10 August 2010

Asia Pacific/China
Equity Research
Real Estate

China Property Policy Outlook: 2

Research Analysts
THEME
Jinsong Du
852 2101 6589
jinsong.du@credit-suisse.com
Grey income: who benefits if the wealth gap
Raymond Cheng, CFA
852 2101 6945 narrows?
raymond.cheng@credit-suisse.com
Ronney Cheung Figure 1: Grey income leads to a big swing in housing affordability in China
852 2101 7472 P/I (x)
ronney.cheung@credit-suisse.com Housing price to annual income ratio
13

12
11
Asia Property Research Analysts
10
Ernest Fong 9

(Head of Asia Property Research) 8

7
Anand Agarwal 6
(India) 5
4
Raymond Cheng
3
(China)
2

Jinson Du 1
0
(China)
US K orea Japa n Singapore HK China * China ** C hina *** China* ** *
Cusson Leung
(Hong Kong)
Source: Government websites, Credit Suisse research * = using average income; ** =
Gilbert Lopez average income with grey income included; *** = median income; **** = median income with
(Philippines)
grey income included
Teddy Oetomo
(Indonesia) Based on the grey income research sponsored by Credit Suisse, we conclude
Tricia Song
that China will not only increase wages, but also optimise its tax system –
(Singapore) developers that focus on mass market products and high asset turns, such as
Chai Techakumpuch
China Vanke, should stand to win.
(Thailand)
■ Grey income improved affordability, but only for the rich: The wealth
Tan Ting Min gap skews housing affordability more significantly than indicated by the
(Malaysia)
official data.
Sidney Yeh
(Taiwan) ■ Wealth gap led to a housing mix mismatch in major cities – time to
change: In metropolitan areas such as Hong Kong, the widening wealth gap
Research Assistants
has created social issues. However, public housing took up around 45% of
Abhishek Bansal Hong Kong’s total housing stock, and only less than 6% in China. Therefore,
(India)
we expect the government to use tax, among other things, to improve
Ronney Cheung affordability, and continue to suppress investment-purpose housing demand.
(China)

Joyce Kwock ■ Asset turns will become more important for developers: We expect that
(Hong Kong) the pace of land price appreciation will slow in China, and that the prevailing
business model of land hoarding for developers will no longer work. China
Vanke, COLI, and KWG remain our top picks in the sector.
Much of the data in this report is from the Credit Suisse Expert Insights
series: analysing Chinese grey income, published on 6 August 2010.

DISCLOSURE APPENDIX CONTAINS ANALYST CERTIFICATIONS AND THE STATUS OF NON-US ANALYSTS. U.S.
Disclosure: Credit Suisse does and seeks to do business with companies covered in its research reports. As a result,
investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making their investment decision.
 10 August 2010

Focus charts and table

Figure 2: Grey income does improve affordability ratio … Figure 3: … but wealth gap skews housing affordability
Price to income ratio Gini index vs P/I ratio
Price to income
(x) ratio (x)
Gini index vs P/I ratio - based on median income
13 13
12 12 HK
HK
11 11 Singapore
Singapore
10 10
9 9 China**
8 China 8
7 Japan 7 J apan
6 6 China***
5 Korea 5 Korea
4 4
3 US China* 3 US
2 2
1 1
0 0

0.2 0.25 0.3 0.35 0.4 0.45 0.5 0.55 0.6 0.2 0.25 0.3 0.35 0.4 0.45 0. 5 0.55 0. 6
Gini index Gini index

* = grey income used for calculation; Source: Government websites; ** = using median offical income; *** = using median official income +
Credit Suisse estimates median grey income; Source: Government websites; Credit Suisse
estimates;

Figure 4: Investment-driven demand caused housing mix mismatch – Shanghai’s large

unit sales volume as % of total correlates with property pricing changes
% Rmb/sqm
30 26,000
23,000
25
20,000
20 17,000
14,000
15
11,000
10 8,000
5,000
5
2,000
0 -1,000
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
09 09 09 09 09 09 09 09 09 09 09 09 10 10 10 10 10 10 10

Above 150 sqm / unit ASP (RMB/sqm) - RHS

Source: CRIC, Credit Suisse Research

Figure 5: Those with higher asset turns stand to win

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

-
China Vanke COLI KWG Shimao GZ R&F CR Land Sino Ocean Hopson

Source: Company data, Credit Suisse estimates

China Property Policy Outlook: 2 2

 10 August 2010

Figure 6: Valuation summary – China developers

Share Target +/- Mkt Current (Disc.)/ +12M (Disc.)/ Yield P/B Net
Price Price Cap NAV Prem. NAV Prem. Core PE (x) (%) (x) Gearing
Company RIC Rating (HK$) (HK$) (%) (US$b) (HK$/sh) (%) (HK$/sh) (%) FY09 FY10 FY11 FY09 FY10 FY10 (%)
COLI 0688.HK O 16.72 17.70 6 17.5 16.88 (1) 19.68 (15) 18.3 17.6 15.4 1.2 2.9 59.5
CR Land 1109.HK O 15.96 17.00 7 10.3 21.66 (26) 24.29 (34) 24.8 16.7 13.5 1.5 2.1 44.5
China Vanke - A (Rmb) 000002.SZ O 7.96 10.00 26 11.2 8.50 (6) 10.50 (24) 16.4 12.7 11.0 0.9 2.4 33.4
China Vanke - B 200002.SZ O 9.74 7.90 (19) 1.6 9.66 1 11.93 (18) 17.7 13.7 11.8 0.7 2.6 33.4
Evergrande 3333.HK N 2.69 2.40 (11) 5.2 6.08 (56) 6.20 (57) 154.3 5.1 4.7 0.1 1.9 21.6
Greentown 3900.HK U 9.33 8.30 (11) 1.8 15.95 (42) 16.62 (44) 17.4 10.1 7.7 3.3 1.3 169.1
Guangzhou R&F 2777.HK N 12.68 9.80 (23) 5.3 15.80 (20) 17.80 (29) 14.3 9.9 8.7 3.2 1.8 109.7
Hopson 0754.HK N 10.74 9.90 (8) 2.0 22.00 (51) 24.80 (57) 6.4 5.7 4.3 2.3 0.6 33.4
Kaisa 1638.HK O 1.62 2.10 30 1.1 4.90 (67) 5.30 (69) 17.1 5.0 8.3 n.a 1.1 54.1
KWG 1813.HK O 5.46 5.90 8 2.0 10.10 (46) 10.70 (49) 18.0 10.6 9.2 0.9 1.2 70.2
Poly (A) 600048.SS O 12.61 17.30 37 7.4 16.70 (24) 19.20 (34) 11.9 12.1 9.1 1.3 1.6 66.5
Poly (Hong Kong) 0119.HK O 9.15 9.90 8 3.8 12.20 (25) 14.10 (35) 31.7 24.7 17.0 0.5 1.5 52.9
Shimao Property 0813.HK O 14.24 14.10 (1) 6.5 17.66 (19) 20.20 (30) 16.2 11.4 10.3 2.0 1.8 78.5
Sino Ocean 3377.HK O 5.81 8.00 38 4.2 9.60 (39) 11.44 (49) 21.9 12.4 10.9 1.4 1.2 45.1

Prices are as of 9 August 2010;Source: Bloomberg;Company data, Credit Suisse estimates

China Property Policy Outlook: 2 3

 10 August 2010

Grey income: who benefits if the

wealth gap narrows
Based on the grey income research sponsored by Credit Suisse, we conclude that China
will not only increase wages, but optimise its tax system – developers that focus on mass
market products and high asset turns, such as China Vanke, should stand to win.

Grey income has improved affordability, but only for

the rich
The grey income research (conducted by Dr Wang Xiaolu and sponsored by Credit The wealth gap skews
Suisse) enables us to compare China’s “real” housing affordability with other countries. housing affordability more
We conclude that the consideration of grey income helps explain the strong demand for significantly than indicated
housing despite the surging property prices – the overall affordability may be better than by official data
indicated by official government data.
However, the research also shows that the wealth gap skews housing affordability more
significantly than indicated by the official data. If we use the median urban income instead
of the average to calculate affordability, the affordability ratio will increase from 8x to 9.8 –
based on official income data. The difference between average and median income is
even bigger when we consider the effect of grey income – the affordability ratio in this
case will increase from 4x to 7.5x.

Wealth gap has led to a housing mix mismatch in

major cities
In metros such as Hong Kong, it is well documented that the widening wealth gap has Public housing in China
created social issues. However, public housing took up around 45% of Hong Kong’s total currently took up less than
housing stock, and therefore cushioned the negative impact to a significant extend. Public 6% of the total housing
housing in China, however, currently takes up less than 6% of the total housing stock. stock
Therefore, the negative impact on housing in China should be much more significant, in
our view.
The Chinese government is committed to improving housing affordability by building more
public housing, raising average wages, and implementing changes in the tax system (such
as property tax). However, so far only wage increases have been implemented broadly.
To improve housing affordability, we believe China should not only raise wages, but also
optimise its tax system to narrow the wealth gap. For example, we expect the government
to implement property tax, which should increase the holding costs for property
investments of the wealthy.

With tax reform, asset turns will become more

important for developers
We believe that the positive impact of public housing should come only after it expands to We expect that the pace of
a large scale. Hence, in the near-to-medium term, we expect that the government will land price appreciation will
continue to suppress housing demand for investment/speculation purposes. As a result, slow in China, and that the
we expect the pace of land price appreciation to slow in China. prevailing business model of
land hoarding for developers
Therefore, the prevailing business model of land hoarding for developers will no longer
will no longer work
work in China, in our view. Instead, we believe those focusing on high asset turns and a
diversified product mix should stand to win.
China Vanke, COLI, and KWG remain our top picks in the sector.

China Property Policy Outlook: 2 4

 10 August 2010

Grey income has improved

affordability, but only for the rich
The grey income research (conducted by Dr Wang Xiaolu and sponsored by Credit We conclude that the grey
Suisse) enables us to compare China’s “real” housing affordability with that of other income consideration helps
countries. We conclude that the consideration of grey income helps explain the strong explain the strong demand
demand for housing despite the surging property prices – the overall affordability may be for housing despite of the
better than indicated by official government data. surging property prices
However, the research also shows that the wealth gap skews housing affordability more
significantly than indicated by official data. If we use the median urban income instead of
the average to calculate affordability, the official income data results in an affordability ratio
of 9.8x instead of 8x. The difference is even bigger when we consider the effect of grey
income – the affordability ratio in this case is 7.5x instead of 4x.
This helps explain why the government is committed to doubling average wages to narrow However, the research also
the wealth gap, in our view. shows that the wealth gap
skews housing affordability
Figure 7: China’s proposed solutions to its housing issue more significantly than
indicated by official data
Property tax
(near-term) Investors/
speculators

Double wages
(five-year plan)
Middle class

Public housing
(long term but start now?)
Low-income population

Source: Credit Suisse Research

How skewed is the measurement of housing

affordability?
Due to historical reasons, the method for calculating affordability ratios differs from country
to country. Nevertheless, the key difference has been in using average income versus
median income for the calculation.
After we published our brief introductory note on the impact of grey income on China’s
housing affordability on 20 July 2010, many investors inquired about the extent to which
the wealth gap skewed “real” affordability in China. To answer this question, we need to
introduce the Gini index.

China Property Policy Outlook: 2 5

 10 August 2010

Figure 8: Gini index (or Gini coefficient) worldwide

Source: Wikipedia

The Gini index (or Gini coefficient) is a measure of the inequality of a distribution, a value
of 0 expressing total equality and a value of 1 maximal inequality. It is commonly used as
a measure of inequality of income or wealth. Worldwide, Gini coefficients for income range
from approximately 0.25 (Denmark) to 0.70 (Namibia), although not every country has
been assessed.
The figure below shows that, based on the official average urban income from China’s Based on the official data,
National Statistics Bureau (NSB), China’s current affordability ratio is 8x (that is, it takes China’s current affordability
eight years’ average income to buy an average residential property unit). This is lower ratio was 8x. However, it
than the figure for city states such as Singapore (probably not a relevant comparison), but drops to 4x if we consider
significantly higher than the figure for large and developed continental nations such as the the impact of the grey
U.S. However, if we consider the impact of grey income, China’s national affordability ratio income
drops to 4x – similar to that in the U.S.

Figure 9: Gini index versus price-to-income ratio – based Figure 10: Gini index versus price-to-income ratio – based
on average income on commonly used local methods
Pri ce to income ratio Price to income
Gini index vs P/I ratio Gini index vs P/I ratio (publicised)
(x) ratio (x)
13 13
12 HK 12 HK
11 Singapore 11
10 Singapore
10
9 9
8 China 8 China
7 Japan
7
6 6 Japan
5 Korea Korea
5
4 4
3 US China* China*
3 US
2 2
1 1
0
0
0.2 0.25 0.3 0.35 0. 4 0.45 0.5 0.55 0.6
0.2 0 .25 0 .3 0.35 0.4 0.45 0.5 0.55 0.6
Gini index
Gi ni inde x

* = using average official income + grey income; Source: Government * = using average official income + grey income; Source: Government
websites; Credit Suisse estimates websites; Credit Suisse estimates

The grey income data also implies that China’s Gini index may be much higher than the The grey income data also
official data. Based on the official data, China’s Gini index is between 0.45-0.5, roughly implies that China’s Gini
equal to the U.S. but higher than other developed countries such as Japan and Europe. If index may be much higher
the effect of grey income is included, China’s Gini index is likely to be more than 0.55 – than the official data
similar to that of many South American countries.

China Property Policy Outlook: 2 6

 10 August 2010

Indeed, the grey income research shows that the average per capita disposable income Research shows that
of the top 10% of the urban population should be 26x that of the bottom 10% – much average per capita
higher than the 9x in the official data. disposable income of the
top 10% of the urban
Figure 11: Comparing Dr Wang’s study to the official data population should be 26x
(2008) Per capita disposable income (Rmb per annum)
that of the bottom 10% –
Urban population distribution Official Data (1) Wang's study (2) (2)/(1) %
much higher than the 9x in
Bottom 10% 4,754 5,350 113
the official data
10-20% 7,363 7,430 101
20-40% 10,196 11,970 117
40-60% 13,984 17,900 128
60-80% 19,254 27,560 143
80-90% 26,250 54,900 209
Top 10% 43,614 139,000 319
Total 16,885 32,154 190
Source: Prof. Wang's Study

The wealth gap thus skews housing affordability more significantly than indicated by the The wealth gap thus skews
official data. If we use median urban income instead of the average to calculate housing affordability more
affordability, the official income data results in an affordability ratio of 9.8x instead of 8x. significantly than indicated
The difference is even bigger when we consider the effect of grey income – the by the official data
affordability ratio in this case is 7.5x instead of 4x.

Figure 12: Gini index versus price-to-income ratio (based on median income)
P rice to inc om e
ra tio (x )
Gini index vs P/I ratio - based on median income
13
12 HK
11 Singapore
10
9 C hina* *
8
7 J apan
6 C hina* **
5 K orea
4
3 US
2
1
0

0 .2 0.25 0 .3 0.35 0 .4 0.45 0 .5 0.55 0 .6

Gini index

** = using median official income; *** = using median official income + median grey income; Source:
Government websites; Credit Suisse estimates

Figure 13: Grey income leads to a big swing in housing affordability in China
P/ I (x)
Housi ng pri ce to annual income ratio
13
12
11
10
9
8
7
6
5
4
3
2
1
0
US Ko rea Japan Singapore HK China * Chi na** China*** Chin a****

* = using average income; ** = average income with grey income included; *** = median income; **** =
median income with grey income included; Source: Government websites, Credit Suisse research

China Property Policy Outlook: 2 7

 10 August 2010

Wealth gap has led to a housing mix

mismatch in major cities
In metros such as Hong Kong, it is well documented that the widening wealth gap has Public housing in China
created social issues. However, public housing took up around 45% of Hong Kong’s total currently took up less than
housing stock, and therefore cushioned the negative impact to a significant extend. Public 6% of the total housing
housing in China, however, currently takes up less than 6% of the total housing stock. stock
Therefore, the negative impact on housing in China should be much more significant, in
our view.
The Chinese government is committed to improve housing affordability by building more
public housing, raising average wages, and implementing changes in the tax system (such
as property tax) to improve housing affordability. However, so far, only wage increases
have been implemented broadly.
To improve housing affordability, we believe China should not only raise wages, but
optimise its tax system to narrow the wealth gap as well. For example, we expect the
government to implement property tax, which should increase the holding costs for
property investments of the wealthy.

Figure 14: Public housing constitutes 45% of the total housing stock in Hong Kong –
versus less than 6% in China
%
50
45
40
35
30
25
20
15
10
5
0
Hong Kong China

Source: CEIC, Credit Suisse estimates

The higher the unit prices, the bigger the unit size
In China’s major cities, the 2009 property price surge resulted in more transactions of
larger size property units. The widening wealth gap should be one of the reasons, in our
view – although the official data shows that China has a Gini ratio similar to Hong Kong’s
(0.45-0.5), the grey income research implies that the Gini ratio should be a lot higher
(0.55-0.6) for China as a whole, and even higher for major cites specifically.
Property ASPs are more correlated with locations rather than unit sizes. However, as The volume of large-size
shown in the two figures below, the volume of large-size property sales as a percentage of property sales as a
total sales volume in Shanghai and Shenzhen correlates closely with property ASP percentage of total sales
changes. volume in Shanghai and
Shenzhen correlates closely
with property ASP changes

China Property Policy Outlook: 2 8

 10 August 2010

Figure 15: Shanghai’s large unit sales volume as % of total correlates with property
pricing changes
% Rmb/sqm
30 26,000
23,000
25
20,000
20 17,000
14,000
15
11,000
10 8,000
5,000
5
2,000
0 -1,000
Jan- Feb- Mar- Apr- May- Jun- Jul- Aug- Sep- Oct- Nov- Dec- Jan- Feb- Mar- Apr- May- Jun- Jul-
09 09 09 09 09 09 09 09 09 09 09 09 10 10 10 10 10 10 10

Above 150 sqm / unit ASP (RMB/sqm) - RHS

Source: CRIC, Credit Suisse Research

Figure 16: Shenzhen’s large unit sales volume as % of total also correlates with property
pricing changes

% Shenzhen Rmb/sqm
30 26,000
23,000
25
20,000
20 17,000
14,000
15
11,000
10 8,000
5,000
5
2,000
0 -1,000
Jul-09

Sep-09

Oct-09

Jul-10
Jan-09

Mar-09

Apr-09

May-09

Jun-09

Aug-09

Nov-09

Dec-09

Jan-10

Mar-10

Apr-10

May-10
Feb-09

Feb-10

Jun-10

Above 140 sqm / unit ASP (RMB/sqm) - RHS

Source: CRIC, Credit Suisse Research

Figure 17: % second home purchase in China

Income group More than one home (as a % of total)
No income 28.57%
Rmb 1 - 7,000 4.38%
Rmb 7001 - 10,000 4.03%
Rmb 10,001 - 17,000 9.72%
Rmb 17,001—26,500 12.50%
Rmb 26,501—34,000 14.20%
Rmb 34,001—75,000 23.24%
Rmb 75,001—400,000 37.01%
> Rmb 400,000 64.47%
Source: Prof. Wang's survey

China Property Policy Outlook: 2 9

 10 August 2010

Figure 18: Average housing size per capita in China

Income group Average GFA per capita (sq.m.)
No income 46
Rmb 1 - 7,000 31
Rmb 7001 - 10,000 31
Rmb 10,001 - 17,000 35
Rmb 17,001—26,500 39
Rmb 26,501—34,000 39
Rmb 34,001—75,000 48
Rmb 75,001—400,000 65
> Rmb 400,000 99
Source: Professor Wang’s survey

In the meantime, migrant workers’ (and professionals’) first home and average working Migrant workers’ (and
classes’ upgrade (both for smaller units) remain the main drivers of China’s self-use professionals’) first home
housing demand. Indeed, Credit Suisse’s annual consumer survey shows that first-home and average working
demand is on the rise. classes’ upgrade (both for
smaller units) remain the
Figure 19: Purpose of purchasing property in the coming one year – first home demand main drivers of China’s self-
is on the rise use housing demand

100 6 6
11 9
90 12
13 17 18
80
70
23 29
60 27 36
50
40
30 53 53
47
20 40
10
0
2006 2007 2008 2009

Upgrade First-time buyer Investment Others

Source: Credit Suisse Annual Consumer Survey

Therefore, there is clearly a mismatch between supply and the self-use demand in China.

The government is raising wages to narrow the

wealth gap – but tax may be more effective
The Chinese government is committed to improving housing affordability by building more Among the housing
public housing, raising average wages, and implementing changes in the tax system (such affordability solutions, so far
as property tax) to improve housing affordability. However, so far only wage increases only wage increases have
have been implemented broadly. been implemented broadly

China Property Policy Outlook: 2 10

 10 August 2010

Figure 20: China’s proposed solutions to its housing issue

Property tax
(near-term) Investors/
speculators

Double wages
(five-year plan)
Middle class

Public housing
(long term but start now?)
Low-income population

Source: Credit Suisse Research

So far in 2010, 30 provinces already raised the minimum wages, with an average increase
of more than 20%. According to the Ministry of Human Resources and Social Security,
other provinces will follow within this year.

Figure 21: Wage increases implemented so far this year

City Range Min. hourly rate Avg. % change
Shanghai 1120 9 16.7
Zhejiang 800-1100 6.5-9 15.3
Guangdong 660-1030 6.4-9.9 21.1
Beijing 960 11 20
Jiangsu 670-960 5.4-7.2 13.1
Tianjin 920 7.8 12.2
Shandong 600-920 6.5-9.6 21.2
Hebei 690-900 6.9-9 18
Mongolia 680-900 6.1-8.1 n.a
Liaoning 650-900 6-8.5 29
Fujian 600-900 6.5-9.6 24.5
Hubei 600-900 6.5-9 28.9
Helongjiang 600-880 5.5-7.5 n.a
Sichuan 650-850 6.8-8.9 13
Shanxi 640-850 7-9.3 15.5
Hunan 600-850 6-8.5 27.8
Hainan 630-830 5.9-7.2 n.a
Yunnan 680-820 6.0-8.0 n.a
Jilin 680-800 5.2-6.3 22.9
Henan 600-800 6.8-9 n.a
Shaanxi 580-760 5.8-7.6 22.7
Tibet 680-730 6-6.5 n.a
Anhui 500-720 7.5 27.25
Jiangxi 500-720 4.7-6.8 12
Ningxia 605-710 6.8-7.2 n.a
Chongqing 520-680 n.a n.a
Guangxi 460-670 3.5-5 n.a
Guizhou 550-650 5.9-6.9 n.a
Gansu 500-620 5.2-6.5 n.a
Qinghai 580-600 6.3-6.5 n.a
Average 20.06
Source: Government websites

China Property Policy Outlook: 2 11

 10 August 2010

However, history shows that an appropriate tax system should be more effective in
optimising the housing product mix. In fact, during the pilot housing program in Yantai in
the 1980s, and the wider pilot housing program in major cities such as Shanghai in the
1990s, the tax system has consistently proven to be an effective tool for better aligning
resources during the shortage in housing supply.
Therefore, to improve housing affordability, we believe China should not only raise wages, We expect the government
but also optimise its tax system to narrow the wealth gap. For example, we expect the to implement a property tax,
government to implement property tax, which should increase the holding costs for which should increase the
property investments of the wealthy. holding costs for property
investments of the wealthy
For more details on the property tax, please refer to our report, China Property Policy
Outlook 1, published on 14 June 2010.

China Property Policy Outlook: 2 12

 10 August 2010

With tax reform, asset turns will

become more important for
developers
We believe the positive impact of public housing should come only after it expands to a We expect that the pace of
large scale. Therefore, in the near-to-medium term, we expect the government to continue land price appreciation will
to suppress the investment/speculation-driven housing demand. With this, we expect the slow in China, and that the
pace of land price appreciation to slow in China. prevailing business model of
land hoarding for developers
Therefore, the prevailing business model of land hoarding for developers will no longer
will no longer work
work in China, in our view. Instead, we believe that those focusing on high asset turns and
a diversified product mix should stand to win.

Figure 22: An assessment of developers’ asset turns – using 2010E contracted sales /
total assets as a proxy

0.45

0.40

0.35

0.30

0.25

0.20

0.15

0.10

0.05

-
China Vanke COLI KWG Shimao GZ R&F CR Land Sino Ocean Hopson

Source: Company data, Credit Suisse estimates

Although these changes may happen only gradually, we believe the upcoming property- China Vanke, COLI, and
related policies should change the valuation of the China property sector within the next KWG remain our top picks
year or two. Those with a relatively high turnover, or strong brand name, or both, should in the sector
stand to outperform those mainly dependent upon financial leverage and a large land bank.
China Vanke, COLI, and KWG remain our top picks in the sector.

China Property Policy Outlook: 2 13

 10 August 2010

Companies Mentioned (Price as of 06 Aug 10)

China Overseas Land & Investment (0688.HK, HK$16.60, OUTPERFORM [V], TP HK$17.70)
China Resources Land Ltd (1109.HK, HK$15.92, OUTPERFORM [V], TP HK$17.00)
China Vanke Co Ltd-A (000002.SZ, Rmb8.00, OUTPERFORM [V], TP Rmb10.00)

Disclosure Appendix
Important Global Disclosures
Jinsong Du, Raymond Cheng, CFA & Ronney Cheung each certify, with respect to the companies or securities that he or she analyzes, that (1) the
views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or
her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report.
See the Companies Mentioned section for full company names.
3-Year Price, Target Price and Rating Change History Chart for 0688.HK
0688.HK Closing Target
Price Price Initiation/ 22
21 21 21
Date (HK$) (HK$) Rating Assumption 20
15-Aug-07 14.68 17.94 18
18 18
17
9-Jan-08 15.04 21.27 16 16 O
24-Mar-08 11.56 20.78
14 14
4-Aug-08 X
12 12 12
9-Sep-08 11.52 13.84 N N
11
3-Nov-08 8.95 10.899 10
6-Jan-09 11.9 12.11 8
24-Mar-09 12.48 11.99 HK$
6
4-Aug-08 11-Jan-10
19-Jun-09 15.94 16.3
07

08

09

0
7

0
8

8
18-Aug-09 17.46 17.4

-0
-0

-0

-0

-0

-0

-0

-0

-0

-1
-0

-0

-0

-1

-1
n-
c t-

c t-
un
ug

ug

eb

ug

eb
ec

ec

un
ec
pr

pr

pr
eb

ct
-Ju
-O

-O
-O

-A

-A
-A

-J
-D

-D

-D
-F

-F
-A

-A

-A

-J
-F

11-Jan-10 16.7 21 O X
10

10

10

10
10

10

10

10

10
10
10

10

10

10

10

10

10

10
Closing Price Target Price Initiation/Assumption Rating
19-May-10 14.42 17.7
O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

3-Year Price, Target Price and Rating Change History Chart for 1109.HK
1109.HK Closing Target 26
Price Price Initiation/ 24 24 24 24 25 24
Date (HK$) (HK$) Rating Assumption 22 23
22
15-Aug-07 13.24 15.4 O 20
17-Sep-07 15.1 16.66 18
30-Oct-07 18.1 22.27 17 17
16 16
15 RO
4-Dec-07 19.72 23.87 14 15
O 14 14
4-Aug-08 X 12 12
9-Sep-08 8.58 16.232 10
3-Nov-08 7.94 11.914 8
6-Jan-09 10 13.65 HK$
6
4-Aug-08 11-Jan-10
25-Feb-09 9.1 13.646
07

08

09

0
07

0
8

30-Mar-09 11.52 14.6

-0
-0

-0

-0

-0

-0

-0

-0

-1
-0

-0

-0

-1

-1
n-
g-

c t-

c t-
un
ug

eb

ug

eb
ec

ec

ec
pr

pr

pr

un
eb

ct
-Ju
u

-O

-O
-A

-A
-O
-A

-J
-F

-F
-D

-D

-D
-A

-A

-A

-J
-F

18-May-09 15.26 R
10

10

10

10
10

10

10

10

10
10
10

10

10

10

10

10

10

10

Closing Price Target Price Initiation/Assumption Rating

28-May-09 15.4 O
19-Jun-09 15.84 22.7 O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered
3-Aug-09 19.32 23.65
21-Sep-09 17.46 24.15
29-Oct-09 18.22 24.51
11-Jan-10 16.88 24 X
19-May-10 14.04 17

China Property Policy Outlook: 2 14

 10 August 2010

3-Year Price, Target Price and Rating Change History Chart for 000002.SZ
000002.SZ Closing Target
25
Price Price Initiation/
Date (Rmb) (Rmb) Rating Assumption
28-Jul-09 14.24 17 O X 20
12-Oct-09 10.85 15
17
22-Feb-10 9.26 12
15 15
19-May-10 7.26 9.5 O
5-Aug-10 7.99 10 12
10 10 10

28-Jul-09
Rmb
5

07

08

09

0
7

0
8

-0
-0

-0

-0

-0

-0

-0

-0

-1
-0

-0

-0

-0

-1

-1
n-
c t-

c t-
un
ug

ug

eb

ug

eb
ec

ec

un
ec
pr

pr

pr
eb

ct
-Ju
-O

-O
-O

-A

-A
-A

-J
-D

-D

-D
-F

-F
-A
-A

-A

-J
-F
10

10

10

10
10
10

10

10

10
10
10

10

10

10

10

10

10

10
Closing Price Target Price Initiation/Assumption Rating

O=Outperform; N=Neutral; U=Underperform; R=Restricted; NR=Not Rated; NC=Not Covered

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Restricted 2%
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China Property Policy Outlook: 2 15

 10 August 2010

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See the Companies Mentioned section for full company names.
Price Target: (12 months) for (0688.HK)
Method: Our 12-month target price of HK$17.70 for China Overseas Land & Investment is at 10% discount to our 12-month forward net asset value
(NAV) estimate using a 12% discount factor.
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Price Target: (12 months) for (1109.HK)
Method: Our 12-month target price of HK$17 for China Resources Land (CRL) is set at par to our 12-month forward NAV (net asset value) estimate
(HK$17/share) including the assumption of a asset injection by its parent holding company. CRL is one of a few Chinese property companies that
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Price Target: (12 months) for (000002.SZ)
Method: Our target price of Rmb10 is based on 10% discount to its 12 mth NAV, due to its diversified presence and good sales track record
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China Property Policy Outlook: 2 16

 10 August 2010

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China Property Policy Outlook: 2 17

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Asia Pacific/China
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