% 14%

Dividends Paid (1,809) (1,232) (1,217) (1,432) Inc(Dec) In St Borrowings 0 0 (1,336) (223) Increase In Lt Borrowings 4,556 12,809 7,338 955 Increase In Capital Stocks 0 0 0 0 Decrease In Capital Stocks 0 0 0 0 Other Financing Activities (5) (8,651) 3,675 (733) Cash Fr Financing Activities 2,741 2,926 8,460 (1,433)
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

25

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October 25, 2013 China Property

Risk-Reward Snapshot: Agile Property (3383.HK, HK$9.25, OW, PT HK$12.00)
Risk-Reward View: Debut launches to unlock deep valuations
HK$25

Why Overweight
 Having acquired ~8m sqm of new projects in 2013, we expect Agile’s upcoming debut launches to drive ~20% YoY growth in sellable resources and contracted sales growth in 2014.  Successful project launches, in particularly their three Yunnan projects, could reaccelerate their asset turnover and unlock the deep value.  Despite the recent rally, the stock is still trading at inexpensive valuations of 65% discount to our forward NAV and 5.5x 2013e P/E. Agile offers 30% upside potential to our revised TP.

20

HK$19.48 (+111%)

15 HK$12.00 (+30%) 10 HK$ 9.25

HK$6.00 (-35%) 5

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~3383.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$12.00

Our target price is based on probability-weighted bull (20%), bear (20%) and base (60%) case scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Key Value Drivers
 Property prices in Guangdong, YRD and Hainan.  Property sales at Hainan Clearwater Bay, and Agile’s projects in Guangzhou, Nanjing and Zhongshan.

Bull Case HK$19.48

40% discount to bull-case forward NAV

Base Case HK$11.56

55% discount to base-case forward NAV 67% discount to bear-case forward NAV

Potential Catalysts
 Signs of further strengthening in property sales at Hainan Clearwater Bay project.  Policy relaxation by the government.

Bear Case HK$6.00

Key Risks
 Weaker-than-expected cash collection from contracted sales.  New policy tightening measures announced, weighing on property sales volumes.  Weaker-than-expected property demand in Zhongshan, Guangdong and Hainan.

Source: Morgan Stanley Research, Thomson Reuters

26

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October 25, 2013 China Property

China Vanke: Financial Summary
RMB million, Years Ending 31 December

Balance Sheet
2011 2012 2013E 2014E 2015E

Non Current Assets Property, plant & equipment Long-term investments Long-term deferred assets Current Assets Inventories Receivables & prepay. Cash and cash equiv. Sub-Total Total Assets FINANCED BY: Current Liabilities Loans and borrowings Payables & accrued exp. Advances from customers Total Current Liabilities Long-term borrowings Long-term payables Deferred tax credit Share Capital Paid-in capital and reserves Retained earnings Shareholders' equity Minority interest

Income Statement
2011 2012 2013E 2014E 2015E

3,869 6,426 3,267

5,043 7,040 3,944

5,480 7,292 4,339

6,003 7,940 4,772

6,609 8,479 5,250

208,335 255,164 314,256 390,225 497,086 40,072 55,318 78,523 92,763 103,316 34,240 52,292 43,585 47,265 66,349 282,647 362,774 436,364 530,254 666,751 296,208 378,802 453,474 548,970 687,089

Property sales Property management Total Turnover Business tax Net Revenue

70,647 101,580 135,992 160,711 178,919 1,136 1,537 1,767 2,032 2,337 71,783 103,116 137,759 162,743 181,256 (3,886) (5,587) (7,480) (8,839) (9,841) 67,897 97,529 130,279 153,904 171,415

23,587 35,583 25,578 25,578 25,578 66,035 93,226 114,345 137,288 152,298 111,102 131,024 157,821 198,750 288,187 200,724 259,834 297,744 361,616 466,063 26,822 50 779 10,995 23,038 18,935 52,968 14,865 36,036 60 734 10,995 26,142 26,688 63,825 18,313 56,036 60 807 10,995 26,142 39,415 76,552 22,275 66,036 76,036 60 60 888 977 10,995 10,995 26,142 26,142 54,698 72,768 91,835 109,905 28,535 34,048

Cost of property sales (42,626) (64,568) (89,055) (102,066) (110,639) LAT (3,893) (5,329) (5,369) (7,528) (9,329) Cost of others (602) (854) (1,149) (1,321) (1,519) Gross Profit (Post-LAT) 20,776 26,778 34,707 42,989 49,928 Operating expenses (2,557) (3,056) (4,822) (5,696) (7,250) General & Administrative (2,578) (2,780) (4,133) (4,882) (6,344) Profit fr. other operations Operating profit 15,641 20,941 25,753 32,411 36,334 Prov. for loss on projects (65) (84) Net Financial Income (510) (765) (1,155) (1,636) (1,861) Investment income 644 890 898 1,892 1,617 Others 96 87 92 91 88 Profit before taxation 15,806 21,070 25,588 32,757 36,178 Income Tax Expense Minority Interests Net Profit EPS (weighted average) (4,206) (5,408) (6,653) (1,975) (3,111) (3,962) 9,625 12,551 14,973 0.88 1.14 1.36 (8,517) (6,260) 17,981 1.63 (9,406) (5,513) 21,259 1.93

Cash Flow Statement Key Ratios
2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E

Net Debt to Equity Gross Debt to Equity ROE Asset Turnover (contracted sales) Asset turnover Gross Margin (Pre-LAT) Gross Margin (Post-LAT) Operating Margin (Post-LAT) Net Margin Revenue growth Net profit growth Asset/Equity

30.5% 30.3% 49.7% 48.3% 32.1% 95.2% 112.2% 106.6% 99.8% 92.5% 18.2% 19.7% 19.6% 19.6% 19.3% 41.0% 37.6% 37.8% 39.1% 42.4% 24.2% 27.2% 30.4% 29.6% 26.4% 34.4% 31.1% 29.1% 31.0% 32.7% 28.9% 26.0% 25.2% 26.4% 27.5% 21.8% 20.3% 18.7% 19.9% 20.0% 13.4% 12.2% 10.9% 11.0% 11.7% 41.5% 43.7% 33.6% 18.1% 11.4% 32.1% 30.4% 19.3% 20.1% 18.2% 5.59 5.93 5.92 5.98 6.25

Net profit and minority int. Non-Cash Adjustments Changes in working Capital CF from Operating Act. Cash paid to acquire assets Cash from Inv. & disposals Cash paid to investments Capex (excl. land Acq.) CF from Investing

11,599 15,662 18,935 24,240 26,772 12 116 1,505 814 1,393 (8,222) (12,052) (29,563) (20,878) (6,872) 3,389 3,726 (9,123) 4,176 21,293 (262) (151) (237) (276) (302) 865 1,180 647 1,243 1,078 (6,256) (3,482) (262) (151) (237) (276) (302) (5,653) (2,453) 409 968 776

Issue of shares Proceeds from Borrowing 23,575 47,477 20,000 10,000 10,000 Proceeds from investment Retirement of debt (19,975) (26,864) (10,000) Interest paid (4,117) (3,867) (7,261) (8,208) (9,156) Dividend paid (1,155) (1,883) (2,246) (2,697) (3,189) Others, net 2,478 1,422 (486) (558) (641) CF from Financing Act. 807 16,286 7 (1,463) (2,986)
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

27

MORGAN

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RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: China Vanke (000002.SZ, Rmb9.17, OW, PT Rmb13.00)
Risk-Reward View: Robust pipeline targeting right segment
Rmb25

Why Overweight
 We expect Vanke to maintain its leadership position, and the stock remains as one of our top picks in the industry.  Vanke’s new project acquisitions since 2H12 will boost its 4Q13 and 2014 contracted sales, supporting the developer to maintain its leadership position in the industry.  We believe the developers’ continual focus on the mass market end-user segment with small-sized units will continue to pay off to maintain a high asset turnover, and hence, ROE.  Further upside could be accrued through future NAV-accretive acquisitions as they reinvest the funds from contracted sales and deploy their excess cash balance.

Rmb21.64 (+136%) 20

15 Rmb13.00 (+42%) 10 Rmb 9.17

5

Rmb4.95 (-46%)

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~000002.SZ~

Base Case (Oct-14)

Historical Stock Performance

Price Target Rmb13.00

Our target price is based on probability-weighted bull (20%), bear (20%) and base (60%) case scenarios.

Bull Case Rmb21.64

0% discount Relaxation of property austerity measures, monetary policy to bull-case eases: Central government’s relaxation of property austerity forward NAV measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months 20% discount to base-case forward NAV 50% discount to bear-case forward NAV Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Key Value Drivers
 Property sales volume and ASP in Tier 1 & 2 cities.  Residential property price increases driving margin expansion.

Base Case Rmb12.79

Potential Catalysts
 Stronger contracted sales.  Stabilized property prices, supporting margins and hence Vanke’s NAV.

Bear Case Rmb4.95

Key Downside Risks
 Weaker-than-expected property sales volumes.  Announcement of further propertyspecific tightening measures.  Unexpected slippage in contracted sales, resulting in the company missing consensus estimates, thus depressing Vanke’s share price.

Source: Morgan Stanley Research, Thomson Reuters

28

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RESEARCH

October 25, 2013 China Property

Country Garden: Financial Summary
Rmb million; Years Ending December 31

Balance Sheet
2011 2012 2013E 2014E 2015E

Income Statement
2011 2012 2013E 2014E 2015E

Property, plant and equipment Land use rights Property under development Other assets Fixed Assets Land use rights Properties under development Completed prop held for sale Trade and other receivables Other current assets Restricted cash Cash and cash equivalent Current Assets Total Assets ST bank loans and others Presale deposits Trade & other payables Income tax payable Other current liabilities Current Liabilities LT bank loans and others Deferred income tax liabilities Minority interest Shareholder Equity Total Liabilities & Equity

8,181 1,326 26,551 1,523 37,581 25,505 2,865 12,876 12,535 3,554 4,649 7,744 69,729

11,732 12,872 13,820 14,712 1,390 5,530 15,560 9,828 25,701 30,841 36,561 36,754 1,788 2,292 2,953 3,591 40,611 51,535 68,894 64,885 25,905 49,774 62,238 88,456 13,250 15,900 17,490 20,988 18,497 21,272 25,710 22,538 17,124 20,549 24,658 29,590 4,275 5,145 6,610 8,118 5,051 9,632 13,733 16,330 11,809 10,841 9,356 13,798 95,911 133,113 159,795 199,819

Property Sales Hotel services Construction services Property mgt & others Total Turnover Sales of properties Hotel service Other businesses Gross Profit

33,194 802 241 512 34,748 11,796 70 130 11,996

40,012 972 314 592 41,891 15,252 (70) 158 15,340

49,284 1,438 346 652 51,720 17,649 (68) 173 17,754

63,391 1,562 380 717 66,050 22,599 (46) 191 22,744

77,465 1,699 418 788 80,371 27,546 (33) 210 27,723 (3,617) (2,813) 22 114 21,430 (403) 146 21,173 (7,711) (975) 12,488 12,488 3,746 0.69

107,310 136,522 184,647 228,689 264,704 6,469 9,096 4,023 3,688 4,520 27,865 33,354 63,607 90,683 107,837 12,810 19,030 19,839 24,225 23,884 5,707 7,227 8,195 9,407 10,857 920 0 0 0 0 53,772 68,707 95,665 128,003 147,098 22,497 27,817 41,146 42,742 975 1,114 1,114 1,114 1,077 1,307 1,603 2,317 28,990 37,577 45,120 54,514 47,347 1,114 3,291 65,854

Selling & marketing expenses (1,128) (2,186) (2,327) (2,972) Admin expenses (1,319) (1,568) (1,810) (2,312) Other income / (expenses) 43 103 20 21 Interest Income 101 132 107 111 Operating profit 9,693 11,821 13,744 17,591 Finance costs (221) (259) (361) (372) Others 136 (20) 221 171 Profit before taxation 9,608 11,542 13,605 17,390 Income tax expenses Minority Interests Net profit Underlying net profit Dividends Underlying EPS (RMB) (3,769) (4,657) (5,015) (6,366) (25) (32) (296) (713) 5,814 6,853 8,294 10,310 5,803 6,798 8,294 10,310 0 2,527 2,488 3,093 0.33 0.38 0.45 0.57

107,310 136,523 184,648 228,689 264,705

Cash Flow Statement Key Ratios
2011 2012 2013E 2014E 2015E 2011 2012 2013E 2014E 2015E

Net debt to equity 73% 67% 76% 68% Underlying ROE 19% 17% 18% 18% Underlying ROA 5% 5% 4% 5% Development margin (Pre LAT) 36% 38% 36% 36% Gross margin (Pre-LAT) 35% 37% 34% 34% Gross margin (Post LAT) 30% 31% 30% 30% Underlying net margin 17% 16% 16% 16% Asset turnover 32% 31% 28% 29% Asset turnover (Contracted Sales) 39% 35% 45% 44% Asset to Equity 370% 363% 409% 420%

58% 18% 5% 36% 34% 30% 16% 30% 40% 402%

PBT 9,607 11,542 13,605 17,390 21,173 Depreciation 269 383 605 714 824 Other non-cash adjustments 27 192 (41) 17 78 Changes in working capital (7,416) (8,122) (15,478) (11,312) (11,864) Tax & Interest paid (4,973) (6,478) (3,507) (4,537) (5,382) Cash from operating activities (2,487) (2,483) (4,817) 2,272 4,828 Disposal / (purchase) of PPE (2,773) (3,884) (1,225) (1,092) CAPEX / prop add (35) (2) 0 0 Net increase in investments 0 (205) (388) (426) Other investing activities 178 122 107 111 Cash from investing activities (2,629) (3,969) (1,505) (1,408) Dividend paid (1,605) (81) (2,903) (3,609) Net proceeds from borrowings 9,738 7,878 8,256 1,260 Proceeds from issue of shares (595) 2,448 0 0 Other Financing Activities 455 282 0 0 Cash from financing activities 7,993 10,527 5,354 (2,348)
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

(1,097) 0 (469) 114 (1,452) (4,371) 5,438 0 0 1,067

29

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RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Country Garden (2007.HK, HK$5.54, OW, PT HK$6.20)
Risk-Reward View: Solid execution drives re-rating
HK$10 9 8 7 6 5 4 HK$3.46 (-38%) 3 2 1 0 Oct-11 HK$ 5.54 HK$6.20 (+12%)

Why Overweight
HK$8.75 (+58%)

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~2007.HK~

Base Case (Oct-14)

Historical Stock Performance

 We prefer Country Garden’s massmarket exposure, offering products with a lower ASP and requiring a smaller lump sum.  CG has improved its product quality and its execution ability, as evidenced by its resilient ASPs, higher margins, and financial management.  Active land bank replenishment will underpin strong contracted sales growth in 2014E.  We believe new project launches will continue to drive the developers’ contracted sales growth and hence the share price.

Price Target HK$6.20

Our target price is based on probability-weighted bull (20%), bear (20%) and base (60%) case scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months..

Key Value Drivers
 Property demand in lower-tier cities.  Property price increases, driving margin expansion.

Bull Case HK$8.75

10% discount to bull-case forward NAV

Potential Catalysts
 Announcement of property-specific policy easing by the central government.  Contract sales stronger than expected.

Base Case HK$6.34

25% discount to base-case forward NAV 40% discount to bear-case forward NAV

Key Risks
 Weaker-than-expected demand in lower-tier cities.  Additional lower-tier cities announce home purchase restrictions or other tightening measures.  Weaker economic growth in Guangdong Province.  Accumulated inventory continuing to rise, dragging on asset turnover and leverage.

Bear Case HK$3.46

Source: Morgan Stanley Research, Thomson Reuters

30

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RESEARCH

October 25, 2013 China Property

COGO: Financial Summary
HK$ million, Years Ending 31 December

Balance Sheet
Year ended Dec 31 2011 2012 2013E 2014E 2015E

Income Statement
HK$'million 2011 2012 2013E 2014E 2015E

Fixed Assets Investment properties Property, plant & equip. Investment in asso./JV Other fixed assets Sub-total Current Assets Inventory & PUD Trade & Receivables Other current assets Restricted cash Bank & cash Sub-total Total Assets Current Liabs Bank loan Presale deposits Trade & Payables Other current liabilities Sub-total Long-term Liabs Bank & other borrowings Deferred tax & Others Sub-total Share Capital Shareholders' equity Minority interests Sub-total Total Capital & Liabs

1,884 28 73 404 2,389

2,249 47 79 309 2,684

2,249 33 79 309 2,670

2,249 39 79 309 2,676 30,501 4,544 187 1,069 7,200 43,501 46,176

2,249 47 79 309 2,684 35,628 4,845 195 1,087 7,217 48,974 51,658

12,394 17,523 23,386 1,903 2,793 4,617 170 141 189 805 1,821 889 2,021 5,982 7,249 17,293 28,260 36,329 19,682 30,945 38,999

1,387 2,053 1,836 3,787 7,061 5,889 2,173 4,035 6,302 2,845 2,641 2,818 10,191 15,789 16,844 2,616 1,443 4,059 5,146 286 5,432 5,105 9,456 1,441 1,580 6,546 11,036 7,966 10,253 643 866 8,609 11,119

1,273 7,927 6,202 4,289 19,691 10,032 2,731 12,763 12,620 1,103 13,722 46,177

1,471 9,235 6,614 4,139 21,459 11,183 2,613 13,796 15,171 1,232 16,402 51,658

Turnover -Property development 4,996 9,531 15,754 Others 170 186 225 Total Turnover 5,166 9,717 15,979 Cost of sales (2,170) (5,779) (10,845) Gross Profit 2,996 3,938 5,135 Selling & admin exp (333) (564) (799) Inc. in fair value of inv prop. 355 364 Other income/exp 389 72 26 Operating profit 3,407 3,810 4,361 Share of associates 8 9 Finance costs (33) (9) (145) Profit before tax 3,381 3,810 4,216 Tax (1,576) (1,325) (1,452) Minorities 11 (85) (223) Net profit 1,815 2,401 2,541 Underlying Net profit 1,549 2,128 2,541 Underlying EPS (HK$) 0.68 0.93 1.11 MW Underlying EPS (HK$) 0.68 0.86 1.00

15,506 16,536 237 250 15,743 16,786 (9,474) (10,452) 6,269 6,334 (787) (839) 40 33 5,521 5,527 (145) (162) 5,376 5,365 (2,509) (2,402) (237) (129) 2,630 2,835 2,630 2,835 1.15 1.24 1.03 1.11

Cash Flow Statement
Cash Flow Statement 2011 2012E 2013E 2014E 2015E

Profit before tax 3,381 3,810 4,216 5,376 Non-cash adjustment (1,596) (2,023) (1,032) 267 Change in working capital (3,016) (520) (6,591) (5,103) Cash from operation (1,232) 1,267 (3,408) 539 Purchase of assets Disposal of Assets Others Cash fr investing Act. Issue of shares Chg in bank borrowings Other financing activities Cash fr Financing Act. (9) (18) 314 40 (672) (1,042) (367) (1,020) (0) 1,632 8 1,641 (0) 1,506 2,194 3,700 (11) 933 922 4,134 (399) 3,735 (13) (180) (193) 14 (409) (395)

5,365 (2,508) (3,709) (851) (16) (18) (34) 1,349 (446) 903

19,682 30,945 39,000

Key Ratios
2011 2012 2013E 2014E 2015E

Net Debt to Equity ROE (underlying net profit) ROA (underlying) Gross Margin (pre LAT) Gross Margin (post LAT) Net Margin (underlying) Asset Turnover Assets to Equity

39% 30% 16% 58% 41% 30% 26% 3.8

15% 27% 11% 41% 35% 22% 31% 3.9

39% 25% 11% 32% 29% 16% 41% 3.8

33% 21% 12% 40% 30% 17% 34% 3.7

36% 19% 11% 38% 29% 17% 32% 3.4

E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research.

31

MORGAN

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RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: COGO (0081.HK, HK$9.23, UW, PT HK$8.00)
Risk-Reward View: Positives priced in, risks may emerge for 2013/14
HK$14

Why Underweight
 We believe slow capital recycling and target NDER cap may constrain COGO’s growth in assets and sellable resources, making a 30% medium term profit CAGR challenging.  The slower growth momentum, lower-than-expected ASP/margin improvement and rise in gearing may trigger a de-rating of the stock from its valuation of 24% discount to our revised forward NAV estimate.  We believe management faces a challenging task to achieve the consensus estimate of 30% core net profit growth in 2013-2014E. COGO’s incremental sales growth hinges on the progress of the Beijing Tonghui River resettlement project, which remains an uncertainty, in our view.

12 HK$11.49 (+24%) 10 HK$ 9.23

8

HK$8.00 (-13%)

6 HK$4.65 (-50%) 4

2

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0081.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$8.00

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Bull Case HK$11.49

25% discount to bull-case forward NAV

Key Value Drivers
 Property demand in lower-tier cities.  Property price increases, driving margin expansion.

Base Case HK$7.88

35% discount to base-case forward NAV 45% discount to bear-case forward NAV

Key Upside Risks
 Announcement of property-specific policy easing by the central government.  Strong contracted sales and NAVaccretive new land acquisitions.  Stronger-than-expected sales in Yinchuan, Ganzhou and Hohhot.

Bear Case HK$4.65

Key Downside Risks
 Slippage in construction timing, causing a miss in earnings and pressuring the share price.  HPR or other tightening measures in additional lower-tier cities, limiting sales.

Source: Morgan Stanley Research, Thomson Reuters

32

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RESEARCH

October 25, 2013 China Property

COLI: Financial Summary
HKD million, Year ended Dec 31

Balance Sheet
Year ended Dec 31 2011 2012 2013E 2014E 2015E

Income Statement
HK$'million 2011 2012 2013E 2014E 2015E

Fixed Assets Investment properties Property, plant & equip. Investment in associates/JV Other fixed assets Sub-total Current Assets Inventory & PUD Trade and other receivables Other current assets Bank & cash Sub-total Total Assets Current Liabs Bank loan Presale deposits Trade and other payables Other current liabilities Sub-total Long-term Liabs Bank & other borrowings Deferred tax liabilities Sub-total Share Capital Shareholders' equity Minority interests Sub-total

17,766 338 16,032 13,857 47,992

23,657 24,658 27,158 29,658 976 1,307 1,719 2,008 17,211 19,777 22,835 25,651 7,714 7,979 8,538 9,152 49,558 53,721 60,249 66,468

97,503 111,776 153,433 196,996 239,277 1,850 2,599 3,073 3,827 4,313 9,452 25,012 26,277 28,776 31,344 19,179 40,880 42,235 43,285 44,245 127,984 180,268 225,018 272,884 319,179 175,976 229,825 278,739 333,133 385,647

9,820 24,480 16,378 17,250 67,929 32,804 3,353 36,157 71,617 273 71,890

5,546 40,506 16,917 21,007 83,975

4,122 5,042 6,007 62,065 88,225 110,185 25,349 28,700 32,345 19,809 19,732 19,825 111,345 141,699 168,362

Turnover -Property development 49,432 61,407 76,816 95,667 Others 1,900 3,174 3,582 3,800 Total Turnover 51,332 64,581 80,398 99,467 Cost of sales (31,592) (39,781) (50,556) (62,318) Gross Profit 19,740 24,800 29,842 37,149 Selling & admin exp (1,897) (2,037) (2,996) (3,731) Inc. in fair value of inv prop. 3,020 3,651 1,458 Other income/exp 1,639 731 869 909 Operating profit 22,502 27,145 29,173 34,327 Share of associates 922 2,637 2,566 3,058 Finance costs (591) (286) (940) (1,011) Profit before tax 23,765 29,422 30,799 36,374 Tax (8,207) (10,590) (10,832) (13,043) Minorities (94) (110) (868) (889) Net profit 15,464 18,722 19,099 22,442 Underlying Net profit 13,020 15,800 19,099 22,442 Underlying EPS (HK$) 1.59 1.93 2.34 2.74

107,816 4,503 112,318 (67,622) 44,697 (4,205) 951 41,443 2,816 (1,070) 43,189 (15,966) (1,000) 26,223 26,223 3.21

53,243 59,122 64,079 68,072 5,049 4,568 4,809 4,688 58,292 63,690 68,888 72,760 87,244 102,523 120,477 141,455 313 1,181 2,069 3,069 87,557 103,704 122,546 144,525

Cash Flow Statement
2011 2012 2013E 2014E 2015E

Key Ratios
2011 2012 2013E 2014E 2015E

Net Debt to Equity ROE (underlying net profit) ROA (underlying) Dev. Margin (Pre LAT) Gross Margin (Pre LAT) Net Margin (underlying) Assets to Equity Asset Turnover Asset Turnover (contract sales)

33% 18% 7% 39% 40% 25% 246% 29% 50%

21% 18% 7% 39% 38% 24% 263% 28% 43%

20% 21% 21% 19% 19% 19% 7% 7% 7% 38% 38% 40% 37% 37% 40% 24% 23% 23% 272% 277% 273% 29% 30% 29% 43% 39% 36%

Profit before tax 23,765 29,422 30,799 36,374 Non-cash adjustment (4,126) (6,274) (2,415) (2,855) Change in working capital (27,636) (16,098) (24,024) (28,909) Cash from operation (7,998) 7,049 4,360 4,609 Capex (1,565) (1,712) (1,411) (3,013) other investing act. (3,888) 3,218 604 351 Cash from investing act. (5,453) 1,506 (808) (2,662) Issue of shares Change in bank borrowings 755 16,149 4,455 5,878 Other financing activities (1,942) (2,648) (6,652) (6,775) Cash from Financing Act. (1,187) 13,501 (2,197) (896)
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

43,189 (2,576) (33,998) 6,615 (2,909) 337 (2,573) 4,958 (8,041) (3,083)

33

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: COLI (0688.HK, HK$24.30, EW, PT $22.50)
Risk-Reward View: Richly Valued Industry Proxy
HK$35 HK$32.48 (+34%) 30 HK$ 24.30 25 HK$22.50 (-7%) 20

Why Equal-weight
 Smooth management transition with continuous support from parent company, and successful injection of its property business into COLI may bring potential profit enhancement to COLI.  Given the relatively slower land acquisition pace in 2013, we believe COLI’s momentum may be slower compared to peers and hence, lacks the positive catalyst to drive the stock further.  However, we believe the potential upside has already been reflected in its rich valuations of 11% discount to our forward NAV.

15

HK$14.18 (-42%)

10

5

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0688.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$22.50

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios.

Key Value Drivers
 Property sales volume and ASP in Tier 1 & 2 cities.  Residential and commercial property price increases, driving margin expansion.

Bull Case HK$32.48

No discount Relaxation of property austerity measures, monetary policy to bull-case eases: Central government’s relaxation of property austerity forward NAV measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. 20% discount to base-case forward NAV Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Key Upside Risks
 Loosening of the property-specific tightening measures by the central government.  Stronger contracted sales through market consolidation.  Stronger-than-expected property sales in Tier 1 & 2 cities.

Base Case HK$21.85

Bear Case HK$14.18

35% discount to bear-case forward NAV

Key Downside Risks
 Weaker-than-expected property sales volumes.  Announcement of further property-specific tightening measures.  Unexpected slippage in construction schedule may result in COLI missing consensus’ earnings forecasts, and thus put pressure COLI’s share price.

Source: Morgan Stanley Research, Thompson Reuters

34

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RESEARCH

October 25, 2013 China Property

CR Land: Financial Summary
Balance Sheet
HK$mn, Year to Dec 31 2011 2,012 2013E 2014E 2015E

Income Statement
2011 2,012 2013E 2014E 2015E

Fixed assets Property, plant & equipment Investment properties Prepaid lease payment Associated cos and JVs Other Assets Sub-Total

4,073 4,971 6,041 7,153 8,310 31,461 44,357 57,322 62,258 64,633 1,140 1,553 1,553 1,553 1,553 775 2,353 2,394 2,435 2,463 8,253 909 909 909 909 45,702 54,143 68,218 74,308 77,868

Sales of properties Property Investment Others Total Turnover Cost of Sales Gross Profit Selling & Admin expenses Investment Revaluation Other income/(Expenses) Interest Income Operating profit Finance costs Associates and JCE Profit before taxation Income tax expenses Minority Interests Net Profit Underlying Profit Underlying EPS

31,301 38,522 61,114 69,304 84,165 2,194 3,262 3,729 5,559 5,092 2,300 2,580 2,771 2,971 2,937 35,795 44,364 67,615 77,834 92,194 (21,612) (27,667) (46,352) (52,535) (62,074) 14,182 (3,681) 3,372 1,160 96 15,129 (699) 45 14,476 (6,151) (203) 8,121 5,617 1.03 16,696 (3,711) 4,001 623 141 17,751 (670) 414 17,495 (6,298) (628) 10,569 7,168 1.23 21,263 (5,409) 0 0 155 16,009 (834) 41 15,216 (5,846) (625) 8,746 8,746 1.50 25,300 (6,227) 0 0 170 19,243 (1,172) 41 18,112 (6,977) (922) 10,213 10,213 1.75 30,119 (7,375) 0 0 187 22,931 (1,239) 27 21,720 (8,466) (1,088) 12,166 12,166 2.09

Current Assets Properties under dev. 97,207 134,006 154,620 174,924 197,416 Completed prop & inventories 2,695 3,070 3,377 3,715 4,087 Land use right 23 0 0 0 0 A/C & other rec'bles 21,027 13,033 16,904 23,350 27,658 Other current assets 2,145 2,049 1,337 1,337 1,337 Cash and cash equivalent 15,792 21,953 28,219 30,398 30,296 Sub-Total 138,888 174,112 204,458 233,725 260,795 Total Assets 184,590 228,256 272,676 308,033 338,662 FINANCED BY: Current Liabs S/T Borrowings Deposits received A/C & other payables Tax payables Other current liabilities Sub-Total L/T Borrowings Other non-current liabilities Minority interest Share capital Reserves Total Liabs & Equity

22,073 5,283 6,865 15,030 20,339 27,046 51,631 60,725 70,709 76,863 15,329 23,910 38,540 44,365 52,550 5,206 6,746 8,168 9,788 12,131 2,262 11,376 11,376 11,376 11,376 71,917 98,947 125,675 151,269 173,259 39,910 47,620 58,424 60,049 59,003 5,706 5,189 5,189 5,189 5,189 6,361 7,391 7,704 8,165 8,709 583 583 583 583 583 60,114 68,526 75,103 82,779 91,921 184,590 228,256 272,676 308,034 338,664

Cash Flow Statement
2011 2012E 2013E 2014E 2015E

PBT (Pre-LAT) 14,476 Other Non-Cash Adj. (2,023) Changes in working Capital (14,511) Cash Fr Operations (2,058) Tax & Interest paid (4,539) Net Cash fr Operations (6,597) Cap. Expend/Prop Add Other Investing Activities Cash Fr Inv Activities Inc(Dec) In Borrowings New Issue of Shares Other Financing Activities Cash Fr Fin Activities

17,495 15,216 18,112 21,720 (3,964) 717 1,054 1,132 7,279 (11,929) (13,258) (12,083) 20,810 4,004 5,908 10,769 (6,809) (7,198) (9,307) (10,290) 14,002 (3,194) (3,399) 478

Key Ratios
2011 2012 2013E 2014E 2015E

Net Debt to Equity ROE ROA Gross Margin (Pre-LAT) Gross Margin (Post-LAT) Underlying Net Margin Asset Turnover Asset Turnover (Contract Sales) Asset to Equity

75% 9% 6% 40% 31% 16% 19% 23% 299%

45% 10% 6% 38% 33% 16% 19% 26% 330%

49% 54% 53% 12% 12% 13% 4% 4% 5% 31% 33% 33% 28% 29% 29% 13% 13% 13% 25% 25% 27% 30% 30% 31% 360% 370% 366%

(898) (1,472) (1,149) (1,206) (1,267) (9,074) (4,046) 1 1 1 (9,971) (5,519) (1,148) (1,205) (1,266) 14,623 (8,975) 12,386 9,790 4,263 4,241 5,762 (2,327) (2,842) (3,413) 18,864 (3,213) 10,060 6,948 850

E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research.

35

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: CR Land (1109.HK, HK$22.75, EW, PT HK$23.20)
Risk-Reward View: Weaker margins restrict future sales growth
HK$40

Why Equal-weight
 We think that CR Land’s 1H13 profit margin weakness may persist until 2014, despite stronger than expected cost control at headquarters level.  We expect CR Land to partly offset its low margins with a high 2H13 sales recognition, which will reduce its revenue lock-in for 2014/15.  Nonetheless, the developer’s quality land bank with core commercial property assets will continue be a support to its share price.

35

HK$34.85 (+53%)

30

25

HK$ 22.75 HK$23.20 (+2%)

20

15 HK$12.21 (-46%) 10

5

0 Oct-11

Key Value Drivers
Apr-12 Oct-12 Apr-13 Oct-13 Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~1109.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$23.20

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios.

Bull Case HK$34.85

5% discount Relaxation of property austerity measures, monetary policy to Bull-Case eases: Central government’s relaxation of property austerity forward NAV measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. 20% discount to Base-Case forward NAV 40% discount to Bear-Case forward NAV Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

 Rental growth in shopping malls in Tier 1 & 2 cities.  Property price increases, driving margin expansion.  Residential and commercial property price increases, driving margin expansion.

Potential Catalysts
 End of tightening measures.  Loosening of credit available to the property industry.  Stronger-than-expected contracted sales driven by higher sell-through rates.

Base Case HK$23.01

Bear Case HK$12.21

Key Risks
 Further announcements of purchase restrictions and other tightening policies;  Construction costs on investment properties drag financial resources:  Potential equity fundraising risk for asset injection from parent co.

Source: Morgan Stanley Research, Thompson Reuters

36

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Guangzhou R&F Financial Summary
Balance Sheet (RMB mn)
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Income Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Fixed assets Investment Properties 12,688 13,347 Land Use Rights 680 850 Jointly controlled entities 3,620 3,975 Other Inv/Assets 9,763 10,932 Current Assets --Restricted Cash 2,900 5,836 Properties under dev 33,088 39,427 Completions held for sale 6,036 7,964 Accounts Receivables 7,581 7,609 Tax prepayments 1,678 1,620 Cash and cash equivalent 6,126 7,026 Sub-Total 57,408 69,483 Total Assets FINANCED BY: Current Liabs Customer Deposits Short-Term loans Accounts payables Taxes payable Sub-Total Long-term Liabilities Long-term bank loans Minority interest Share capital Reserves Shareholders' Equity

13,347 850 4,595 11,391 5,836 54,354 8,761 7,158 1,568 4,461 82,137

13,347 850 5,497 11,883

13,347 850 6,272 12,409

5,836 5,836 60,291 70,723 9,637 10,600 8,303 9,179 1,681 1,889 8,716 8,604 94,462 106,831 126,039 139,710

84,159 98,587 112,321

Sales of properties Rental income Revenue Cost of Sales Gross Profit Others Interest Income Selling/admin expenses Operating Profit Finance costs Associates & JCE Taxation Minority Interests Exceptionals Net Profit Underlying Profit Underlying EPS

25,390 28,057 30,886 35,671 35,889 491 628 669 754 783 27,370 30,365 31,723 36,566 36,919 (15,954) (17,987) (19,457) (22,948) (22,129) 11,416 12,378 12,267 13,618 14,790 152 18 90 94 99 129 148 170 178 187 (1,924) (1,976) (2,212) (2,808) (2,490) 9,773 10,568 10,314 11,082 12,586 (1,139) (1,502) (1,399) (1,478) (1,480) 99 316 620 902 775 (4,333) (4,382) (4,206) (4,583) (5,278) 7 (157) (36) (64) 436 660 4,842 5,502 5,328 5,887 6,538 4,516 5,162 5,328 5,887 6,538 1.40 1.62 1.67 1.84 2.05

14,055 13,165 10,093 7,212 10,125 12,679 6,504 7,500 40,777 40,557 2,364 2,781 18,285 28,420 207 364 806 806 21,720 25,660 22,526 26,466

18,481 6,672 13,716 7,121 45,990 2,669 33,420 364 806 29,072 29,878

24,937 6,942 16,176 7,846 55,902 2,908 33,420 400 806 32,604 33,410

33,865 6,807 15,599 8,873 65,145 3,349 33,420 464 806 36,527 37,332

Cash Flow Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Operating profit Depreciation & Amortization Other Non-Cash Adjustments Changes In Work Cap Interest/Tax Expenses paid Net cash from operations

9,772 10,568 10,314 11,082 12,586 250 308 318 382 458 (208) (163) (170) (178) (187) (4,206) (7,776) (7,872) 3,265 (1,568) (5,079) (5,401) (6,908) (7,081) (7,578) 529 (2,465) (4,317) 7,470 3,712 (318) (382) (458) (620) (902) (775) (22) (25) (27) 170 178 187 (791) (1,130) (1,074)

Ratio Analysis
2011 2012 2013E 2014E 2015E

Purchases of fixed assets (462) (859) 100 1 Decrease(Increase) in investment 426 225 Acquisition of subsidiaries / Invest 2 Other Investing Activities (1,171) 1,448 Cash from investing activities (1,107) 817 99% 20% 5% 42% 33% 17% 30% 126% 17% 374% 108% 20% 5% 41% 34% 17% 28% 135% 17% 373% 119% 18% 5% 39% 31% 17% 27% 134% 17% 376% 95% 18% 5% 37% 30% 16% 28% 121% 16% 377% 85% 18% 5% 40% 32% 18% 26% 108% 18% 374% Dividend paid Inc(Dec) In St Borrowings Increase In Lt Borrowings Increase In Capital Stocks Other Financing Activities Cash from financing activities

Net Debt to Equity ROE ROA Gross Margin (Pre-LAT) Gross Margin (post-LAT) Underlying Net Margin Asset turnover Gross Debt to Equity Underlying Net Margin Asset to Equity

(2,027) (1,659) (1,917) (2,355) (2,615) (8,729) (7,312) (540) 270 (135) 9,236 14,305 5,000 1,271 (1,487) (250) 3,847 2,543 (2,085) (2,750)

E = Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research

37

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Guangzhou R&F (2777.HK, HK$13.46, EW, PT HK$12.60)
Risk-Reward View: Low sell-through continues to drag balance sheet
HK$25

Investment Thesis
 The developer’s net gearing has risen in 1H13 due to aggressive land acquisitions amid a consistently low sell-through rate. Gearing could deteriorate further from an already very high level given their persistently weak sell-through rates.  We believe the stock’s performance will hinge on the execution of their newly acquired projects, which is set to contribute to their contracted sales from 1H13 onwards.  Having only recognized 23% of our full-year earnings estimate during 1H13, we believe R&F will have to rely on the contributions from their high-margin office and JV projects in 2H13 to avoid an earnings disappointment.  Nonetheless, we believe the stock is fairly valued at ~52% discount to our forward NAV, 7x 2013E PE and 1.3x PB.

20

HK$19.88 (+48%)

15

HK$ 13.46 HK$12.60 (-6%)

10

5

HK$4.90 (-64%)

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~2777.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$12.60

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Bull Case HK$19.88

46% discount to bull-case forward NAV

Key Value Drivers
 Property sales volume and ASP in Tier 1 and 2 cities.  Strong pricing power through its reputable brand name.

Base Case HK$12.73

55% discount to base-case forward NAV 75% discount to bear-case forward NAV

Bear Case HK$4.90

Key Upside Risks
 Loosening of the property-specific austerity measures could improve the developers’ sell-through rate and unlock the deep value.  Stronger contracted sales through market consolidation.

Source: Morgan Stanley Research, Thomson Reuters

Key Downside Risks
 Weaker-than-expected property sales volumes.  Announcement of further property-specific tightening measures.

38

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

KWG Financial Summary
Balance Sheet (RMB mn)
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Fixed assets Property, plant & equip. Investment properties Land Use Rights Associated companies Other Assets

Income Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

1,779 4,234 1,060 8,508 882

2,688 5,255 1,056 8,949 1,218

2,957 3,253 3,578 6,144 8,077 9,742 1,056 1,056 1,056 9,467 10,066 10,520 1,315 1,421 1,538

Current Assets --Properties under dev 17,934 Completed prop held for sale 3,023 Trade and other receivables 1,635 Other current assets 158 Restricted cash 1,349 Cash and cash equivalent 4,025 Sub-Total 28,124 Total Assets 44,587 FINANCED BY: Current Liabs Borrowings Advances from customers Other payables Income tax payable Other current liabilities Sub-Total L/T Borrowings Deferred inc. tax liabilities Minority interest Share capital Reserves Shareholders' Equity

17,951 20,583 21,166 24,078 3,988 4,187 4,396 4,616 1,181 1,275 1,385 1,518 135 135 135 135 1,517 1,593 1,673 1,756 4,927 5,432 4,974 8,352 29,699 33,206 33,729 40,455 48,864 54,145 57,602 66,888

3,410 5,369 5,250 3,291 1,671 18,991 10,425 1,478 202 281 13,210 13,491

3,100 2,330 2,081 1,957 5,262 6,123 8,205 12,228 4,704 5,410 5,951 6,249 3,374 4,011 4,434 4,778 2,454 2,596 2,761 2,885 18,895 20,471 23,432 28,096 13,090 15,963 15,714 19,535 1,526 1,760 1,859 1,968 72 75 75 75 281 281 281 281 15,001 15,598 16,245 16,939 15,282 15,878 16,525 17,220

Sales of properties Rental Income Hotel operating income Total Turnover Sales of properties Rental Income Hotel operating income Gross Profit (Pre-LAT) Selling & Admin expenses Investment Revaluation Other income Interest Income Operating profit (Pre-LAT) Finance costs Associates and JCE Profit before taxation Income tax expenses Minority Interests Net Profit Underlying Profit Dividends Retained Profit Underlying EPS (RMB)

9,815 9,330 139 143 70 84 10,123 9,676 4,217 3,273 111 115 75 91 4,472 3,536 (764) (894) 326 643 43 25 46 48 4,122 3,358 (125) (70) (17) 478 3,980 3,766 (1,876) (1,333) (1) (27) 2,103 2,406 1,859 1,924 318 636 1,785 1,770 0.64 0.66

11,376 144 327 11,978 3,782 115 100 4,095 (1,018) 0 36 50 3,162 (148) 864 3,879 (1,592) (3) 2,283 2,283 856 1,427 0.79

13,409 153 356 14,062 4,704 122 110 5,042 (1,195) 0 28 52 3,927 (147) 998 4,778 (2,008) 0 2,770 2,770 1,039 1,732 0.96

15,690 162 384 16,395 5,572 130 120 5,937 (1,394) 0 33 55 4,632 (155) 756 5,233 (2,206) 0 3,027 3,027 1,135 1,892 1.05

Cash Flow Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Key Ratios
Ratios 2011 2012 2013E 2014E 2015E

Profit before taxation Depreciation Other Non-Cash Adjustments Changes in working Capital Cash Fr Operations Tax & Interest paid Net Cash fr Operations

3,980 3,766 3,879 4,778 5,233 36 76 20 6 2 (222) (1,090) (1,348) (1,662) (1,494) (997) 955 54 3,144 2,508 2,797 3,707 2,606 6,265 6,249 (2,331) (2,696) (2,546) (3,388) (3,779) 466 1,011 59 2,878 2,470

Net Debt to Equity ROE Underlying ROA Underlying Development Margin Gross Margin Net Margin underlying Asset to Equity Asset turnover (Contract Sales)

73% 14% 6% 43% 44% 18% 3.3 26%

74% 13% 8% 35% 37% 20% 3.2 25%

81% 14% 6% 33% 34% 19% 3.4 29%

78% 17% 7% 35% 36% 20% 3.5 32%

76% 18% 6% 36% 36% 18% 3.9 35%

Disposal Of Fixed Assets (387) (989) 5 5 5 Cap. Expenditures/Prop Add (504) (1,005) (1,158) (2,229) (1,990) Net increase In Investments 0 (218) 0 0 0 Other Investing Activities (766) 97 346 399 302 Cash Fr Investing Activities (1,657) (2,116) (807) (1,824) (1,682) Dividend paid (318) (636) (856) (1,039) (1,135) Inc(Dec) In St Borrowings (1,886) 169 (770) (249) (124) Inc(Dec) In Lt Borrowings 2,163 2,455 2,873 (249) 3,821 Inc(Dec) In Capital Stocks 0 0 0 0 0 Proceeds from issue of shares 0 0 0 0 0 Other Financing Activities 10 20 0 0 0 Cash Fr Financing Activities (32) 2,007 1,246 (1,536) 2,561
E = Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research

39

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: KWG (1813.HK, HK$5.04, OW, PT HK$6.10)
Risk-Reward View: Bull case could offer up to ~100% upside
HK$12

Investment Thesis
 KWG has a rich debut launch pipeline which could be the catalysts needed to unlock the stock’s deep value (67% discount to our forward NAV).  A swifter execution of their newly acquired projects to accelerate KWG’s asset turnover could drive a medium-term re-rating of the stock.  Their recent land acquisitions of relatively smaller sized projects and JV structure will help enhance its asset turnover, which should underpin the stock’s re-rating if the momentum continues.

10

HK$9.71 (+93%)

8

6

HK$ 5.04

HK$6.10 (+21%)

4 HK$2.69 (-47%) 2

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~1813.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$6.10

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Key Value Drivers
 Property sales volume and ASP in Tier 1 and 2 cities.  Strong pricing power through its distinguished products.  Stronger than expected demand for offices to support the sales of their office projects.

Bull Case HK$9.71

50% discount to bull-case forward NAV

Base Case HK$6.10

60% discount to base-case forward NAV 75% discount to bear-case forward NAV

Key Downside Risks
 Further announcements of purchase restrictions and other tightening policies;  Further property price decline resulting in margin compression;  Cash collection weaker than expected, dragging on the full year cash flows.

Bear Case HK$2.69

Source: Morgan Stanley Research, Thomson Reuters

40

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Longfor: Financial Summary
Balance Sheet
(RMB mil) 2011 2,012 2013E 2014E 2015E

Fixed assets Property, plant and equipment 175 186 199 213 217 Investment properties 13,198 18,383 20,212 23,825 26,908 Deposits for land use rights 12,560 15,946 20,155 31,023 28,831 Associates and JVs 1,873 2,068 2,382 2,726 3,049 Other Assets 678 1,021 1,021 1,021 1,021 Current Assets Properties under development 46,197 57,727 68,882 68,517 73,894 Prop held for sale & Inventories 3,614 5,134 6,863 5,014 7,167 Accounts receivables/deposits 3,344 4,098 8,138 8,762 10,441 Other current assets 1,094 2,251 2,473 2,717 2,986 Restricted cash 406 227 233 231 237 Cash and cash equivalent 14,121 18,384 10,441 8,850 13,122 Sub-Total 68,776 87,821 97,030 94,092 107,846 Total Assets 97,259 125,426 141,000 152,900 167,872 FINANCED BY: Current Liabs Short-term borrowings 3,580 5,109 5,065 6,589 6,623 Deposits received 34,570 40,845 41,906 41,563 42,646 Amounts due to associates/JVs 803 1,052 1,104 1,159 1,217 Income tax payable 4,788 7,899 9,855 12,230 14,108 Other current liabilities 6,841 7,670 12,885 13,630 16,241 Sub-Total 50,582 62,575 70,815 75,171 80,836 Long-term borrowings 20,386 27,728 29,116 30,027 31,003 Other non-current liabilities 2,197 2,546 2,546 2,546 2,546 Minority interest 2,154 2,668 3,572 4,486 5,969 Share capital 453 476 476 476 476 Reserves 21,487 29,433 34,475 40,194 47,042 Total Liabs & Equity 97,260 125,425 140,998 152,899 167,872

Income Statement
(RMB mil) 2011 2012 2013E 2014E 2015E

Sales of properties Property Investment Others Total Turnover Sales of properties Property Investment Others Gross Profit SG&A Investment Revaluation Other income Interest Income Operating profit Finance costs Associates and JCE Profit before taxation Income tax expenses Minority Interests Net Profit Underlying Profit MW EPS

23,376 402 315 24,093 9,443 306 21 9,769 (1,352) 2,630.6 135.0 141 11,323 (202) 324 11,445 (4,524) (593) 6,328 4,500 0.87

26,946 483 463 27,893 10,795 358 31 11,183 (1,561) 1,308.6 31.2 140 11,101 (48) 248 11,301 (4,436) (564) 6,301 5,400 1.02

45,210 736 533 46,478 14,092 544 35 14,672 (2,324) 154 12,502 (258) 314 12,557 (5,352) (904) 6,302 6,302 1.15

48,678 1,173 613 50,465 15,871 868 40 16,780 (2,523) 95 14,352 (271) 344 14,426 (6,363) (914) 7,148 7,148 1.30

58,004 1,794 705 60,502 17,308 1,327 47 18,682 (3,025) 113 15,769 (284) 322 15,808 (5,764) (1,483) 8,561 8,561 1.56

Cash Flow Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Key Ratios
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Net Debt to Equity ROE Assets to Equity Dev Margin (Pre-LAT) Dev Margin (Post-LAT) Gross Margin Pre-LAT) Net Margin Underlying Net Margin Asset Turnover

45% 21% 4.43 40% 31% 41% 26% 19% 25%

48% 18% 4.19 40% 32% 40% 23% 19% 22%

68% 18% 4.03 31% 25% 32% 14% 14% 33%

68% 18% 3.76 33% 25% 33% 14% 14% 33%

52% 18% 3.53 30% 25% 31% 14% 14% 36%

PBT (Pre-LAT) Depreciation Other Non-Cash Adjustments Changes in working Capital Cash Fr Operations Tax & Interest paid Net Cash fr Operations

11,445 27 (2,834) 4,342 12,979 (3,772) 9,208

11,301 12,557 14,426 15,808 33 54 64 73 (1,507) (68) (27) (10) 4,377 2,382 9,133 10,142 14,205 14,926 23,595 26,013 (4,423) (5,822) (6,599) (6,610) 9,781 9,104 16,996 19,403

Disposal Of Fixed Assets 38 10 0 0 0 Cap. Expenditures/Prop Add (11,047) (16,132) (16,818) (19,262) (14,077) Other Investing Activities 94 233 0 0 0 Cash Fr Inv Activities (10,915) (15,889) (16,818) (19,262) (14,077) Inc(Dec) In Borrowings Other Financing Activities Cash Fr Fin Activities 6,927 (706) 6,221 8,850 1,344 2,435 1,011 (953) (1,260) (1,430) (1,712) 7,897 84 1,006 (701)

E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

41

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Longfor (0960.HK, HK$13.24, OW, PT HK$15.90)
Risk-Reward View: Improved land bank to help asset turnover
HK$30

Why Overweight
 We expect Longfor to deliver stable contracted sales growth, supported by prudent financial management.  Underpinned by the RMB32.9bn spent on land acquisitions during 2012 and 1H13, we expect the developers’ sellable resources and contracted sales to achieve a stable growth of 12% and 18% in 2014, respectively.  Management believes they have already recalibrated their land bank exposure well to target cities and urban area, which should help accelerate asset and capital cycling  Therefore, we believe Longfor’s land banking spree will slow down into 4Q13 and 1H14, which should help to contain their net debt to equity within its 70% target.

25

HK$24.77 (+87%)

20

15

HK$ 13.24

HK$15.90 (+20%)

10 HK$8.47 (-36%) 5

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0960.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$15.90

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios.

Bull Case HK$24.77

7% discount Relaxation of property austerity measures, monetary policy to bull-case eases: Central government’s relaxation of property austerity forward NAV measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. 25% discount to base-case forward NAV 40% discount to bear-case forward NAV Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Key Value Drivers
 Property price appreciation in Tier 1 & 2 cities.  Residential and commercial property price increases, driving margin expansion.

Base Case HK$15.48

Potential Catalysts
 Greater-than-expected rise in property prices, expanding margins.  Loosening of home purchase restrictions by the central government.  Higher-than-expected sell-through rates driving up contracted sales.

Bear Case HK$8.47

Source: Morgan Stanley Research, Thomson Reuters

Key Downside Risks
 Further tightening policies announced.  Further property price declines.  Equity fundraising to recapitalize balance sheet.

42

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Poly Property: Financial Summary
Balance Sheet
Balance Sheet 2011 2012 2013E 2014E 2015E

Non-Current Assets Investment properties 6,578 7,085 7,407 Property, plant and equipment 1,996 1,934 2,005 Interests in JV and Associates 104 104 104 Deposits Paid 3,280 707 707 Others 1,574 1,375 1,375 Subtotal 13,532 11,205 11,598 Current Assets PUD and Inventory 66,255 76,904 87,322 Trade and other receivables 1,916 3,071 3,101 Others 1,183 1,286 1,299 Pledged bank deposits 326 962 962 Cash and Equivalents 12,296 14,308 18,168 Subtotal 81,975 96,531 110,852 Total Assets 95,507 107,736 122,450 Current Liabilities Trade and other payables Pre-sale deposits Others ST Bank & other borrowings Subtotal Share capital Reserves Shareholders' Equity Non-controlling interests

Income Statement
Income Statement 2011 2012 2013E 2014E 2015E

9,209 9,209 2,051 2,106 104 104 707 707 1,375 1,375 13,446 13,501 91,682 98,108 3,516 4,388 1,314 1,333 962 962 10,441 9,336 107,916 114,127 121,362 127,628

Sales of Properties 13,279 Rental Income & Mgt Service Inc. 516 Revenue 14,105 Gross profit (Pre-LAT) 5,573 Gross profit (Post-LAT) 5,021 Selling expenses (554) Administrative expenses (1,095) Finance costs (440) Share of results of JV & asso. 8 Profit before taxation 5,001 Income tax expense Non-controlling interests Net Profit Underlying Profit Diluted Underlying EPS

19,676 23,664 28,758 33,075 707 969 1,019 1,070 20,695 25,046 30,211 34,590 6,287 7,664 9,215 9,722 5,968 7,326 8,809 9,320 (620) (751) (967) (1,107) (1,368) (1,628) (1,994) (2,283) (418) (337) (349) (305) 4 4,581 5,430 6,412 6,559

6,260 8,953 12,002 13,701 14,087 11,945 18,521 21,307 22,775 24,669 11,092 7,947 7,947 7,947 7,947 13,102 14,846 15,998 7,784 8,000 42,399 50,267 57,255 52,207 54,704 1,804 1,804 1,804 1,804 1,804 22,867 25,268 27,193 30,062 33,169 24,671 27,073 28,997 31,866 34,973 2,501 2,975 3,862 4,736 5,399

(1,779) (1,539) (1,611) (1,907) (1,941) (445) (413) (1,109) (1,093) (828) 2,777 2,630 2,711 3,412 3,789 2,437 2,296 2,711 3,412 3,789 0.67 0.63 0.74 0.94 1.04

Cash Flow Statement
Cash Flow 2,011 2,012 2013E 2014E 2015E

Key Ratios
Ratio Analysis 2,011 2,012 2013E 2014E 2015E

Net Gearing Assets to Equity ROE Gross Margin (Pre-LAT) Gross Margin (Post-LAT) Underlying Net Margin Asset Turnover

104% 387% 10% 40% 36% 17% 15%

98% 398% 8% 30% 29% 11% 19%

99% 422% 9% 31% 29% 11% 20%

89% 381% 11% 31% 29% 11% 25%

85% 365% 11% 28% 27% 11% 27%

Operating Activities Profit before taxation 5,001 4,581 5,430 Depreciation of PPE 118 128 5 Cashflows pre- Working Cap 4,131 4,770 5,772 Change in Working Capital (12,048) 2,021 (4,625) Others (4,639) (5,902) (1,948) Net Cash from Operating (12,555) 889 (801) Investing Activities Purchase of PP&E (105) (46) (76) Land use rights deposits (420) Others 417 (326) (322) Net Cash Used In Investing (108) (373) (398) Financing Activities Borrowings Raised 22,810 24,837 6,067 Shares issuance Repayments Of Borrowings (15,973) (22,081) Others 1,545 (1,260) (1,008) Net Cash From Financing 8,382 1,496 5,059
E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

6,412 6,559 15 14 6,775 6,878 (1,625) (5,035) (2,256) (2,247) 2,894 (404) (61) (1,802) (1,863) (7,998) (761) (8,759) (68) (68) 216 (848) (632)

43

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Poly Property (0119.HK, HK$4.84, UW, PT HK$4.30)
Risk-Reward View: Low margins restrict reinvestment ability
HK$ 8 HK$7.08 (+46%)

Why Underweight
 We expect Poly Property’s recognized ASP and margins to trend down in 2H13, while net debt to equity and completed inventory could rise again by end-2013.  Scheduled completion of low sell-through and low-margin projects such as Zunyi Future City in 2H13 are likely to be a key drag on its inventory and cash flow.  As a result, we believe this restricts the cash flow resources for Poly Property to reinvest for future growth.

7

6 HK$ 4.84 5 HK$4.30 (-11%) 4

3

2

HK$1.89 (-61%)

1

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0119.HK~

Base Case (Oct-14)

Historical Stock Performance

Key Value Drivers
 Property price growth, particularly in Guiyang, Zunyi, Wuhan, and Shanghai.  Volume growth in Tier 1 & 2 cities such as Suzhou and Wuhan.

Price Target HK$4.30

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Bull Case HK$7.08

55% discount to bull-case forward NAV

Key Upside Risks
 Stronger-than-expected sales from new project launches.  Higher sell-through rate and margin expansion.  Property price increases, driving margin expansion.  Loosening of property-specific policies by the central government.  Improvement in sell-through rate, easing cash flow concerns.

Base Case HK$4.15

65% discount to base-case forward NAV 75% discount to bear-case forward NAV

Bear Case HK$1.89

Key Downside Risks
 Weaker economic growth, depressing demand for property.  Decline in property prices, causing further margin compression.  Slippage in construction timing, leading to a miss in earnings, putting pressure on gearing ratios and on the share price.

Source: Morgan Stanley Research, Thomson Reuters

44

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Shimao Financial Summary
Balance Sheets (RMB mn)
2011 2012 2013E 2014E 2015E

Fixed assets Property, plant & Equip. 8,326 9,703 10,676 Investment properties 20,567 26,248 27,851 Land Use Rights 2,475 4,717 4,953 Associated companies 5,616 7,038 7,390 Intangible assets 2,264 2,140 2,140 Other Assets 4,787 2,375 2,797 Current Assets --Properties under dev. 44,959 44,285 64,425 Compl. prop held for sale 7,382 7,103 7,459 Trade/other receivables 4,472 6,639 8,651 Other current assets 2,401 2,481 2,940 Restricted cash 1,681 2,204 2,424 Cash and cash equiv. 12,313 15,894 10,624 Sub-Total 73,208 78,606 96,523 Total Assets 117,243 130,828 152,330 FINANCED BY: Current Liabs Borrowings Advances fr customers Trade & other payables Income tax payable Other current liabilities Sub-Total L/T Borrowings Deferred income tax liab. Minority interest Share capital Reserves Shareholders' Equity

Income Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

11,648 28,370 5,201 7,984 2,140 3,115

12,620 28,870 5,461 8,800 2,140 3,487

83,566 90,619 7,831 8,223 10,334 11,601 3,307 3,726 2,667 2,934 12,555 19,463 120,260 136,565 178,718 197,943

14,983 11,829 17,471 7,159 31 51,474 27,578 3,173 4,426 356 30,236 30,592

12,381 20,578 14,396 7,260 2,898 57,512 28,613 3,776 5,020 356 35,551 35,907

7,523 8,777 33,172 44,556 17,439 18,898 8,219 9,337 2,028 2,231 68,382 83,798 33,284 37,481 5,050 6,014 5,567 6,510 356 356 39,691 44,559 40,048 44,915

8,060 55,330 18,830 10,672 2,454 95,346 37,080 7,136 7,907 356 50,118 50,475

Sales of Properties Rental Income Hotel Operating Income Total Turnover Sales of properties Rental Income Hotel operating income Gross Profit (Pre-LAT) Selling & Admin expenses Investment Revaluation Other income Interest Income Operating Profit Finance Costs Associates and JCE Profit before Taxation Income Tax Expenses Minority Interests Net Profit Underlying Profit EPS (RMB) Underlying EPS (RMB)

24,589 441 1,001 26,031 7,807 308 715 10,000 (2,119) 2,527 602 100 11,110 (480) 122 10,752 (4,303) (726) 5,723 4,560 1.62 1.29

26,607 507 1,538 28,652 7,107 355 1,217 9,605 (2,863) 2,363 929 146 10,181 (168) 152 10,165 (3,581) (820) 5,764 4,400 1.66 1.27

39,689 793 1,165 41,647 10,690 555 820 14,464 (3,498) 0 995 153 12,114 (505) 352 11,961 (4,790) (547) 6,625 6,625 1.91 1.91

49,275 1,018 1,171 51,465 13,085 713 824 17,414 (4,323) 0 1,096 161 14,348 (506) 594 14,435 (5,704) (943) 7,788 7,788 2.25 2.25

56,643 1,024 1,178 58,846 15,619 717 828 20,502 (4,943) 0 1,045 169 16,774 (530) 816 17,060 (6,769) (1,397) 8,895 8,895 2.56 2.56

Cash Flow Statement
(Year to Dec 31) 2011 2012E 2013E 2014E 2015E

Ratio Analysis
2011 2012 2013E 2014E 2015E

Net profit before MI Depreciation Other Non-Cash Adj. Chg in working Capital Cash Fr Operations Tax & Interest paid Net Cash fr Operations

6,449 6,584 7,171 298 347 348 (2,675) (3,404) (506) (7,228) 7,155 (5,160) 1,197 14,513 7,149 (5,259) (6,119) (6,586) (4,062) 8,394 562

8,732 365 (755) (5,597) 8,954 (7,450) 1,504 0 (2,103) 0 0 (2,103) (2,921) 1,254 4,197 0 0 0 2,530

10,291 382 (985) 4,883 21,870 (8,394) 13,476 0 (2,114) 0 0 (2,114) (3,336) (717) (402) 0 0 0 (4,454)

Net Debt to Equity 99% 70% 75% 75% 51% ROE 19% 16% 17% 17% 18% Assets Turnover 22% 22% 27% 29% 30% Assets Turnover (Contracted sales) 26% 35% 43% 42% 43% Gross Margin (Pre-LAT) 38% 34% 35% 34% 35% Gross Margin (Post LAT) 34% 30% 29% 28% 29% Net Margin 18% 15% 16% 15% 15% Asset to Equity 383% 364% 380% 398% 392%

Disposal Of Fixed Assets 238 164 0 Cap. Expend./Prop Add (2,591) (4,275) (3,160) Net increase In Inv. 0 0 0 Other Investing Activities (856) 830 0 Cash Fr Investing (3,209) (3,281) (3,160) Dividend paid (1,382) (556) (2,484) Inc(Dec) In St Borrowings 9,118 (442) (4,858) Inc(Dec) In Lt Borrowings 0 0 4,671 Inc(Dec) In Capital Stocks (422) (21) 0 Proceeds fm issue of shrs 12 30 0 Other Financing Activities 169 (541) 0 Cash Fr Financing Act. 7,496 (1,530) (2,671)
E = Morgan Stanley Research estimates Source: Company Data, Morgan Stanley Research

45

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Shimao (0813.HK, HK$19.98, OW, PT HK$23.00)
Risk-Reward View: Turnaround in sales drives re-rating
HK$40 HK$37.06 (+85%) 35 30 25 HK$ 19.98 20 15 10 5 0 Oct-11 HK$23.00 (+15%)

Investment Thesis
 Strong sell-through, margin recovery and further improvement in cost control will continue to underpin the stock’s re-rating in our view.  We expect Shimao to achieve Rmb66 bn of contracted sales in 2013, beating its Rmb55bn original target set at the beginning of the year, and forming a solid cash flow base to reinvest for 2014 contracted sales growth.  We believe the developer’s 2014 sellable resources could reach at least Rmb110 bn, underpinning a ~20% YoY 2014 contracted sales growth.  Shimao’s profit margins have bottomed and recovered earlier than expected in 1H13.

HK$9.14 (-54%)

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0813.HK~

Base Case (Oct-14)

Historical Stock Performance

Source: Company Data, Morgan Stanley Research

Price Target HK$23.00

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Bull Case HK$37.06

20% discount to bull-case forward NAV

Key Value Driver
 Robust contracted sales to improve developers’ asset turnover and lower inventory  Property prices increase driving margin expansion

Base Case HK$23.00

35% discount to base-case forward NAV 61% discount to bear-case forward NAV

Key Downside Risks
 Weaker economic growth results in weaker demand for properties;  Margins are lower than expected due to price cuts and rising construction costs;  Unexpected slippage in cash collection, resulting in further increase in gearing and cash flow pressures.

Bear Case HK$9.14

Source: Morgan Stanley Research, Thomson Reuters

46

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Sino Ocean: Financial Summary
RMB million, Years Ending 31 December

Balance Sheet
2011 2012 2013E 2014E 2015E

Income Statement
2011 2012 2013E 2014E 2015E

Fixed assets Property, plant & Equip. Investment properties Land Use Rights Associated companies Goodwill Other Assets Sub-Total Current assets Land under Develop. PUD & Completed Props Trade & Receivables Other current assets Restricted cash Cash & cash Equiv. Sub-Total Total Assets

225 213 260 278 294 5,462 7,202 8,722 8,722 18,371 9 9 9 9 9 1,658 2,143 2,221 2,376 2,535 630 457 457 457 457 2,345 3,707 3,943 5,346 5,812 10,331 13,731 15,614 17,189 27,478 4,029 1,639 1,720 1,806 1,897 68,744 81,066 91,415 97,998 92,510 6,087 9,727 7,473 8,480 9,387 8,676 5,995 4,978 4,164 3,514 3,769 5,399 5,399 5,399 5,399 8,648 10,747 17,874 19,109 10,248 99,954 114,573 128,859 136,957 122,954 110,285 128,304 144,473 154,146 150,432

Current Liabs Borrowings Advances fr. customers Trade payables Income tax payable Other current liabilities Sub-Total L/T Borrowings Deferred income tax liab. Minority interest Long-term payables Share capital Reserves Total Liabs & Equity

14,482 22,870 10,175 3,509 0 51,036

11,520 9,730 9,273 8,760 30,681 34,747 36,980 34,931 16,191 17,171 19,404 21,440 5,276 5,750 6,172 6,651 19 192 315 667 63,687 67,590 72,144 72,448

Sales of properties Rental Income Property Mgt Total Turnover Sales of properties Rental Income Property Management Gross Profit Selling & Admin Exp. Investment Revaluation Other income Interest Income Operating profit Finance costs Associates and JCE Profit before taxation Tax expenses Minority Interests Net Profit Underlying Profit EPS (before preferred dist.) Underlying EPS

17,618 340 1,939 19,897 5,366 221 671 6,258 (1,596) 513 128 225 5,528 (419) 66 5,175 (2,554) (50) 2,571 2,134 0.46 0.38

26,053 414 2,191 28,658 6,672 269 758 7,699 (1,816) 1,535 (126) 209 7,501 (625) 359 7,235 (3,248) (191) 3,796 2,505 0.67 0.36

30,998 767 2,257 34,022 6,943 499 781 8,223 (2,143) 0 (201) 291 6,168 (523) 79 5,724 (2,318) (270) 3,137 2,519 0.51 0.41

34,802 1,479 2,324 38,605 8,118 962 804 9,884 (2,509) 0 (201) 291 7,464 (604) 155 7,015 (2,798) (547) 3,669 3,410 0.51 0.47

38,561 1,778 2,394 42,733 9,218 1,156 828 11,202 (2,778) 0 (201) 291 8,514 (562) 158 8,110 (3,315) (524) 4,271 4,012 0.59 0.56

Cash Flow Statement
19,105 20,873 32,531 34,758 27,498 1,387 1,698 2,850 3,067 3,306 3,489 3,786 4,055 4,602 5,127 20,099 20,735 25,720 25,720 25,720 15,169 17,524 11,555 13,683 16,161 110,285 128,303 144,301 153,974 150,260
Cash Flow Statement 2011 2012E 2013E 2014E 2015E

Key Ratios
2011 2012 2013E 2014E 2015E

Net Debt to Equity ROE ROA Gross Margin (Pre-LAT) Gross Margin (Post-LAT) Underlying Net Margin Total Assets / Equity Asset Turnover Asset Turnover (Contracted Sales)

71% 6% 7% 31% 26% 11% 3.13 18% 24%

57% 7% 8% 27% 22% 9% 3.35 22% 24%

65% 7% 6% 24% 21% 7% 3.88 24% 26%

63% 9% 7% 26% 22% 9% 3.91 25% 25%

62% 10% 7% 26% 22% 9% 3.59 28% 28%

Net Profit before MI Depreciation Non-cash items Chg in working Capital Cash Fr Operations Tax & Interest paid Net Cash fr Operations Capital invested in JV Capital Expenditure Net increase In Inv. Other investing Act. Net cash Fr Investing Dividend paid Inc(Dec) In Borrowings Proceeds fr issue of shrs Other Financing Activities Net Cash Fr Financing

2,621 3,987 3,406 4,216 4,795 49 47 48 47 48 2,676 1,978 3,090 3,217 3,687 (8,980) 2,880 (2,002) (1,167) (2,498) (3,434) 9,271 4,541 6,313 6,032 (5,943) (4,799) (4,127) (4,983) (5,003) (9,377) 4,472 414 1,330 1,029 (342) (346) 0 0 0 (68) (228) (63) (65) (64) 848 286 0 0 0 (341) (532) 0 0 0 98 (731) (63) (65) (64) (492) (277) (1,548) (1,541) (1,794) 4,387 (1,015) 9,868 1,770 (7,773) 2,492 0 4,985 0 0 (2,343) (29) (618) (260) (260) 4,044 (1,641) 6,718 (31) (9,826)

E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

47

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

Risk-Reward Snapshot: Sino Ocean (3377.HK, HK$4.85, UW, PT HK$4.10)
Risk-Reward View: High-cost land puts pressure on margin
HK$ 7 HK$6.59 (+36%) 6 HK$ 4.85 5

Why Underweight
 We believe the latest share subscription plan by Sino Ocean is an important step in its costly and painful process to unwind its Perpetual Convertible Securities  Sino Ocean has yet to show a plan to revive its margins and asset turnover, and a swift turnaround seems unlikely, in our view.  Sino Ocean’s single-digit return on equity is among the lowest in our coverage, due to weak asset turnover and low net margins.

4

HK$4.10 (-15%)

3

2

HK$1.79 (-63%)

1

0 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~3377.HK~

Base Case (Oct-14)

Historical Stock Performance

Key Value Drivers
 Property sales volume in Tier 1 & 2 cities, Bohai Rim cities in particular.  Residential and commercial property price increases, driving margin expansion.

Price Target HK$4.10

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Bull Case HK$6.59

50% discount to bull-case forward NAV

Potential Downside Catalysts
 Weaker-than-expected monthly contracted sales.  Higher-than-expected refinance cost for maturing loans.

Base Case HK$4.11

60% discount to base-case forward NAV 75% discount to bear-case forward NAV

Key Upside Risks
 Loosening of the property-specific tightening measures by the central government.  Stronger-than-expected property sales in Tier 1 & 2 cities.  Better-than-expected execution in property completion and sales.  Continued improvement in margins.

Bear Case HK$1.79

Source: Morgan Stanley Research, Thomson Reuters

48

MORGAN

STANLEY

RESEARCH

October 25, 2013 China Property

SOHO China Financial Summary
Balance Sheet (RMB mn)
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Fixed assets Property, plant and equip. Investment properties leases/subsidiaries Associated cos and JVs Other Assets Current Assets --Properties under dev. Completed prop held for sale and inventories A/C & other rec'&deposits Other current assets Cash and cash equivalent Sub-Total Total Assets

Income Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

688 682 746 831 938 13,335 38,310 41,994 46,116 50,345 0 2,124 18,084 5,345 4,066 2,147 7,260 2,789 4,066 2,147 8,602 3,006 4,066 2,147 8,678 1,123 4,066 2,147 9,919 321

5,615 3,262 3,245 3,073 3,157 2,583 2,353 2,353 2,353 2,353 11,906 19,709 12,782 8,312 7,813 43,533 35,373 29,988 23,540 23,564 59,680 80,578 79,027 76,782 81,156

FINANCED BY: Current Liabs S/T Borrowings Deposits received Income tax payable Other current liabilities Sub-Total L/T Borrowings Other non-current liabilities Minority interest Share capital Reserves Total Liabs & Equity

2,215 13,199 5,682 1,950 23,044 11,410 2,008 1,495 107 21,615 59,680

3,922 8,896 9,571 2,657 25,047 19,082 4,738 1,011 106 30,593 80,578

3,299 5,686 7,522 3,014 19,521 20,379 5,863 1,012 106 32,144 79,026

3,083 4,116 5,277 3,506 15,983 20,346 6,999 1,017 106 32,331 76,782

2,932 2,217 4,569 4,617 14,335 25,502 7,887 1,034 106 32,291 81,155

Sales of properties Property Investment Total Turnover Sales of properties Property Investment Gross Profit (Pre-LAT) Selling & Admin expenses Investment Revaluation Other income Interest Income Operating profit Finance costs Associates and JCE Profit before taxation Income tax Minority Interests Net Profit Underlying Profit MW EPS (RMB)

5,594 15,157 12,895 5,185 91 148 414 1,108 5,685 15,305 13,309 6,293 2,639 8,859 6,866 2,848 91 148 290 776 2,731 9,007 7,156 3,623 (448) (581) (665) (378) 4,027 9,605 0 0 343 290 0 0 559 433 218 202 7,213 18,753 6,708 3,448 (351) (558) (571) (576) 0 0 0 0 6,862 18,195 6,137 2,872 (2,375) (7,548) (3,307) (1,402) (594) (62) (2) (5) 3,892 10,585 2,829 1,466 1,422 3,335 2,829 1,466 0.25 0.59 0.50 0.26

3,707 2,269 5,977 1,399 1,589 2,987 (448) 0 0 174 2,714 (720) 0 1,994 (739) (17) 1,238 1,238 0.22

Cash Flow Statement
(Year to Dec 31) 2011 2012 2013E 2014E 2015E

Key Ratios
Ratio Analysis

PBT Depreciation Other Non-Cash Adjustments Changes in working Capital Cash Fr Operations Tax & Interest paid Net Cash fr Operations

6,862 18,195 6,137 2,872 1,994 19 23 22 22 23 (4,361) (9,478) 358 379 550 (3,517) (904) 771 2,144 (1,134) (996) 7,835 7,288 5,416 1,433 (3,234) (2,773) (4,717) (3,042) (1,295) (4,230) 5,062 2,571 2,374 138

(Year to Dec 31) Net Debt to Equity ROE ROA Gross Margin (Pre- LAT) Gross Margin (Post LAT) Underlying Net Margin Asset Turnover

2011 8% 7% 12% 48% 34% 25% 10%

2012 11% 11% 20% 59% 37% 22% 19%

2013E 34% 9% 7% 54% 39% 21% 17%

2014E 47% 5% 5% 58% 46% 23% 8%

2015E 64% 4% 6% 50% 45% 21% 7%

Disposal Of Fixed Assets 1 0 5 5 5 Cap. Expenditures/Prop Add (2,110) (3,844) (8,711) (5,207) (4,568) Other Investing Activities 3,087 (1,566) 0 0 0 Cash Fr Inv Activities 978 (5,410) (8,706) (5,201) (4,563) Inc(Dec) In Borrowings Other Financing Activities Cash Fr Fin Activities 1,975 9,238 674 (250) 5,006 (1,479) (1,189) (1,278) (1,278) (1,278) 497 8,049 (604) (1,528) 3,728

E = Morgan Stanley Research estimates Source: Company data, Morgan Stanley Research

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October 25, 2013 China Property

Risk-Reward Snapshot: SOHO China (0410.HK, HK$6.85, EW, PT HK$6.50)
Risk-Reward View: Fully-valued commercial property developer
HK$10 HK$9.50 (+39%) 9 8 HK$ 6.85 7 HK$6.50 (-5%) 6 5 4 3 2 1 0 Oct-11

Investment Thesis
 SOHO owns property assets in prime locations in Beijing and Shanghai and is the only Hong Kong-listed China property company to focus solely on commercial properties.  We believe SOHO is making a smooth transition to becoming a landlord.  We expect the Rmb14.8 bn contracted sales achieved at SOHO Peak Towers 1 and 2 to underpin its 2H13 and 2014 earnings  Leasing activity has picked up in SOHO Century Plaza, reaching full occupancy by end-June 2013. This should ease investors’ concerns on SOHO’s execution capability as a landlord.  Nonetheless, we believe the rich valuations implies limited upside potential, and hence, we remain EW.

HK$3.68 (-46%)

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0410.HK~

Base Case (Oct-14)

Historical Stock Performance

Source: Thomson Reuters, Morgan Stanley Research

Price Target HK$6.50

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios.

Bull Case HK$9.50

25% disc. to Economic rebound drives corporate expansion plans: Office bull-case and retail rents rise by 15% in 2014. We have assumed a stable forward NAV 6-8% cap rate for office and retail. We apply a 25% target discount to NAV. 35% disc. to Slow but steady economic growth: We expect 2014 office and base-case retail rents to remain stable and assume a 6% and 8% gross cap forward NAV rate for offices and retail properties, respectively. We have applied a target discount to NAV of 35% based on our scorecard applied across the industry. 50% disc. to Capitulation in economy and property market: We expect office bear-case and retail rents to decline sharply by 15% in 2014. We assume the forward NAV same 6-8% cap rate for office and retail. We apply a 50% target discount to NAV.

Base Case HK$6.51

Key Value Drivers
 Office rents in Beijing and Shanghai  Cap rates in Beijing and Shanghai

Potential Catalysts
 Evidence of successful pre-leasing of Fuxing Plaza and Sky SOHO  Successful disposal of minority stake in SOHO’s investment properties

Bear Case HK$3.68

Source: Morgan Stanley Research, Thomson Reuters

Key downside risks
 Delay in project completion and pre-leasing of Fuxing Plaza and Sky SOHO  Weaker-than-expected cash collection from SOHO Peaks

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October 25, 2013 China Property

Yuexiu Property: Financial Summary
RMB million, Years Ending 31 December

Balance Sheet
Balance Sheet 2011 2012 2013E 2014E 2015E

Income Statement
Income Statement 2011 2012 2013E 2014E 2015E

Non-current assets Property, plant and equipment Investment properties Interests in JV & Assoc Other non-current assets Subtotal Current assets Prop. under dev & Held for Sales Land Use Rights & Prepayments Trade/Other receivables, Prepay. Other current assets Cash and cash equivalents Subtotal Total Asset Current liabilities Adv. receipts from customers Payables and accrued charges Amt due to JV,Assc, & MI Borrowings Others Subtotal Borrowings Deferred tax liabilities Total liabilities Shareholders' Equity Non-controlling interests

3,183 1,047 1,744 2,514 3,224 11,923 6,185 9,536 10,477 12,486 2,109 6,956 6,838 6,752 7,383 881 978 978 978 978 18,095 15,166 19,095 20,721 24,070 32,444 37,821 40,003 42,980 44,012 2,065 5,440 8,332 10,028 12,442 852 1,588 3,791 4,126 4,515 2,937 2,922 3,032 3,148 3,269 4,824 7,060 5,461 4,503 7,079 43,121 54,831 60,618 64,784 71,317 61,216 69,997 79,714 85,506 95,387 5,393 6,482 10,591 893 23,359 11,191 6,034 40,584 20,187 442 10,003 9,191 6,829 1,534 27,556 13,302 6,018 46,877 22,158 962 12,654 11,343 6,829 1,534 32,359 16,711 6,018 55,087 23,511 1,115 14,351 17,452 12,784 14,531 6,829 6,829 1,534 1,534 35,498 40,346 17,711 20,711 6,018 6,018 59,227 67,074 24,956 26,670 1,323 1,642

Property Development Property Investment Revenue Gross profit (Pre-LAT) Gains on Reval. of inv. Prop. Selling and marketing costs Administrative expenses Operating profit Finance income Finance costs Share of profit of JV & Assoc Profit before taxation Taxation PAT less Non-controlling interests Profit/(loss) for the year Underlying Earnings Underlying Weighted EPS

8,477 445 9,569 4,004 4,956 (255) (730) 8,082

6,946 12,926 16,257 20,076 484 340 340 372 8,120 13,874 17,225 21,118 3,858 5,312 5,763 6,567 1,567 0 0 0 (465) (555) (517) (634) (831) (1,041) (1,033) (1,267) 4,805 3,716 4,213 4,667

53 61 82 79 7 (473) (553) (471) (491) (551) 480 246 94 136 865 8,364 4,635 3,422 3,937 4,987 (3,008) (2,075) (1,516) (1,583) (2,096) 5,356 2,559 1,906 2,354 2,892 (120) (77) (153) (208) (319) 5,237 1,607 0.17 2,482 1,279 0.14 1,753 2,146 2,573 1,753 2,146 2,573 0.19 0.23 0.28

Cash Flow Statement
Cash Flow Statement 2011 2012 2013E 2014E 2015E

Key Ratios
Ratio Analysis 2011 2012 2013E 2014E 2015E

Net Debt to Equity 84% 59% 77% 80% 77% Gross Debt to Equity 108% 91% 100% 98% 103% ROE 8% 6% 7% 9% 10% Assets to Equity 303% 316% 339% 343% 358% Gross Margin (Pre-LAT) 42% 48% 38% 33% 31% Gross Margin (Post-LAT) 38% 34% 34% 30% 27% Underlying Net Margins (Ex-IP sale) 17% 16% 13% 12% 12% Assets Turnover 16% 12% 17% 20% 22% Asset Turnover (Contract Sales) 15% 18% 21% 25% 29%

Operating activities Operating profit Depreciation and amortisation Change in Working Capital Others Net cash used in operating Investing activities Purchases of PPE Proceeds from sale of PPE Others Net cash generated fr. Inv. Financing activities Issue of ordinary shares New Borrowings Repayment of Borrowings Net cash generated fr. Fin.

8,082 4,805 3,716 4,213 4,667 67 76 17 32 49 (6,337) (4,004) (5,935) (2,925) (1,117) (6,703) (4,615) (1,905) (1,995) (2,639) (4,890) (3,738) (4,107) (675) 959 (1,489) (932) 722 5,823 (811) (1,982) (1,578) 2,909 1 6 10,783 13,495 (5,990) (11,182) 4,865 3,111 (714) 212 (502) (803) (758) 221 234 (582) (525)

3,408 1,000 3,000 3,008 299 2,142

Source: Company Data, Morgan Stanley Research E = Morgan Stanley Research estimates

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October 25, 2013 China Property

Risk-Reward Snapshot: Yuexiu Property (0123.HK, HK$2.16, OW, PT HK$3.30)
Risk-Reward View: Consistent contracted sales growth into 2014
HK$6.00 HK$5.29 (+145%) 5.00

Investment Thesis: Why OW
 We see a further rerating for Yuexiu Property, based on improvement in contracted sales growth, a stronger balance sheet, and lower funding costs thanks to its good credit ratings.  We view the stock as undervalued at a 61% discount to our forward NAV and at 0.7x book value.  The impact of Yuexiu’s debt restructuring began to pay off in 1H13, with average interest costs declining to 5.99% from 7.32% in 1H12, while SG&A has also been contained.

4.00 HK$3.30 (+53%) 3.00 HK$ 2.16 2.00

1.00

HK$.93 (-57%)

0.00 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0123.HK~

Base Case (Oct-14)

Historical Stock Performance

Key Value Drivers
 Residential property ASP.  Commercial property ASP.

Source: Company Data, Morgan Stanley Research

Price Target HK$3.30

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios. Relaxation of property austerity measures, monetary policy eases: Central government’s relaxation of property austerity measures, coupled with a looser monetary policy, stimulates investment demand and drives property prices higher. Our bull case factors in 15% growth in property prices across the board over the next 12 months. Policy direction remains intact: Government’s major policy direction remains unchanged, as local governments aim to contain property price growth within GDP growth. Our base case factors in a stable 0-5% growth in property prices over the next 12 months. Liquidity tightens while government strictly enforces property austerity measures: Local governments tighten up on home purchase restrictions enforcement. Meanwhile, tighter financial conditions amid the China banks reform triggers developers to soften their asking prices to stimulate volumes. Our bear case factors in a 15% property price decline over the next 12 months.

Potential Catalysts
 Stronger-than-expected monthly contracted sales.  New project launches.  NAV-accretive project acquisitions.  Transfer of commercial property projects to its related REIT.

Bull Case HK$5.29

20% discount to bull-case forward NAV

Base Case HK$3.39

40% discount to base-case forward NAV 74% discount to bear-case forward NAV

Key Risks
 Weaker-than-expected contracted sales for projects outside Guangdong.  Further policy tightening, affecting property sales volumes.  Lower-than-expected sell-through rates, causing a rise in net gearing.

Bear Case HK$0.93

Source: Thomson Reuters, Morgan Stanley Research

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October 25, 2013 China Property

Yuexiu REIT: Financial Summary
RMB million, Years Ending 31 December

Balance Sheet
RMB mn 2011 2012 2013E 2014E 2015E

Income Statement
RMB mn 2011 2012 2013E 2014E 2015E

Non-current assets Machinery and tools Investment properties Deferred assets Goodwill Subtotal Current assets Tax recoverable Prepayments, deposits Cash and cash equivalents Subtotal Total assets Current liabilities Rental deposits, current portion Receipts in advance Accruals and other payables Due to related companies Bank borrowings, secured Subtotal Non-current liabilities, Rental deposits, non-current Bank borrowings, secured Deferred tax liabilities Subtotal Minority interest Net assets attrib to unitholders

0 2,287 2,148 2,008 6,471 18,264 18,299 18,335 39 116 116 116 160 160 160 160 6,670 22,736 22,632 22,528

1,869 18,370 116 160 22,424

2 2 2 2 2 7 25 18 21 23 521 774 442 457 406 705 2,138 1,799 1,817 1,768 7,375 24,874 24,432 24,345 24,192

Gross income 522 Hotel and Serv Apt direct expenses Leasing agents' fee (18) Property related taxes (92) Other property expenses (3) Net Property Income 410 Net Operating Income (NOI) 410 Withholding tax (47) Manager fees (34) Trustee fees (2) Other trust expenses (17) Total Non-Prop exp (102) Operating Profit Fair value gain on inv prop Net Finance Costs Net profit before tax Income tax expenses PAT before trans. with Unitholders PAT before gain on inv. Prop. No of Shares Total distributable income MW EPS (HK$) DPU (HK$) 308 1,026 36 1,371 (34) 1,337 311 1,066 231 0.35 0.26

712 (61) (21) (120) (3) 507 637 (50) (50) (3) (5) (144)

1,372 (206) (39) (240) (3) 883 1,013 (34) (87) (6) (19) (286)

1,631 (258) (52) (285) (4) 1,031 1,068 (38) (91) (7) (23) (298)

1,754 (253) (51) (307) (4) 1,139 1,139 (41) (94) (7) (25) (306)

54 8 45 22 129

73 25 1,409 46 300 1,862

141 25 1,409 46 1,630

168 25 1,409 46 1,656

180 25 1,409 46 1,669

364 598 733 832 391 (110) (316) (327) (347) 738 282 406 485 (50) (14) (20) (24) 688 268 386 461 297 268 386 461 2,743 2,760 2,778 2,795 403 604 630 665 0.23 0.11 0.16 0.19 0.26 0.27 0.28 0.30

73 121 234 278 299 1,978 8,058 7,806 7,806 7,806 100 2,226 2,226 2,226 2,226 2,151 10,405 10,266 10,311 10,331 83 83 83 5,095 12,524 12,453 12,296 12,109

Key Ratios
RMB mn 2011 2012 2013E 2014E 2015E

Net Debt to Equity Total Debt to Assets ROE NPI Margin Operating Margin Distributable Margin

29% 27% 6.1% 78% 59% 44%

61% 34% 2.4% 71% 51% 57%

59% 32% 2.2% 64% 44% 44%

60% 32% 3.1% 63% 45% 39%

61% 32% 3.8% 65% 47% 38%

Cash Flow Statement
2011 2012 2013E 2014E 2015E

Cash flows from operating Cash generated from operations Interest paid China enterprise income tax paid Net Operating Cashflows Cash flows from investing Additions of investment properties Interest received Net Investing Cashflows

321 (37) (9) 275

224 924 940 1,004 (145) (382) (363) (351) (7) (14) (20) (24) 71 529 557 628

(12) (12) 3 32 (9) (4,611)

(35) 66 31

(35) 36 1

(35) 5 (31)

Cash flows from financing Distribution paid (223) Net proceeds from bank borrowings 274 Issuance of units Net Financing Cashflows 51 Net changes in cash 317

(275) (339) (543) (648) 1,884 (552) 3,184 4,793 (891) (543) (648) 253 (332) 15 (51)

Source: Company Data, Morgan Stanley Research E = Morgan Stanley Research estimates

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October 25, 2013 China Property

Risk-Reward Snapshot: Yuexiu REIT (0405.HK, HK$3.83, OW, PT HK$5.00)
Risk-Reward View: Strong execution in GZ commercial property
HK$7.00 HK$6.17 (+61%)

Investment Thesis: Why OW
 Yuexiu REIT stock is trading at compelling valuations, in our view, and our PT suggests 31% upside potential, with a 7.1% dividend yield for 2013E.  We believe the better-than-expected execution at Guangzhou IFC should trigger a rerating of the REIT to a lower dividend yield. Our PT implies a 5.5% dividend yield.  Since the remaining ~25% vacant office space is mainly on the higher floors of the office building, we see potential upside in office rents.  Yuexiu REIT is a pure play on China’s commercial property, which should sustain steady growth, and is not subject to the government’s measures to cool the residential property market.

6.00

5.00 HK$ 3.83

HK$5.00 (+31%)

4.00

HK$3.63 (-5%) 3.00

2.00

1.00

0.00 Oct-11

Apr-12

Oct-12

Apr-13

Oct-13

Apr-14
Current Stock Price

Oct-14
WARNINGDONOTEDIT_RRS4RL~0405.HK~

Base Case (Oct-14)

Historical Stock Performance

Price Target HK$5.00

Based on a discount to our Fwd NAV, probability-weighted bull (20%), bear (20%) and base (60%) scenarios.

Bull Case HK$6.17

Implies Economic rebound drives corporate expansion plans: Lack of 2013E div. land sales in the next four years causes a supply shortage of yield of 4.4% commercial property amid robust demand driven by active corporate expansion, pushing up commercial property rents in Guangzhou. This drives 5% rent growth p.a. in 2017-2026. Implies Slow but steady economic growth: Land sales for commercial 2013E div properties moderate in Guangzhou Tianhe and Zhujiang New yield of 5.4% Town CBD, following the peak of the completion cycle in 2016. Vacancy rates decline gradually, amid a stable macroeconomic environment, driving rents to rise steadily at 3% p.a. in the medium term (2017-2026). Implies Capitulation in economy and property market: Guangzhou 2013E div. government constructs a new CBD, flooding the market with new yield of 7.5% office supply, while a structural slowdown in the macro economy drags the demand for prime office spaces. Tianhe and Zhujiang New Town lose their appeal, and rents decline by 5% p.a. in the medium term (2017-2026).

Key Value Drivers
 Guangzhou office and retail rents, especially rent growth from Guangzhou IFC and the White Horse Building.  Yield-enhancing acquisitions.

Base Case HK$5.12

Potential Catalysts
 Value-enhancing acquisitions.  Stronger-than-expected operational performance from GZ IFC.

Bear Case HK$3.63

Key Risks
 A cut in the dividend payout ratio to 90%.  Acquisition of assets within Yuexiu Property at a higher-than-expected cost.  Refinancing risk of GZ IFC’s construction loans.  Interest rate hikes in China and the US.

Source: Morgan Stanley Research, Thomson Reuters

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The information and opinions in Morgan Stanley Research were prepared or are disseminated by Morgan Stanley Asia Limited (which accepts the responsibility for its contents) and/or Morgan Stanley Asia (Singapore) Pte. (Registration number 199206298Z) and/or Morgan Stanley Asia (Singapore) Securities Pte Ltd (Registration number 200008434H), regulated by the Monetary Authority of Singapore (which accepts legal responsibility for its contents and should be contacted with respect to any matters arising from, or in connection with, Morgan Stanley Research), and/or Morgan Stanley Taiwan Limited and/or Morgan Stanley & Co International plc, Seoul Branch, and/or Morgan Stanley Australia Limited (A.B.N. 67 003 734 576, holder of Australian financial services license No. 233742, which accepts responsibility for its contents), and/or Morgan Stanley Wealth Management Australia Pty Ltd (A.B.N. 19 009 145 555, holder of Australian financial services license No. 240813, which accepts responsibility for its contents), and/or Morgan Stanley India Company Private Limited, and/or PT Morgan Stanley Asia Indonesia and their affiliates (collectively, "Morgan Stanley"). For important disclosures, stock price charts and equity rating histories regarding companies that are the subject of this report, please see the Morgan Stanley Research Disclosure Website at www.morganstanley.com/researchdisclosures, or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY, 10036 USA. For valuation methodology and risks associated with any price targets referenced in this research report, please email morganstanley.research@morganstanley.com with a request for valuation methodology and risks on a particular stock or contact your investment representative or Morgan Stanley Research at 1585 Broadway, (Attention: Research Management), New York, NY 10036 USA. The following analysts hereby certify that their views about the companies and their securities discussed in this report are accurately expressed and that they have not received and will not receive direct or indirect compensation in exchange for expressing specific recommendations or views in this report: Brian Leung. Unless otherwise stated, the individuals listed on the cover page of this report are research analysts.

Analyst Certification

Global Research Conflict Management Policy

Morgan Stanley Research has been published in accordance with our conflict management policy, which is available at www.morganstanley.com/institutional/research/conflictpolicies. As of September 30, 2013, Morgan Stanley beneficially owned 1% or more of a class of common equity securities of the following companies covered in Morgan Stanley Research: China Overseas Grand Oceans Group, China Overseas Land & Inv., Guangzhou R&F Properties, SOHO China. Within the last 12 months, Morgan Stanley managed or co-managed a public offering (or 144A offering) of securities of Agile Property, Central China Real Estate Ltd, Guangzhou R&F Properties, Longfor Properties, SOHO China, Yuexiu Property. Within the last 12 months, Morgan Stanley has received compensation for investment banking services from Agile Property, Central China Real Estate Ltd, Longfor Properties, Shimao Property, SOHO China, Yuexiu Property, Yuexiu Real Estate Investment Trust. In the next 3 months, Morgan Stanley expects to receive or intends to seek compensation for investment banking services from Agile Property, Central China Real Estate Ltd, China Overseas Land & Inv., China Resources Land, China Vanke Co., Ltd., Country Garden Holdings Company Limited, KWG Property Holding Limited, Longfor Properties, Shimao Property, Sino Ocean Land, SOHO China, Yuexiu Property, Yuexiu Real Estate Investment Trust. Within the last 12 months, Morgan Stanley has received compensation for products and services other than investment banking services from Agile Property, China Overseas Grand Oceans Group, KWG Property Holding Limited, Shimao Property, Sino Ocean Land, SOHO China. Within the last 12 months, Morgan Stanley has provided or is providing investment banking services to, or has an investment banking client relationship with, the following company: Agile Property, Central China Real Estate Ltd, China Overseas Land & Inv., China Resources Land, China Vanke Co., Ltd., Country Garden Holdings Company Limited, Guangzhou R&F Properties, KWG Property Holding Limited, Longfor Properties, Shimao Property, Sino Ocean Land, SOHO China, Yuexiu Property, Yuexiu Real Estate Investment Trust. Within the last 12 months, Morgan Stanley has either provided or is providing non-investment banking, securities-related services to and/or in the past has entered into an agreement to provide services or has a client relationship with the following company: Agile Property, China Overseas Grand Oceans Group, KWG Property Holding Limited, Shimao Property, Sino Ocean Land, SOHO China. The equity research analysts or strategists principally responsible for the preparation of Morgan Stanley Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Morgan Stanley and its affiliates do business that relates to companies/instruments covered in Morgan Stanley Research, including market making, providing liquidity and specialized trading, risk arbitrage and other proprietary trading, fund management, commercial banking, extension of credit, investment services and investment banking. Morgan Stanley sells to and buys from customers the securities/instruments of companies covered in Morgan Stanley Research on a principal basis. Morgan Stanley may have a position in the debt of the Company or instruments discussed in this report. Certain disclosures listed above are also for compliance with applicable regulations in non-US jurisdictions.

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(as of September 30, 2013)

For disclosure purposes only (in accordance with NASD and NYSE requirements), we include the category headings of Buy, Hold, and Sell alongside our ratings of Overweight, Equal-weight, Not-Rated and Underweight. Morgan Stanley does not assign ratings of Buy, Hold or Sell to the stocks we cover. Overweight, Equal-weight, Not-Rated and Underweight are not the equivalent of buy, hold, and sell but represent recommended relative weightings (see definitions below). To satisfy regulatory requirements, we correspond Overweight, our most positive stock rating, with a buy recommendation; we correspond Equal-weight and Not-Rated to hold and Underweight to sell recommendations, respectively.

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Stock Rating Category

Coverage Universe Investment Banking Clients (IBC) % of % of % of Rating Total Count Count Total IBC Category

Overweight/Buy Equal-weight/Hold Not-Rated/Hold Underweight/Sell Total

1002 1278 114 526 2,920

34% 44% 4% 18%

410 493 28 140 1071

38% 46% 3% 13%

41% 39% 25% 27%

Data include common stock and ADRs currently assigned ratings. An investor's decision to buy or sell a stock should depend on individual circumstances (such as the investor's existing holdings) and other considerations. Investment Banking Clients are companies from whom Morgan Stanley received investment banking compensation in the last 12 months.

Analyst Stock Ratings
Overweight (O or Over) - The stock's total return is expected to exceed the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Equal-weight (E or Equal) - The stock's total return is expected to be in line with the total return of the relevant country MSCI Index, on a risk-adjusted basis over the next 12-18 months. Not-Rated (NR) - Currently the analyst does not have adequate conviction about the stock's total return relative to the relevant country MSCI Index on a risk-adjusted basis, over the next 12-18 months. Underweight (U or Under) - The stock's total return is expected to be below the total return of the relevant country MSCI Index, on a risk-adjusted basis, over the next 12-18 months. Unless otherwise specified, the time frame for price targets included in Morgan Stanley Research is 12 to 18 months.

Analyst Industry Views
Attractive (A): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be attractive vs. the relevant broad market benchmark, as indicated below. In-Line (I): The analyst expects the performance of his or her industry coverage universe over the next 12-18 months to be in line with the relevant broad market benchmark, as indicated below. Cautious (C): The analyst views the performance of his or her industry coverage universe over the next 12-18 months with caution vs. the relevant broad market benchmark, as indicated below. Benchmarks for each region are as follows: North America - S&P 500; Latin America - relevant MSCI country index or MSCI Latin America Index; Europe - MSCI Europe; Japan - TOPIX; Asia - relevant MSCI country index.
.

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Industry Coverage:China Property
Company (Ticker) Angus Chan, CFA Central China Real Estate Ltd (0832.HK) Jacky Chan SOHO China (0410.HK) Yuexiu Real Estate Investment Trust (0405.HK) Brian Y Leung Agile Property (3383.HK) China Overseas Grand Oceans Group (0081.HK) China Overseas Land & Inv. (0688.HK) China Resources Land (1109.HK) China Vanke Co., Ltd. (000002.SZ) Country Garden Holdings Company Limited (2007.HK) Guangzhou R&F Properties (2777.HK) KWG Property Holding Limited (1813.HK) Longfor Properties (0960.HK) Poly Property Group (0119.HK) Shimao Property (0813.HK) Sino Ocean Land (3377.HK) Yuexiu Property (0123.HK) Rating (as of) Price* (10/23/2013)

U (01/03/2011)

HK$2.62

E (01/27/2010) O (03/14/2013)

HK$6.73 HK$3.86

O (11/23/2011) U (07/30/2013) E (11/23/2011) E (08/26/2013) O (04/11/2012) O (11/23/2011) E (10/21/2012) O (10/21/2012) O (10/21/2012) U (03/10/2013) O (10/21/2012) U (04/11/2012) O (03/19/2013)

HK$9.17 HK$9.1 HK$23.65 HK$21.8 Rmb9.07 HK$5.35 HK$12.7 HK$4.96 HK$12.9 HK$4.69 HK$18.7 HK$4.79 HK$2.16

Stock Ratings are subject to change. Please see latest research for each company. * Historical prices are not split adjusted.

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