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China Financials
Investment case: We see Joy City as an up-and-coming retail mall
operator and manager in China. Backed by asset injections from parent
COFCO Corporation (one of the largest state-owned business groups in
China), Joy City now owns 8 Joy City complexes, with 29 property projects
in 8 cities as well as 8 hotels and other residential and commercial projects. We think Joy City has developed a special product (Joy City mall) for China
malls that is gaining acceptance from the young and upcoming consumer
groups, enabling its malls to remain resilient amid slower retail sales
growth. Over the years, it has formed partnerships with many brands (both
international and domestic), which bodes well for its prospects in terms of
achieving above-average growth in foot traffic and retail sales. Joy City has kicked off its asset-light strategy with its mall business, which we
think could become a supplementary revenue growth driver to cushion the
slowdown in retail sales growth. Under this strategy, it would either acquire a
small stake in already-developed malls or help manage malls. We think that
either way, there is the potential for it to achieve sustainable income growth,
helped by the large number of poorly managed malls in China. It reported 2015 contract sales of CNY3.2bn (+79%) and we expect its robust
sales growth to continue in 2016-17 (2016: +35%; 2017: +47%), on the back of
CNY40bn of saleable resources. While we believe Joy City’s strong sales are
sufficient to support its capex needs, we also think they will underpin our strong
revenue growth forecasts for 2016-17 (2016: +41%; 2017: +35%). Thanks to its steady recurrent income and to having COFCO Corporation
as its parent, Joy City has been able to enjoy low finance costs. Its overall
funding cost of 5.8% for 1H15 was lower than its peers’ average of 6.7%,
and we forecast it to drop to 5.4% for 2016 and 5.2% for 2017. It recently
issued 5-year domestic corporate bonds with a 3.2% coupon rate, one of
the lowest rates among Hong Kong-listed China developers. Catalysts: The potential share-price catalysts we see in 2016 are: 1)
increased market recognition that Joy City has a sound and differentiated
business model for its retail property business, 2) progress in the execution
of its asset-light strategy, 3) the monetisation of its existing malls and the
Joy City model, eg., securitisation, REIT, spinoff, partial stake disposal, etc. Valuation: We initiate coverage with a Buy (1) rating and 12-month TP of
HKD1.52, based on a 50% target discount applied to our end-2016E NAV of
HKD3.04. Our target 50% NAV discount is at the lower end of the current 50-
70% discount to market NAV for the mid-cap HK-listed China property firms. Risks: The key risks to our call include: 1) a further deterioration in China’s
economy, which could impact retail sales and rents, and 2) difficulty in
securing projects in good locations going forward.
29 January 2016
Joy City Property
Initiation: upcoming landlord for upcoming consumers
Building a potential franchise for upcoming consumers in China
Leveraging on its asset light model to boost scale further
Initiating with a Buy (1) rating and target price of HKD1.52
Source: FactSet, Daiwa forecasts
Joy City Property (207 HK)
Target price: HKD1.52
Share price (28 Jan): HKD0.98 | Up/downside: +55.1%
Cynthia Chan(852) 2773 8243
cynthia.chan@hk.daiwacm.com
80
105
130
155
180
0.8
1.3
1.7
2.2
2.7
Jan-15 Apr-15 Jul-15 Oct-15 Jan-16
Share price performance
JCP (LHS) Relative to FSSTI (RHS)
(HKD) (%)
12-month range 0.98-2.61
Market cap (USDbn) 1.53
3m avg daily turnover (USDm) 1.38
Shares outstanding (m) 12,234
Major shareholder COFCO Corporation (66.8%)
Financial summary (CNY)
Year to 31 Dec 15E 16E 17E
Revenue (m) 5,643 7,976 10,805
Operating profit (m) 1,865 2,570 3,471
Net profit (m) 213 579 1,072
Core EPS (fully-diluted) 0.017 0.047 0.088
EPS change (%) (25.5) 172.0 85.2
Daiwa vs Cons. EPS (%) (47.2) (21.3) (17.6)
PER (x) 47.5 17.5 9.4
Dividend yield (%) 0.4 1.4 2.6
DPS 0.003 0.012 0.022
PBR (x) 0.4 0.4 0.4
EV/EBITDA (x) 17.9 13.4 10.0
ROE (%) 0.8 2.1 3.8
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Joy City Property (207 HK): 29 January 2016
Table of contents
Joy City – a model that is gaining credential ......................................................... 6
Currently owns 8 Joy City malls with 7 in operation ...........................................................6
A proven model with a solid track record............................................................................6
Targeting up-and-coming consumers .................................................................................7
A growing pool of partnering brands – local and international ............................................8
Joy City malls are strategically located ............................................................................ 10
Enhancement of customer value ...................................................................................... 10
Growing credentials ......................................................................................................... 13
Strong rental income growth in 2016-17 .......................................................................... 14
Upside to EBITDA-to-cost ................................................................................................ 14
Shift in strategy for the retail property business ..................................................16
Setting up joint ventures for greenfield projects ............................................................... 16
Asset-light strategy for new malls has kicked off .............................................................. 16
Strong property sales to continue .........................................................................19
Support decent top-line growth in the next few years ....................................................... 19
Strong support from SOE parent ...........................................................................21
66.83% owned by COFCO Corporation ........................................................................... 21
SOE reform on the agenda for COFCO Corporation ........................................................ 22
Earnings to decline in 2015 before picking up ......................................................23
Earnings outlook .............................................................................................................. 23
Financial position ............................................................................................................. 25
Dividend policy ................................................................................................................ 26
Valuation ..................................................................................................................27
Initiating with Buy (1) rating and target price of HKD1.52 ................................................. 27
Risks .........................................................................................................................30
Appendix I: company background .........................................................................31
Commercial property developer and operator .................................................................. 31
Appendix II: Joy City malls .....................................................................................35
Appendix III: overview of the China retail market .................................................38
10.7% retail sales growth in 2015 .................................................................................... 38
Appendix IV: retail sales in Joy City’s cities .........................................................40
3
Joy City Property (207 HK): 29 January 2016
How do we justify our view?
Growth outlook Valuation Earnings revisions
Growth outlook Joy City: revenue and core profit
As a result of a decline in property sales booked in 2015,
we forecast both Joy City’s revenue and core earnings to
have dipped in 2015. However, in 2016, with more property
sales to be booked (we forecast an 89% YoY rise in
property development revenue) and more malls to
contribute to rental income (set to rise by 33% YoY on our
forecasts), we anticipate 41% and 172% surges in Joy
City’s revenue and core profit to CNY7,976m and
CNY579m, respectively, for 2016. We forecast its revenue
and earnings to rise by a further 35% and 85% YoY for
FY17 to reach CNY10,805m and CNY1,072m,
respectively.
Source: Company, Daiwa forecasts
Valuation Joy City: discount to NAV
Joy City is trading currently at a 68% discount to our end-
16E NAV of HKD3.04, pretty much in line with its mid-cap
peers’ discount to market NAV of 50-70%. We think Joy
City deserves to trade at a lower NAV discount to its peers
due to its growing recurring income from its investment
properties, amid a potential slowdown in residential sales
growth for property developers as a result of weaker
housing demand. We believe the company’s property sales
in the next few years should be sufficient to cover its
required capex on investment properties.
Source: Company, Daiwa
Earnings revisions Joy City: revisions to the Bloomberg-consensus EPS forecasts
Our earnings forecast for 2015 is some 47% below that of
the Bloomberg-consensus mean estimate, and 19% below
the consensus median forecast as a result of 2 very high
outliers. Our lower-than-consensus forecast is largely
attributable to our estimated higher profit attributable to
minority interests from the booking of 2 projects in Sanya,
namely The Signature and Brilliant Villa. Our earnings
forecast for 2016 is 21% below the mean consensus
forecast, but only 7% below the consensus median
forecast. We believe the company’s lagging share-price
performance over the past year has largely factored in an
expected earnings dip for 2015. Hence, we recommend
that investors buy into Joy City on the recent share-price
weakness.
Source: Bloomberg, Daiwa
6,8095,713 5,643
7,976
10,805
357 232 213 5791,072
0
4,000
8,000
12,000
2013 2014 2015E 2016E 2017E
Revenue Core net profit
(CNYm)
(80)
(60)
(40)
(20)
0
2014 2015
(%)
Mean -36.5%
+1SD -14.2%
-1SD -58.8%
0.00
0.05
0.10
0.15
Jan-15 Mar-15 May-15 Jul-15 Sep-15 Nov-15 Jan-16
(CNY)
2015E consensus EPS 2016E consensus EPS
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Joy City Property (207 HK): 29 January 2016
Financial summary
Key assumptions
Profit and loss (CNYm)
Cash flow (CNYm)
Source: FactSet, Daiwa forecasts
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Recognized GFA ('000 sqm) n.a. n.a. n.a. n.a. n.a. 36 48 80
Recognized ASP (CNY/sqm) n.a. n.a. n.a. n.a. n.a. 42,748 60,629 64,355
Rental income from Joy City malls
(CNY m)n.a. n.a. n.a. 1,268 1,518 1,753 2,457 2,867
Hotel operation income (CNY m) n.a. n.a. n.a. 883 1,011 1,115 1,196 1,261
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sale of properties n.a. n.a. n.a. 3,650 2,021 1,553 2,935 5,122
Gross rental income n.a. n.a. n.a. 1,694 2,009 2,209 2,940 3,366
Other Revenue n.a. n.a. n.a. 1,465 1,684 1,880 2,101 2,317
Total Revenue n.a. n.a. n.a. 6,809 5,713 5,643 7,976 10,805
Other income n.a. n.a. n.a. 60 42 50 55 61
COGS n.a. n.a. n.a. (3,138) (2,318) (2,600) (3,664) (4,925)
SG&A n.a. n.a. n.a. (1,409) (1,473) (1,416) (1,978) (2,647)
Other op.expenses n.a. n.a. n.a. 218 164 189 181 177
Operating profit n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471
Net-interest inc./(exp.) n.a. n.a. n.a. (626) (852) (888) (908) (953)
Assoc/forex/extraord./others n.a. n.a. n.a. 3,685 1,911 15 17 20
Pre-tax profit n.a. n.a. n.a. 5,599 3,186 992 1,678 2,539
Tax n.a. n.a. n.a. (2,055) (1,239) (317) (570) (881)
Min. int./pref. div./others n.a. n.a. n.a. (425) (274) (462) (529) (586)
Net profit (reported) n.a. n.a. n.a. 3,118 1,673 213 579 1,072
Net profit (adjusted) n.a. n.a. n.a. 356 232 213 579 1,072
EPS (reported)(CNY) n.a. n.a. n.a. 0.513 0.168 0.017 0.047 0.088
EPS (adjusted)(CNY) n.a. n.a. n.a. 0.059 0.023 0.017 0.047 0.088
EPS (adjusted fully-diluted)(CNY) n.a. n.a. n.a. 0.059 0.023 0.017 0.047 0.088
DPS (CNY) n.a. n.a. n.a. 0.000 0.008 0.003 0.012 0.022
EBIT n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471
EBITDA n.a. n.a. n.a. 2,540 2,127 1,865 2,570 3,471
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Profit before tax n.a. n.a. n.a. 5,599 3,186 992 1,678 2,539
Depreciation and amortisation n.a. n.a. n.a. 284 340 343 377 410
Tax paid n.a. n.a. n.a. (686) (1,196) (317) (570) (881)
Change in working capital n.a. n.a. n.a. (867) (1,986) 360 1,409 1,006
Other operational CF items n.a. n.a. n.a. (3,189) (1,239) 873 891 932
Cash flow from operations n.a. n.a. n.a. 1,141 (895) 2,251 3,785 4,007
Capex n.a. n.a. n.a. (873) (969) (928) (879) (885)
Net (acquisitions)/disposals n.a. n.a. n.a. (1,081) (1,299) (2,093) (1,319) (1,811)
Other investing CF items n.a. n.a. n.a. 3,095 (152) 550 576 623
Cash flow from investing n.a. n.a. n.a. 1,141 (2,419) (2,471) (1,621) (2,073)
Change in debt n.a. n.a. n.a. 4,211 2,495 3,985 1,313 2,184
Net share issues/(repurchases) n.a. n.a. n.a. 3,016 3,768 5,054 0 0
Dividends paid n.a. n.a. n.a. (206) (168) (43) (145) (268)
Other financing CF items n.a. n.a. n.a. (4,029) (5,742) (10,118) (1,575) (1,641)
Cash flow from financing n.a. n.a. n.a. 2,993 352 (1,121) (407) 276
Forex effect/others n.a. n.a. n.a. 0 0 0 0 0
Change in cash n.a. n.a. n.a. 5,275 (2,962) (1,341) 1,757 2,209
Free cash flow n.a. n.a. n.a. 268 (1,864) 1,323 2,906 3,122
5
Joy City Property (207 HK): 29 January 2016
Financial summary continued …
Balance sheet (CNYm)
Key ratios (%)
Source: FactSet, Daiwa forecasts
As at 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Cash & short-term investment n.a. n.a. n.a. 9,042 6,489 5,115 6,872 9,081
Inventory n.a. n.a. n.a. 7,726 11,634 12,448 13,393 14,520
Accounts receivable n.a. n.a. n.a. 164 125 150 179 215
Other current assets n.a. n.a. n.a. 804 704 643 589 569
Total current assets n.a. n.a. n.a. 17,736 18,952 18,356 21,033 24,385
Fixed assets n.a. n.a. n.a. 5,392 5,963 6,420 6,843 7,233
Goodwill & intangibles n.a. n.a. n.a. 193 203 203 203 203
Other non-current assets n.a. n.a. n.a. 38,451 42,920 45,122 46,526 48,438
Total assets n.a. n.a. n.a. 61,772 68,038 70,102 74,605 80,260
Short-term debt n.a. n.a. n.a. 7,284 9,621 8,688 9,557 10,321
Accounts payable n.a. n.a. n.a. 1,789 1,132 1,189 1,308 1,412
Other current liabilities n.a. n.a. n.a. 6,649 10,105 5,726 7,480 9,045
Total current liabilities n.a. n.a. n.a. 15,722 20,858 15,602 18,344 20,779
Long-term debt n.a. n.a. n.a. 11,347 14,479 16,135 17,748 19,168
Other non-current liabilities n.a. n.a. n.a. 5,161 5,701 6,260 6,858 7,514
Total liabilities n.a. n.a. n.a. 32,229 41,037 37,997 42,951 47,461
Share capital n.a. n.a. n.a. 668 748 1,122 1,122 1,122
Reserves/R.E./others n.a. n.a. n.a. 24,921 22,783 27,296 26,561 27,366
Shareholders' equity n.a. n.a. n.a. 25,589 23,531 28,419 27,684 28,488
Minority interests n.a. n.a. n.a. 3,954 3,469 3,686 3,970 4,311
Total equity & liabilities n.a. n.a. n.a. 61,772 68,038 70,102 74,605 80,260
EV n.a. n.a. n.a. 23,562 31,110 33,409 34,401 34,696
Net debt/(cash) n.a. n.a. n.a. 9,588 17,610 19,707 20,433 20,408
BVPS (CNY) n.a. n.a. n.a. 4.207 2.366 2.323 2.263 2.329
Year to 31 Dec 2010 2011 2012 2013 2014 2015E 2016E 2017E
Sales (YoY) n.a. n.a. n.a. n.a. (16.1) (1.2) 41.3 35.5
EBITDA (YoY) n.a. n.a. n.a. n.a. (16.2) (12.3) 37.8 35.1
Operating profit (YoY) n.a. n.a. n.a. n.a. (16.2) (12.3) 37.8 35.1
Net profit (YoY) n.a. n.a. n.a. n.a. (34.8) (8.4) 172.0 85.2
Core EPS (fully-diluted) (YoY) n.a. n.a. n.a. n.a. (60.2) (25.5) 172.0 85.2
Gross-profit margin n.a. n.a. n.a. 53.9 59.4 53.9 54.1 54.4
EBITDA margin n.a. n.a. n.a. 37.3 37.2 33.1 32.2 32.1
Operating-profit margin n.a. n.a. n.a. 37.3 37.2 33.1 32.2 32.1
Net profit margin n.a. n.a. n.a. 5.2 4.1 3.8 7.3 9.9
ROAE n.a. n.a. n.a. n.a. 0.9 0.8 2.1 3.8
ROAA n.a. n.a. n.a. n.a. 0.4 0.3 0.8 1.4
ROCE n.a. n.a. n.a. 2.6 4.3 3.5 4.4 5.7
ROIC n.a. n.a. n.a. 2.2 3.1 2.6 3.3 4.3
Net debt to equity n.a. n.a. n.a. 32.5 65.2 61.4 64.5 62.2
Effective tax rate n.a. n.a. n.a. 36.7 38.9 32.0 34.0 34.7
Accounts receivable (days) n.a. n.a. n.a. 4.4 9.2 8.9 7.5 6.7
Current ratio (x) n.a. n.a. n.a. 1.1 0.9 1.2 1.1 1.2
Net interest cover (x) n.a. n.a. n.a. 5.8 3.4 1.4 1.9 2.4
Net dividend payout n.a. n.a. n.a. 0.0 4.9 20.0 25.0 25.0
Free cash flow yield n.a. n.a. n.a. 2.7 n.a. 13.1 28.7 30.8
Company profile
Joy City Property is a commercial property developer and manager that focuses on the development,
operation, sales, leasing and management of shopping malls under its “Joy City” brand and other
commercial properties in Mainland China. Its parent, COFCO Corporation, is one of the 21 state-
owned enterprises that have been granted approval to engage in real estate development in China.
6
Joy City Property (207 HK): 29 January 2016
Joy City – a model that is gaining credential
Currently owns 8 Joy City malls with 7 in operation
Joy City is a commercial property developer and manager that focuses on the
development, operation, sales, leasing and management of shopping malls under its “Joy
City” brand in Mainland China. It also develops residential and commercial properties. After
2 asset injections from its parent, COFCO Corporation (a state-owned enterprise), in 2013-
14 and other project acquisitions from local governments and third parties, the company
now owns 29 property projects in 8 cities, including 8 Joy City complexes, 8 hotels and
other residential and commercial projects.
Of the 8 Joy City malls, 7 have already commenced operations. The newest malls are
Shanghai Joy City Phase 1 North and Chengdu Joy City, both of which started operations
in December 2015. Hangzhou Joy City, which was newly acquired in February 2015, is
expected to start operating in 2018.
Joy City: retail mall portfolio
2014 1H15
City Stake Total GFA Rentable
GFA
Completion
Date
Average
rent Occupancy Rental
income
Average
rent Occupancy Rental
income
(sqm) (sqm) (CNY/sqm/day) (%) (CNY m) (CNY/sqm/day) (%) (CNY m)
Bejing Xidan Joy City Beijing 100% 185,654 66,267 2008 33 95% 600 35.37 93% 310
Beijing Chaoyang Joy City Beijing 90% 405,570 112,538 2010 10.4 98% 420 10.5 99% 230
Shenyang Joy City Shenyang 100% 555,146 121,643 2011 3.7 86% 130 4.1 93% 78
Shanghai Joy City* Shanghai 100% 449,849 94,721 2015 8.8 98% 85 8.3 97% 42
Tianjin Joy City Tianjin 100% 531,369 83,965 2012 8.7 99% 250 9.9 99% 148
Yantai Joy City Yantai 51% 219,964 78,267 2014 2.4 96% 33 3.2 94% 42
Chengdu Joy City Chengdu 100% 314,560 95,200 2015 - - - - - -
Hangzhou Joy City Hangzhou 55% 307,061 - 2017 - - - - - -
Total
2,969,173 652,601
1,518
850
Source: Joy City, Daiwa Note: Shanghai Joy City Phase 1 South was completed in 2011, while Phase 1 North was completed in 2015.
A proven model with a solid track record
Having the right strategy differentiates Joy City malls Joy City has put in a lot of effort into developing the right strategy for its malls in past
years. Through data mining and analysis and also trial and error, it has fine-tuned its
strategy for its malls and come up with a business model that we believe enables its malls
to succeed and stand out among their competitors.
In terms of business strategy, Joy City mainly focuses on targeting the right group of
customers, selecting the right brands, choosing a strategic location for its malls, and also
enhancing customers’ value through the provision of value-added services and an O2O
shopping experience.
Good track record resulting from the right strategy As a result of having the right target customers, the right brands, strategic locations and
quality management, most of Joy City’s malls have seen decent growth in foot traffic and
retail sales since the commencement of operations.
Joy City malls to stay resilient amid slowdown in retail sales growth With growth in the overall economy likely to slow further in 2016, retail sales growth is also
likely to falter. Daiwa’s house forecast calls for nationwide retail sales growth of 9.6% YoY
for 2016, down from 10.7% for 2015. Despite a potential slowdown in overall retail sales
growth and more competitive retail market, we believe Joy City’s malls, with their right
strategy, would be able to continue to grab market share and see retail sales growth
exceed the nationwide average in 2016, as they have in the past few years. In the first half
of 2015, total retail sales for Joy City’s malls increased by 22.1% YoY, while nationwide
retail sales rose by only 10.4%.
Shanghai Joy City Phase
1 North and Chengdu
Joy City commenced
operations in December
2015
Joy City has come up
with a business model
that differentiates its
malls and enables them
to succeed
7
Joy City Property (207 HK): 29 January 2016
Targeting up-and-coming consumers
One-stop shopping experience for middle-class younger generation
Joy City’s malls are positioned as stylish and trendy shopping malls targeted at the middle
class younger generation of 18-35 years old. Its malls aim to provide a one-stop shopping,
entertainment and dining experience for these targeted customers, with their wide range of
brands, different types of cuisine and various entertainment facilities.
Themed pedestrian streets popular amongst younger consumers
To cater for the preference of the younger generation in particular, Joy City has created
special attractions, such as themed pedestrian streets, at a few of its malls. For example,
“Cheer Market”, which is located in Tianjin Joy City, is positioned as an indoor pedestrian
art street, and features shipping containers where young entrepreneurs can set up shop
and undertake their own interior design and decor. Another example is “Joy Yard” in Beijing
Chaoyang Joy City. “Joy Yard” is considered an indoor utopia and nature setting, with 35%
of its indoor space adorned by greenery and natural elements, such as stone, wood and
water. The mall consists of 32 creative shops including trendy cafes and restaurants, a
painting studio, a cultural bookstore, etc. Other special projects of Joy City that cater to the
tastes of young customers include “No. 5 Garage” in Tianjin Joy City, “Mofang 166” in
Shanghai Joy City and also, “Gulu School” in Chengdu Joy City.
Cheer Market at Tianjin Joy City Joy Yard at Beijing Chaoyang Joy City
Source: Joy City, Daiwa Source: Joy City, Daiwa
Major shift in consumption in China driven by younger generation
20-30 year olds set to become the core of the middle class in China
Over the past 3 decades, the shopping habits of Chinese consumers have changed
drastically as incomes have risen and new products and concepts have emerged in the
Chinese market. Nowadays, the consumer market in China is largely driven by a new
generation of young, prosperous and independent consumers who were born in the 1980s
and later.
Since the one-child policy was implemented in China in 1979, parents have become more
generous in providing financial support to their children and afforded them with more
comfortable financial prospects and larger budgets. As people born in the 1980s and later,
and with less experience with hardship than their parents and being more exposed to
different cultures, these young people are usually characterised as being more
independent-minded, less price-sensitive, quality conscious, loyal to brands and prefer
niche products over mass-market products. Moreover, this younger generation is usually
more attracted to Western products and are more accustomed to Western brands and
products. According to AC Nielsen forecasts, the 20-30 age group will become the core of
the middle class in China, and will contribute 35% to total consumption in China by 2020,
up from 15% in 2014.
Joy City malls target the
middle-class younger
generation of 18-35
years old
8
Joy City Property (207 HK): 29 January 2016
Breakdown of population among age groups
Source: NBS, Daiwa
With the expected increased contribution to nationwide consumption and the growing
influence of the younger generation in the China consumer market, many companies have
adapted to this new generation of young consumers by differentiating their products and
adjusting their branding and marketing strategies to appeal to younger consumers. We
think Joy City has chosen the right group of target customers for its malls and will continue
to benefit from this strategic choice.
A growing pool of partnering brands – local and international
80 core brands, many of which are renowned international brands
Joy City has around 300-400 shops in each of its Joy City malls. In order to maintain
consistent quality in terms of the brands and products across all its malls, the company has
developed a classification management system especially for its malls to integrate
resources, adopt standardised management and ensure smooth and stable business
operations.
In terms of the brands at the Joy City malls, they are classified into 3 classes. Some 30%
of them are core brands, of which Joy City has around 80. Some examples of its core
brands are Apple, ZARA, UNIQLO, Muji, Sephora, Starbucks and H&M. Then, 40% of the
brands are picked from a list of non-core brands, with which Joy City has cooperated in the
past. The remaining 30% of brands are chosen in accordance with either the shopping
habits and behavior of local shoppers or the local culture and characteristics. For example,
bars with trendy interiors and decor are popular in Chengdu.
0%
20%
40%
60%
80%
100%
2010 2011 2012 2013 2014
Below 20 years old 20-29 years old Above 29 years old
Joy City has good
connections with its
core brands, which add
up to around 80 of them
9
Joy City Property (207 HK): 29 January 2016
Joy City: core brands
Source: Company, Daiwa
Foreign fashion brands gaining popularity, especially among the young
With increasing product knowledge and stronger purchasing power, consumers in China,
especially the younger generation, are increasingly demanding quality and comfort in
clothing. Moreover, with more exposure to the Western media, Chinese consumers are
now more aware of global fashion trends, and are less price-conscious but more brand-
conscious. They generally trust foreign brands for their strong brand image, services,
quality, fit and cut.
As Chinese consumers increasingly demand stylish, quality products, foreign brands, in
particular fast fashion retailers like Zara, H&M and Uniqlo, are expected to see decent
retail-sales growth in China over the next few years. By focusing on China’s booming
middle class, these brands have sought to lure the younger generation by offering stylish
designs at cheaper prices and customised promotions. These foreign fashion brands use
big data to spot market trends and have developed a good understanding of consumer
behavior. They monitor consumer behavior of different age groups in stores and then
adjust their designs accordingly. From the below table, we can see that foreign fashion
brands (ie, UNIQLO, Zara and H&M) have been gaining market share in the past few
years, while local apparel and footwear brands like Belle and Meters/bonwe have been
losing market share.
Market share of domestic and foreign apparel/footwear brands
2011 1.0 1.2 1.9 0.9 2.6 1.2 1.3 1.1 0.9 1.5
2012 1.3 1.3 1.8 1.0 1.9 1.1 1.3 1.0 0.9 1.0
2013 1.5 1.4 1.6 1.1 1.4 1.0 1.1 0.9 0.8 0.9
2014 1.6 1.5 1.5 1.2 1.1 1.0 0.9 0.8 0.8 0.7
Source: CKGSB Knowledge, Euromonitor; Note: *Owned by Belle International
The younger generation
generally prefers foreign
fashion brands over
local brands
10
Joy City Property (207 HK): 29 January 2016
Joy City malls are strategically located
Located in popular business hubs or areas with huge potential for development
Of Joy City’s 8 shopping malls, 3 are located in tier-1 cities (Beijing and Shanghai) and the
remaining 5 are in upper tier-2 cities (Shenyang, Tianjin, Yantai, Chengdu and Hangzhou)
where the purchasing power of local shoppers is typically higher than that in the lower-tier
cities. Moreover, as the Joy City malls are designed and developed with an aim to become
the focal point of their respective areas, and also to add value to adjacent areas within the
city, they are also strategically located in each of the cities.
Beijing Xidan Joy City is a landmark located in the centre of the Xidan commercial area, a
popular business hub in Xicheng District in Beijing. It is well-connected to transportation
networks and is in close proximity to metro stations and bus stops. Beijing Chaoyang Joy
City is situated in the core of Chaoqing area to the east of Beijing and is also connected by
metro lines and bus stops. Due to the eastward shift in the city’s development focus, the
Chaoqing area has more and more high-end residential buildings and is becoming a
“central living district”.
Tianjin Joy City is located in a core area within the Inner Ring in Tianjin and is at the
intersection point of the city transportation network. It is close to other tourist attractions
like cultural street and Gulou commercial streets, and within 5km of the mall lives a
population of 3.3m. Shanghai Joy City is in the core of the Suhewan in Zhabei District in
Shanghai and is in close proximity to the Nanjing East Road and People’s Square
business hub. With its core location, it can divert and attract some of the shoppers in the
Nanjing East Road business hub and has the potential to become the centre of a new
Suhewan business hub.
Chengdu Joy City, which commenced operations in December 2015, is situated in Wuhou
District in Chengdu, a high-tech cultural district. This area comprises a lot of mid-to-high
end residential projects and has a permanent population of around 0.5m, which could
increase to 1.5m in the medium to long term. Hangzhou Joy City, the newest addition to
Joy City’s shopping mall portfolio, is located in a new Yunhe business hub in Gongshu
District in Hangzhou and is some 20 minutes away from the city centre. This new business
hub will be one of the development focuses of the local government and will include a
cruise terminal next to the Jinghang Canal. Two metro lines close to Hangzhou Joy City
are expected to start operating in 2019-20.
Enhancement of customer value
Data collection to identify target customers’ needs and interests
To identify the needs and interests of target customers, Joy City has been consistently
collecting data from each customer through different channels, eg, consumption records
through WeChat payment, customers’ age and gender and frequently visited places
through WeChat and Unionpay, customers’ consumption pattern and duration of stay in
each of the stores through wifi data. Using this collected data, the company predicts
customers’ consumption behaviour and possible visits to stores, and applies tailor-made
marketing to each of the customers.
Moreover, Joy City has developed a foot traffic forecasting system which collects foot traffic
statistics and allows the company to predict foot traffic and adjust the allocation of tenants
to optimise the shopping experience of customers.
Joy City malls are
strategically located
either in popular
business hubs or areas
with huge potential for
development
Joy City relies on big
data to identify
customers’ interests and
consumption behaviour
11
Joy City Property (207 HK): 29 January 2016
Valuation creation for customers
Membership programme to add value Joy City has developed a membership programme named “Joy Citizen” for customers at its
malls, whereby members can enjoy discounts at selected stores, participate in activities
exclusively for members, enjoy free parking, use baby strollers and nursing room at the
malls, obtain bonus points to redeem gifts, etc.
Promotion activities for Joy City’s members “Joy Citizen”
Source: Joy City
As at June 2015, Joy City had over 1m members nationwide in its Joy Citizen programme
and nearly 950,000 WeChat followers. Tianjin Joy City alone had 200,000 members and
110,000 WeChat followers. Besides having special-themed streets like “Cheer Market”,
“Shen Shou Si”, “0618 Street” and “No. 5 Garage”, Tianjin Joy City launched “Taste Good”,
the first O2O member experience platform nationwide. This platform comprises an online
shopping mall and offline physical stores, whereby members can collect bonus points and
redeem gifts. “Taste Good” even collaborated with China Merchants Bank and set up its
first branch outside Joy City at the China Merchants Bank Anxi Road branch, where
members of China Merchants Bank can also enjoy the services provided by “Taste Good”.
Tianjin Joy City achieved
satisfactory results as a
result of its special-
themed streets and its
member experience
platform
12
Joy City Property (207 HK): 29 January 2016
“Taste Good” membership centre
Source: Joy City, Daiwa
At Shanghai Joy City, an intelligent shopping system – WeChat electronic membership was
launched. This electronic membership on WeChat makes shopping more convenient for
members as it includes information on promotion coupons, discounts, membership
activities, bonus points, etc.
WeChat electronic membership for customers at Shanghai Joy City
Source: Joy City, Daiwa
Collaboration with O2O service providers Joy City has collaborated the tenants at its malls with O2O service providers (ie, Baidu
Waimai, Meituan) in order to provide value-added services to customers, and at the same
time, increase promotion for its tenants. For example, customers will receive shopping
coupons at Joy City malls upon the browsing and purchases on the O2O services
providers’ websites.
All of Joy City’s malls
have some sort of O2O
platform or business to
create value and
enhance customers’
shopping experience
13
Joy City Property (207 HK): 29 January 2016
O2O mobile payments To further enhance customers’ shopping experience, Joy City has introduced O2O mobile
payment methods for customers at its malls. These payment methods include QR Code
payment, WeChat payment, Shake n Pay, Sound Wave payment, etc.
Growing credentials
Decent growth in foot traffic, retail sales and rental for existing malls
As a result of having the right target customers, the right brands, strategic locations and
quality management, most of Joy City’s malls have seen decent growth in foot traffic and
retail sales since commencement of operations.
Higher foot traffic for most malls in past years
Looking at the below table that depicts foot traffic, all of Joy City’s malls besides Shanghai
Joy City Phase 1 South have recorded sequentially higher YoY foot traffic in the past few
years. Tianjin Joy City, which started operations in 2012, saw very strong YoY foot traffic
growth of 51% and 29% for 2013 and 2014, respectively. We expect its foot traffic in 2015
to also see decent growth, given that in 1H15 foot traffic was already some 26% higher
than that for 1H14. Yantai Joy City, on the other hand, is also expected to record strong
foot traffic growth in 2015 as it commenced operations only in 2014.
Joy City: foot traffic at its Joy City malls
(m persons) 2008 2009 2010 2011 2012 2013 2014 1H15
Bejing Xidan Joy City 19.2 28.7 27.9 31.5 25.6 29.3 29.5 13.2
Beijing Chaoyang Joy City
7.5 14.5 15.0 21.0 23.4 10.9
Shenyang Joy City
2.4 9.2 18.5 19.9 21.9 22.1 10.8
Shanghai Joy City Phase 1 South
6.6 5.8 6.1 5.8 2.9
Tianjin Joy City
9.4 14.3 18.4 10.9
Yantai Joy City
5.1 5.3
Total 19.2 31.1 44.5 71.1 75.8 92.6 104.3 54.0
Source: Joy City, Daiwa
Retail sales growth at Joy City’s malls likely to exceed nationwide average
Basically, all of Joy City’s malls saw retail sales growth in the past few years, including
Shanghai Joy City, which recorded declining foot traffic during the period. Not surprisingly,
Tianjin Joy City saw especially strong YoY retail sales growth of 92% and 48% for 2013
and 2014, respectively. Beijing Xidan Joy City saw the slowest retail sales growth in the
past few years, having only recorded 2% YoY sales growth in each of 2013 and 2014.
However, the mall generated the largest amount of retail sales of CNY3,601m among Joy
City’s 6 malls in operation in 2014, which is a quite sizeable amount for individual malls in
China. Besides, Xidan Joy City saw a decent 28% YoY increase in retail sales for 1H15,
and hence, the mall’s retail sales growth for the whole of 2015 should meet expectations.
Nationwide retail sales growth has been slowing in the past few years, and with economic
growth likely to slow further in 2016, slower growth in retail sales during the year is also
very likely. Daiwa’s house forecast calls for nationwide retail sales growth of 9.6% YoY for
2016, down from 10.5% for 2015E.
Despite the potential for a slowdown in overall retail sales growth, we believe Joy City’s
malls, with their right target group, favourable locations, international brand focus and
positioning, would be able to record better retail sales growth than the nationwide average,
as they have in the past few years. In 2013, while nationwide retail sales recorded 13.2%
YoY growth, retail sales at Joy City’s malls increased by 23.5% YoY for the year. In 2014,
the 16.8% YoY growth in Joy City malls’ retail sales again outperformed nationwide retail
sales growth of 12.0%. In 1H15, total retail sales for Joy City’s malls grew by 22.1% YoY,
while nationwide retail sales only rose by 10.4%.
Most Joy City malls saw
decent growth in foot
traffic and retail sales in
the past few years
Retail sales growth at
Joy City malls has
outperformed the
nationwide average over
the past few years, and
we expect this to
continue
14
Joy City Property (207 HK): 29 January 2016
Joy City: retail sales at its Joy City malls
(CNY m) 2008 2009 2010 2011 2012 2013 2014 1H15
Bejing Xidan Joy City 899.8 1,529.7 2,191.0 3,198.9 3,448.6 3,513.7 3,601.4 2,049.2
Beijing Chaoyang Joy City
404.2 1,055.0 1,377.3 2,156.1 2,516.9 1,301.7
Shenyang Joy City
59.0 296.7 505.4 607.3 639.0 880.5 631.0
Shanghai Joy City Phase 1 South
376.5 408.1 420.6 431.4 215.5
Tianjin Joy City
701.8 1,348.7 2,001.0 1,103.6
Yantai Joy City
241.7 295.9
Total 899.8 1,588.7 2,891.9 5,135.8 6,543.0 8,078.1 9,672.9 5,596.9
Source: Company, Daiwa
Strong rental income growth in 2016-17
Contribution from two new malls starting in 2016
In 2014, Joy City’s rental income from its Joy City retail malls amounted to CNY1,518m,
accounting for around 27% of its total revenue. We forecast aggregate rental income of
CNY1,724m for the malls in 2015, which is a 13.6% YoY increase. For 2016, we anticipate
a strong 39.6% YoY jump in rental income to reach CNY2,407m, due largely to an income
contribution of CNY498m from the 2 new malls (Shanghai Joy City Phase 1 North and
Chengdu Joy City), and also steady organic rental income growth of 11.7% from the other
5 Joy City malls. We forecast a further 15.7% YoY increase in rental income for the
company to CNY2,784m in 2017.
Joy City: rental income from Joy City malls
Source: Company, Daiwa forecasts
Upside to EBITDA-to-cost
Most EBITDA-to-cost upside for Yantai Joy City and Shanghai Joy City
Joy City achieved an overall EBITDA-to-cost ratio of 8.6%, or a yield on cost of 7.2%, for
its 6 malls under operation in 1H15. During 1H15, its Beijing Xidan Joy City achieved the
highest EBITDA-to-cost of 22%, followed by 10% for Beijing Chaoyang Joy City, and
around 6% for each of Tianjin Joy City and Shenyang Joy City. Meanwhile, Shanghai Joy
City and Yantai Joy City saw low EBITDA-to-cost ratios of around 2% and 1%, respectively.
Joy City: EBITDA-to-cost of its malls
Joy City recorded an
average EBITDA-to-cost
of 8.6% for its malls
under operation, and we
see more upside to this
number over the next
few years
Source: Company, Daiwa
1,2681,518
1,724
2,407
2,784
0
500
1,000
1,500
2,000
2,500
3,000
2013 2014 2015E 2016E 2017E
(CNY m)
22%
10%
6% 6%
2% 1%
0%
5%
10%
15%
20%
25%
Bejing Xidan Joy City Beijing Chaoyang JoyCity
Tianjin Joy City Shenyang Joy City Shanghai Joy CityPhase 1 South
Yantai Joy City
We forecast 40% and
16% rental income
growth for Joy City malls
for 2016 and 2017,
respectively
15
Joy City Property (207 HK): 29 January 2016
For its Joy City malls operating at different stages, the company has set different targets
for EBITDA-to-cost. It has set an EBITDA-to-cost target of 6.0-6.5% for malls in their third
year of operations, while the EBITDA-to-cost targets for malls in their sixth year and eighth
year of operations are 8.0-8.5% and around 10%, respectively.
Of Joy City’s newer malls, the operating performance of Tianjin Joy City is most in line with
the company’s targets set when it commenced operations. Yantai Joy City only
commenced operations in 2014, and hence there is upside to its EBITDA-to-cost in
subsequent years. Meanwhile, with the opening of Shanghai Joy City Phase 1 North in
December 2015, which is larger than the already-developed Shanghai Joy City Phase 1
South and encompasses more shops and entertainment facilities, Joy City expects
Shanghai Joy City Phase 1 South to benefit and believes its operating performance will
see an improvement. Thus, we also see further upside to the EBITDA-to-cost of Shanghai
Joy City Phase 1 South.
Existing malls likely to stay resilient amid slowdown in nationwide retail sales growth
While Joy City plans to add new malls to its retail property portfolio, its existing malls
should continue to see high foot traffic and better-than-nationwide retail sales growth due
to the company’s right strategy, right positioning, right target group, right brands and right
location, in our view. Moreover, a few of its newer malls are likely to see even more upside
than the older Joy City malls in foot traffic and retail sales in the next few years.
16
Joy City Property (207 HK): 29 January 2016
Shift in strategy for the retail property business
Setting up joint ventures for greenfield projects
Lower capex requirements
Joy City currently owns 8 shopping malls under its Joy City brand, of which 5 are wholly
owned by the company (ie, Beijing Xidan Joy City, Tianjin Joy City, Shanghai Joy City,
Shenyang Joy City and Chengdu Joy City), while it holds a controlling stake in the
remaining 3 malls (namely, Beijing Chaoyang Joy City, Yantai Joy City and Hangzhou Joy
City).
The company is targeting to own 20 malls under its Joy City brand in 5 years’ time. One
way to achieve this is to develop greenfield projects from scratch, and the other way is to
acquire a minority stake in already developed malls that are either poorly developed or
poorly managed, and operate them under the Joy City brand.
However, unlike some of its previous greenfield malls in which Joy City owned the entire
stake, the company plans to set up joint ventures (JV) with third parties for all its newly
developed malls going forward, but would have a controlling stake in them. This shift in
strategy on new malls is intended to lower the capex requirement upfront amid intense
competition in the retail property market.
Joy City aims to acquire at least one greenfield project each year in the tier-1 and major
tier-2 cities like Nanjing, Ningbo, Xiamen, Wuhan, Chongqing, Qingdao, etc.
Established JV with GIC that operates 2 malls
Of the 3 Joy City malls Joy City does not own entirely, 2 are JV projects with the
Government of Singapore Investment Corporation (GIC), Joy City’s second-largest
shareholder with an 8.17% stake. Yantai Joy City, which commenced operations in 2014, is
the first Joy City mall that was jointly developed by Joy City and GIC. In December 2015,
GIC acquired a 45% stake in Hangzhou Joy City, which is currently under development
and will not commence operations until 2018.
Other existing malls could be securitised to form a commercial REIT
For the other 5 completed Joy City malls that are wholly owned by Joy City, there is the
possibility of the securitization of these malls to form a commercial real estate investment
trust (REIT) in order to increase their value. The initial idea is for Joy City to manage the
trust and that part of the trust would be sold to pension funds or sovereign funds.
Nonetheless, there is no fixed timetable on this.
Asset-light strategy for new malls has kicked off
A supplementary growth driver to cushion slowdown in retail sales growth
Another way for Joy City to build up its retail mall portfolio under its asset-light strategy is
to acquire malls that are already developed. Under this strategy, the company plans to
focus on 2 business models for its new malls, both of which would lead to Joy City owning
only a small, or even a zero, stake in its new malls.
Business model No.1: acquire a small stake in already developed malls and operate them under the Joy City brand
Under the first asset-light business model, Joy City would acquire a minority stake in a
number of already developed malls, refurbish them and operate them under its Joy City
brand. Besides operating the malls and receiving a portion of the rental income, Joy City
would also be responsible for the management of the malls and receive management fees
under this business model.
Joy City is targeting to
own 20 Joy City malls in
5 years’ time, including
its 8 currently owned
malls
Under its asset-light
strategy, Joy City will
either acquire a small
stake in malls that are
already developed, or
manage malls in which it
does not have a stake
17
Joy City Property (207 HK): 29 January 2016
Business model No.2: management-only contracts on existing malls
Under the second asset-light business model, Joy City would look for existing malls, advise
on redevelopment and subsequently help manage them. The company would not own a
stake in the malls, and hence, these malls would not be branded as “Joy City” malls. There
are 3 types of fees that Joy City could collect in these cases: 1) advisory fees before the
refurbishment of the malls, 2) consultancy fees during the redevelopment process, and 3)
management fees for management of the malls.
Criteria for the 2 business models
For the malls to be operated under its first asset-light business model, in which Joy City
has a stake, the company would focus mainly on tier-1 and tier-2 cities, eg, Shanghai,
Guangzhou, Shenzhen, Suzhou, Nanjing, Wuxi, Xiamen, Quanzhou, Chongqing, Wuhan,
Xi’an, etc. The ideal mall size for this business model is around 100,000-150,000sqm. The
malls that are smaller than this ideal size are more likely to be considered for the second
asset-light business model, in which Joy City does not have a stake and only manages
them. Moreover, the malls under this business model are more likely to be located in
smaller tier-2 and tier-3 cities.
Recurrent income at low costs
The initial capex required to develop malls from scratch is huge and the payback period is
usually long. Joy City’s decision to switch to an asset-light strategy for its malls would save
it a lot of costs upfront. For its first asset-light business model, the largest capex would be
the costs involved in the re-modeling and renovation of existing malls, which Joy City only
has to contribute a fraction of it. For its second asset-light business model, the costs
involved would even be lower as Joy City does not have a stake in the malls. The labour
costs, which would be incurred under both asset-light business models, would be
accounted for by the owner and operator of the malls.
Hence, while Joy City would be able to enjoy steady recurrent income from its asset-light
malls, the capex and costs needed are low. In 2015, the capex spent by Joy City was
around CNY4bn due to the opening of 2 new malls, but for 2016, the capex amount is
expected to be much lower at CNY2-2.5bn.
Joy City acquired its first asset-light project in December 2015
Joy City announced its first asset-light project in Tianjin in December 2015. Tianjin Heping
Joy City, the company’s second Joy City complex in Tianjin, will become its first asset-light
project. This project, first opened in 2001, is owned by GIC, and while Joy City has no
stake in it, the mall is an exception in being branded Joy City, largely due to the company’s
close relationship with GIC. It is located in one of the busiest business districts in Tianjin,
namely the Binjiang Road and Nanjing Road business district. It comprises a total GFA of
180,000sqm, including 68,000sqm of retail mall, 82,000sqm of offices and 38,000sqm of
hotel. The mall will undergo refurbishment and will re-open by the end of 2016.
Joy City is responsible for the commercial operations and management of Tianjin Heping
Joy City. It will participate in the planning, architectural design, tenant enrolling, operations
and lease management of the commercial portion of the project. It will receive advisory
fees before the refurbishment of the project and management fees after the re-opening of
the mall.
Like its own Joy City malls, Joy City plans to position the mall to target customers in the
22-35 age group. It will promote the theme of “slow but quality living” and will include many
small and exclusive designer stores. Joy City will also introduce to this mall its “themed
street” approach, which adopts different themes for different floors at the mall.
Joy City will receive
advisory and
management fees from
its first asset-light
project in Tianjin
18
Joy City Property (207 HK): 29 January 2016
Tianjin Heping Joy City (formerly named The Exchange Mall)
Source: Joy City, Daiwa
Carefully choosing other new projects from a list of 30-35 malls
On top of Tianjin Heping Joy City, Joy City is looking to choose new malls from a list of 30-
35 already developed malls to operate under its asset-light strategy. Going forward, the
company targets to add at least 1 mall each year under its new strategy.
Joy City’s strategy and track record differentiate it from other mall operators
While competition for the acquisition of poorly-operated and managed malls in China could
become more intense, we believe Joy City, with its reputation, its SOE background, its right
strategy on malls and its good track record, will stand out among mall operators and
enable it to turn poorly operated or managed malls into popular and well-run malls with
more foot traffic.
Joy City has a list of 30-
35 projects to choose
from for its asset-light
business
19
Joy City Property (207 HK): 29 January 2016
Strong property sales to continue
Support decent top-line growth in the next few years
CNY3.2bn of property sales achieved in 2015, up 79% YoY
Joy City set a contract sales target of CNY2-2.5bn for 2015, compared to CNY1.8bn of
sales achieved in 2014. For the whole of 2015, Joy City achieved contract sales of around
CNY3.2bn, some 79% higher than that for 2014.
In November 2015, Joy City launched 2 more residential projects, namely Joy Mansion
One in Shanghai (the residential portion of Shanghai Joy City) and Joy Mansion in
Hangzhou (the residential portion of Hangzhou Joy City). Joy Mansion One in Shanghai
launched 85 units, and some 60 of them were sold on the first day of launch, fetching
around CNY1.2bn in contract sales. Meanwhile, during the same month, Joy Mansion in
Hangzhou had sold over 7,000sqm of units of the 11,000-12,000sqm launched, fetching
some CNY200m of sales. These 2 projects alone generated CNY1.4bn of sales in
November.
Joy City: development property portfolio
Project City Product type Stake Total GFA Attributable GFA
(sqm) (sqm)
Ocean One Shanghai Residential 100% 3,294 3,294
Shanghai Joy City Shanghai Residential 100% 61,350 61,350
Shanghai Retail 100% 20,000 20,000
Shanghai Office 100% 87,641 87,641
Shanghai Qiantan Project Shanghai Residential 50% 40,000 20,000
Shanghai Office 50% 43,613 21,807
Chengdu Joy City Chengdu Retail 100% 13,299 13,299
Chengdu Office 100% 10,000 10,000
Tianjin Joy City Tianjin Residential 100% 212 212
Tianjin Office 100% 61,254 61,254
Hangzhou Joy City Hangzhou Residential 100% 23,700 23,700
Hangzhou Retail 100% 80,362 80,362
Hangzhou Office 100% 90,000 90,000
Brilliant Villa Sanya Residential 41% 64,403 26,405
Hongtang Bay Project Sanya Residential 51% 157,768 80,462
Andingmen Project Beijing Office 65% 62,500 40,625
Total
819,396 640,410
Source: Company, Daiwa
We forecast CNY4.26bn in property sales for 2016
Backed by CNY10bn of saleable resources
For 2016, Joy City will continue to sell its existing projects, including the Shanghai Ocean
One residential project, Sanya Brilliant Villa residential project, Tianjin Joy City residential
portion, Hangzhou Joy Mansion and Shanghai Joy Mansion One. Shanghai Joy Mansion
One has over 200 units available-for-sale in 2016 and assuming an ASP of around
CNY100,000-110,000/sqm, this project alone could already fetch some CNY4.0bn in sales.
The new projects that could be launched in 2016 include the Sanya Hongtang Bay project,
the residential portion of the Shanghai Qiantan project and the office portion of Tianjin Joy
City. According to Joy City, total saleable resources in 2016 could amount to as much as
CNY10bn.
If we assume a 40-45% sell-through rate in 2016, similar to Joy City’s sell-through for
2015, we anticipate around CNY4.26bn in contract sales to be achieved in the following
year, which is 35% above the company’s achieved sales of CNY3.2bn for 2015.
For 2017, we anticipate further strong 47% YoY growth in Joy City’s property sales to
reach CNY6.25bn.
We forecast 35% and
47% contract sales
growth for Joy City in
2016 and 2017,
respectively
20
Joy City Property (207 HK): 29 January 2016
Joy City: contract sales value
Source: Company, Daiwa forecasts
CNY40bn saleable resources for current portfolio to support strong sales growth and capex needs
According to Joy City, its current portfolio of 9 property development projects has total
saleable resources of about CNY40bn, of which 48% is for residential usage and the
remaining 52% for commercial usage. We believe this CNY40bn in saleable resources is
sufficient to support strong sales growth for the company in the next 3-4 years, and in turn
would support its capex needs in those years.
While Joy City spent about CNY4bn in capex for 2015 due to the opening of 2 new malls,
its capex requirements in the next few years should be considerably lower due to its switch
to an asset-light strategy for its malls. We estimate around CNY2-2.5bn in capex
requirements for the company in 2016, which should be well-supported by CNY4.3bn of
property sales during the year, per our forecasts.
Sizeable contribution to top-line growth starting in 2016 Revenue from property sales to see 89% and 75% jumps in 2016E and 2017E
As a result of a decline in property sales booked for Shanghai Ocean One and Tianjin Joy
City in 2015 compared to 2014, and also that Shanghai Joy Mansion One and Hangzhou
Joy Mansion will only start to contribute to earnings in 2016, we expect a lower revenue
contribution from property development in 2015. We forecast revenue from property sales
of CNY1,554m for 2015, down 23% from CNY2,021m in 2014.
For 2016, with Shanghai Joy Mansion One and Hangzhou Joy Mansion starting to
contribute to earnings and with the offices at Tianjin Joy City likely to be sold and booked,
we look for a 89% YoY jump in Joy City’s revenue from property sales in 2016 to
CNY2,935m. For 2017, with more units at Shanghai Joy Mansion One to be booked and
Shanghai Qiantan project to start booking, we anticipate a further 75% YoY increase in Joy
City’s property development revenue to CNY5,122m.
Joy City: property development income
Source: Company, Daiwa forecasts
1,766
3,165
4,259
6,252
0
2,000
4,000
6,000
8,000
2014 2015 2016E 2017E
(CNY m)
3,650
2,0211,554
2,935
5,122
0
2,000
4,000
6,000
2013 2014 2015E 2016E 2017E
(CNY m)
We expect a turnaround
in Joy City’s property
development revenue in
2016 after the dip in 2015
21
Joy City Property (207 HK): 29 January 2016
Strong support from SOE parent
66.83% owned by COFCO Corporation
One of the SOEs approved by the central government to engage in the property business
Joy City is 66.83% held by its parent, COFCO Corporation, which is one of the 21 SOEs to
have obtained the approval of the State-owned Assets Supervision and Administration
Commission (SASAC) to develop and invest in property projects. It has been engaged in
the property development and investment businesses in Mainland China since the 1990s.
As its only offshore listed property platform (COFCO Corporation has an onshore listed
property company called COFCO Property [000031 CH, Not rated]), Joy City, should
benefit from COFCO Corporation’s long-standing relationships with various government
departments in the real-estate industry.
Joy City enjoys very low finance costs
Most importantly, we believe Joy City will be able to leverage on COFCO Corporation’s
track record in the property industry and obtain favorable financing terms from banks and
financial institutions, ie, low finance costs. In fact, Joy City enjoyed very low overall funding
costs of around 5.8% for 1H15, below the average reported number of 6.7% for its peers.
We expect its average funding cost go even lower, to around 5.4% by the end of 2016 and
5.2% by the end of 2017.
Joy City: weighted average borrowing cost
Source: Company, Daiwa forecasts
Average borrowing costs of the China property companies for 1H15
Joy City’s overall
funding cost of 5.8% for
1H15 was well below the
average of its peers, at
6.7%
Source: Companies, Daiwa
6.01%
5.70%
5.40%
5.20%
0%
2%
4%
6%
8%
2014 2015E 2016E 2017E
0%
2%
4%
6%
8%
10%
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Average - 6.7%
22
Joy City Property (207 HK): 29 January 2016
Issued CNY1.5bn in 5-year domestic bonds at a 3.2% coupon rate, one of the lowest among the China developers
In December 2015, Joy City received approval to issue CNY7.4bn of domestic corporate
bonds and in January 2016, the company issued its first tranche of CNY1.5bn 5-year
domestic bonds at a coupon rate of 3.2%. This is the one of the lower coupon rates
enjoyed by the China developers so far for their domestic bonds. And we expect any other
of Joy City’s domestic bonds issued later to enjoy similarly low coupon rates, which in turn
would lower the overall financing cost of the company.
SOE reform on the agenda for COFCO Corporation
Ownership diversification being carried out at some subsidiaries
The Third Plenum of the 18th Central Committee of the Chinese Communist Party held in
November 2013 set the agenda for a new round of reforms for SOEs and these reforms
were outlined by the Fourth Plenum in October 2014. The main principles of the SOE
reforms point to the conversion of a large batch of SOEs into enterprises with mixed
ownership to increase efficiency and implement management incentives tied to company
performance (ie, share options). The reforms also call for the separation of capital
management from on-the-ground operations for the State-owned Assets Supervision and
Administration Commission (SASAC), China’s supervisory body for SOEs.
In July 2014, the SASAC announced that COFCO Corporation was among the first batch
of key SOEs to be included in a reform pilot programme. Since then, the company has
begun to decentralise the business ownership of some of its subsidiaries (ie, Joy Come
and Womai) by diversifying the types of shareholders (ie, financial investors or strategic
investors) and the shareholding structure, and improving the corporate governance.
Moreover, it has also enhanced the professionalism of its management and adopted an
incentive mechanism for the managements of its subsidiaries. It is widely expected by the
market that the reforms will be gradually extended to all of the company’s other
businesses.
No set timetable for reform at Joy City yet
COFCO Corporation unlikely to dispose of shares at below the cost it paid for them of HKD1.70-1.80/share
As part of the reforms of COFCO Corporation, Joy City, being one of COFCO
Corporation’s subsidiaries, would have to reform its business ownership. This means that
COFCO Corporation would have to dispose of some of its 67.03% stake in Joy City to an
unrelated third party until it no longer holds a controlling stake (less than 50%) in the
company. The timetable for COFCO Corporation’s stake disposal is unknown at this point,
as it is not likely to dispose of its stake at below the cost it paid to it (ie, HKD1.70-
1.80/share). However, if the stake disposal were to occur, COFCO Corporation would likely
sell its stake to financial investors (eg, insurance companies) or strategic investors, which
would boost Joy City’s business development.
Besides the decentralization of business ownership, we believe Joy City will also adopt a
management incentive mechanism as part of the reforms, ie, by issuing share options to
the management team. Nonetheless, as the management incentive mechanism has to be
carried out at the same time as the business ownership diversification, there is also no set
timetable yet for the introduction of the incentive mechanism.
According to the SOE
reform on business
ownership, COFCO
Corporation would have
to dispose of shares in
Joy City, but no
timetable has been set
for this
23
Joy City Property (207 HK): 29 January 2016
Earnings to decline in 2015 before picking up
Earnings outlook
Strong property development revenue growth expected for 2016-17E
For 2015, we forecast Joy City’s recognised GFA to decline by 27% YoY to reach
36,300sqm, on the back of lower sales and lower bookings for its Shanghai Ocean One
and Tianjin Joy City projects. Nonetheless, we expect its recognised ASP for 2015 to rise
by 5% to CNY42,748/sq m. Further, we forecast the company’s revenue from property
development to be CNY1,554m for 2015, down 23% YoY.
For 2016, we expect to see a 33% surge in Joy City’s recognised GFA to 48,400sq m, as it
starts to book its Joy Mansion One residential project at Shanghai Joy City. We also expect
the company’s recognised ASP to jump by 42% YoY jump for 2016 to CNY60,629/sq m, as
a result of the booking of Joy Mansion One, which has very high ASPs. We forecast its
total property development revenue to be CNY2,935m for 2016, up 89% YoY.
In 2017, we anticipate higher recognised GFA of 79,600sq m and forecast Joy City’s
recognised ASP to rise by a further 6% YoY to reach CNY64,355/sq m. This is due to the
company’s booking of high ASP projects, including Joy Mansion One at Shanghai Joy City,
some retail shops in Shanghai Joy City and, also its Shanghai Qiantan project. We
forecast a property development revenue in 2017 of CNY5,122m, 75% higher YoY.
Joy City: recognised GFA and ASP
Source: Company, Daiwa forecasts
Joy City: property development revenue
Source: Company, Daiwa forecasts
49.536.3
48.4
79.640,850 42,748
60,62964,355
0
20,000
40,000
60,000
80,000
0
40
80
120
160
2014 2015E 2016E 2017E
Recognized GFA Recognized ASP (RHS)
('000 sqm) (CNY/sqm)
3,650
2,0211,554
2,935
5,122
0
2,000
4,000
6,000
2013 2014 2015E 2016E 2017E
(CNY m)
A huge leap in Joy City’s
property development
revenue in 2016 is
expected due to the
booking of Shanghai Joy
Mansion One and Tianjin
Joy City office
24
Joy City Property (207 HK): 29 January 2016
Improved rental income growth for 2016-17E due to the start of operations at new malls
We forecast a 10% YoY increase in Joy City’s rental income from its investment property
portfolio to reach CNY2,209m for 2015. With Shanghai Joy City Phase 1 North and
Chengdu Joy City commencing operations at the end of 2015, we forecast the company’s
rental income to see a jump of 33% YoY for 2016, reaching CNY2,940m. We believe the
rental income growth brought about by these two new malls will continue into 2017, and we
forecast a further 14% YoY growth in Joy City’s rental income for 2017, at CNY3,366m.
Joy City: gross rental income from investment properties
Source: Company, Daiwa forecasts
Revenue and core profit to dip for 2015E before picking up in 2016-17E
Due to the limited number of properties being developed and delivered by Joy City in 2015,
we expect its revenue and core net profit to decline in 2015, before seeing better growth in
2016 and 2017, as more projects are booked.
We estimate that the company will see declines of respective 1% and 8% YoY in its
revenue and core profit for 2015, to CNY5,643m and CNY213m. We attribute the big
expected decline in core profit to the payment of interest to the holders of Joy City’s
perpetual instruments, which were issued in October 2014. For 2016, we expect Joy City’s
revenue and core profit to rise by 41% and 172% YoY, to CNY7,976m and CNY579m,
respectively, as a result of more higher-margin projects being booked and also on a higher
revenue contribution from its Joy City malls as Shanghai Joy City Phase 1 North and
Chengdu Joy City started operations in late-2015. For 2017, we expect 35% and 85% YoY
growth in revenue and core profit to CNY10,805m and CNY1,072m respectively.
Joy City: revenue breakdown by business
Source: Company, Daiwa forecasts
1,6942,009
2,209
2,940
3,366
0
1,000
2,000
3,000
4,000
2013 2014 2015E 2016E 2017E
(CNYm)
0
3,000
6,000
9,000
12,000
15,000
2013 2014 2015E 2016E 2017E
Sale of properties Gross rental income Hotel operations Property management Others
6,809
(CNYm)
5,713 5,643
7,976
10,805
We expect 33% YoY
growth in Joy City’s 2016
rental income, driven by
the contribution from 2
new malls
We expect lower revenue
and core profit in 2015
before seeing a jump in
2016
25
Joy City Property (207 HK): 29 January 2016
Joy City: revenue and core net profit
Source: Company, Daiwa forecasts
Our 2016-17E earnings factor in our house forecast of CNY7.50 to the USD
Our earnings forecast for 2015 factors in the impact of a 4.4% depreciation in the CNY for
last year. Meanwhile, our earnings forecasts for 2016 and 2017 factor in Daiwa’s forecast
that the CNY will be at 7.50 against the USD at the end of both 2016 and 2017.
If the CNY were to depreciate further by 5% from our base-case scenario (7.50 by end-
2016 and 2017), we estimate that Joy City’s earnings for 2016 and 2017 would decline by
2.0% and 1.9% to reach CNY567m and CNY1,051m, respectively.
Gross margin likely to be maintained at above 50% for the next few years
Thanks to the low cost of projects acquired from its parent in 2013-14 and the high
proportion of rental income revenue from investment properties, Joy City saw a high gross
margin of above 50% for both 2013-14. And we expect its gross margin to be maintained at
over 50% for 2015-17, significantly higher than the sector average of 25-30% (on the
Bloomberg consensus forecasts).
For 2015, we forecast a gross margin of 53.9% for Joy City, lower than the 59.4% for 2014,
on the back of fewer bookings for Ocean One in Shanghai, for which we expect a high
gross margin of 70% for 2015. Meanwhile, we expect the company’s overall gross margin
to rise slightly for both 2016 and 2017, at 54.1% (+0.4pp) and 54.4% (+0.3pp),
respectively.
Joy City: gross margin
Source: Company, Daiwa forecasts
Financial position
Net gearing to remain acceptable
Joy City’s net debt rose from CNY9,588m for 2013 to CNY17,610m for 2014 due to it
issuing USD800m in guaranteed notes and its acquisition of numerous projects from its
parent. Nonetheless, the net gearing ratio as at end-2014 was still acceptable at 65.2%.
And for 2015-17, we forecast the net debt to rise further, reaching CNY19,707m for 2015
(+12% YoY), CNY20,433m for 2016 (+4% YoY) and CNY20,408m for 2017 (-0% YoY). In
6,8095,713 5,643
7,976
10,805
357 232 213 5791,072
0
4,000
8,000
12,000
2013 2014 2015E 2016E 2017E
Revenue Core net profit
(CNYm)
53.9%
59.4%
53.9%
54.1%
54.4%
40%
50%
60%
70%
2013 2014 2015E 2016E 2017E
A 5% depreciation in the
CNY from our base-case
scenario would lead to a
2% drop in 2016 and
2017 earnings
Joy City’s overall gross
margin in 2016-17E
should remain high at
>50%
26
Joy City Property (207 HK): 29 January 2016
terms of net gearing, we expect this to remain at acceptable levels of 61.4% for 2015 (-
3.8pp), 64.5% for 2016 (+3.1pp) and 62.2% for 2017 (-2.3pp) – these levels are below its
net gearing target of 65%.
Joy City: net debt and net gearing
Source: Company, Daiwa forecasts
Average borrowing cost on a down trend
For 2015-17, we expect to see a steady decline in Joy City’s average borrowing cost,
which in 1H15 was lower than the average of its peers. For 2015, we expect its average
borrowing cost to see a considerable decline, reaching 5.70% as at end-2015, on the back
of the 5 interest rate cuts in China since November 2014. For 2016, we expect a further
decline in the average borrowing cost to 5.40%, as the company is planning to issue a
CNY7.4bn domestic corporate bond at a lower finance cost (has already issued CNY1.5bn
with a 3.2% coupon rate as at early-January 2016) to repay its higher-cost debt. As for
2017, we forecast a slightly lower average borrowing cost of 5.20%, on the back of our in-
house forecasts of more interest rate cuts and because it is issuing domestic bonds at a
lower finance cost.
Joy City: weighted average borrowing cost
Source: Company, Daiwa forecasts
Dividend policy
Dividend payout to rise progressively to 20-35% of core profit
For 2014, Joy City declared and paid a final dividend of HKD0.01/share, representing a
dividend payout of c.5% of the reported net profit. In the longer run, the company is
targeting to increase this gradually to 20-35% of core profit. For 2015, we forecast the
dividend payout to be maintained at around 20%, while for 2016 and 2017, it should rise to
25%. We estimate that the dividend yield for 2015, 2016 and 2017 will be 0.4%, 1.4% and
2.6%, respectively.
9,588
17,61019,707 20,433 20,408
32.5%
65.2%61.4%
64.5%62.2%
0%
20%
40%
60%
80%
0
10,000
20,000
30,000
40,000
2013 2014 2015E 2016E 2017E
Net debt Net gearing (RHS)
(CNYm)
6.01%
5.70%
5.40%
5.20%
0%
2%
4%
6%
8%
2014 2015E 2016E 2017E
We expect Joy City’s
average borrowing cost
to decline from 5.80% in
1H15 to 5.20% for 2017
27
Joy City Property (207 HK): 29 January 2016
Valuation
Initiating with Buy (1) rating and target price of HKD1.52
NAV estimate and target discount to NAV
NAV is our preferred approach to value property companies
We regard the NAV as the best way to value property companies, as it is based on the
market value of a company’s property assets. Moreover, property companies typically trade
at a discount to their appraised NAV to reflect: 1) their capability in project execution and
property sales, as well as their long-term sales growth potential, 2) their market risk and
business diversification, and 3) their corporate risk (eg, corporate governance and financial
position).
We value Joy City at end-2016E NAV of HKD3.04/share
Based on Joy City’s investment property and hotel portfolio, and its existing development
property pipeline, we estimate an end-2016 total gross asset value (GAV) of CNY57,014m
by discounting its estimated future net cash flow to be generated using a WACC of
12.09%. The company’s development properties account for only 28% of the GAV, and its
investment properties account for the remaining 72%.
Assuming an end-2016 net debt of CNY20,433m and outstanding land premium of
CNY800m, we calculate an end-2016 NAV of CNY35,781m. Based on the outstanding
share capital of 12,234m shares as at end-June 2015, we derive a NAV per share of
CNY2.92 or HKD3.04 for Joy City.
Joy City: WACC
Rate assumptions
Risk-free rate 2.9%
Risk premium 12.9%
Beta 1.05
Cost of equity 16.4%
Cost of debt 4.1%
Debt/Assets 35.0%
WACC 12.1%
Source: Daiwa forecasts
Joy City: NAV breakdown
Joy City’s investment
properties and
development properties
account for 72% and
28% of its end-2016E
total GAV, respectively
(CNYm) End-2016 NAV % of GAV
Development properties:
Shanghai 8,811 15.5 Sanya 2,346 4.1 Beijing 2,379 4.2 Hangzhou 1,837 3.2 Tianjin 526 0.9 Chengdu 77 0.1 Development property NAV 15,975 28.0
Investment properties:
Beijing 18,355 32.2
Shanghai 7,570 13.3
Hangzhou 1,714 3.0
Tianjin 4,130 7.2
Chengdu 3,161 5.5
Sanya 2,514 4.4
Shenyang 1,972 3.5
Hong Kong 718 1.3
Yantai 567 1.0
Nanchang 187 0.3
Suzhou 151 0.3
Investment property NAV 41,039 72.0
GAV 57,014 100.0
Net debt (20,433) Outstanding land premium (800) NAV 35,781 Shares (m) 12,234 NAV/Share (CNY) 2.92 NAV/Share (HKD) 3.04
Source: Daiwa forecasts
28
Joy City Property (207 HK): 29 January 2016
We apply a 50% discount to Joy City’s NAV
Based on our estimated NAV of HKD3.04/share for Joy City and its last trading price of
HKD0.98 on 28 January, its shares are now trading at a 68% discount to NAV. Joy City’s
current NAV discount is in line with that of its Hong Kong-listed mid-cap peers’ average of
50-70% discount to market NAV.
We believe Joy City deserves to trade at a narrower NAV discount compared to its peers
due to its large exposure to investment properties, which would bring about steady
recurring income and cash flow. Even though investment properties require a lot of capex
upfront to build, we think this should not be a problem for Joy City as its property sales
should be sufficient to cover its required capex. Hence, we apply a 50% target discount to
Joy City’s NAV, which is at the low end of the current valuation range of the mid-cap Hong
Kong-listed China property companies.
Initiate coverage with a Buy (1) rating and target price of HKD1.52
Applying a 50% target discount to Joy City’s end-2016 NAV per share of HKD3.04, we
arrive at our 12-month target price of HKD1.52. As the stock was trading at HKD0.98 (28
January), our target price of HKD1.52 represents 55% upside potential from current share
price levels. We initiate a Buy (1) rating on Joy City.
High PER to come down over the next few years
Based on our estimates, Joy City’s 2015E PER is very high at 47.5x, on the back of its
likely low earnings. This is well above the sector average 2015E PER of 8.8x (on both our
and the consensus forecasts). However, as we anticipate strong earnings growth for the
company for both 2016-17, we expect its PER to fall to 17.5x and 9.4x for 2016E and
2017E, respectively.
Meanwhile, we forecast a 2015E and 2016E PBR for Joy City of 0.4x and 0.4x,
respectively, below the sector average of 0.6x for both years (on our and the consensus
forecasts).
China property companies: valuation
Company Ticker Market cap 2014 PER
2014 PBR
2015E PER
2015E PBR
2016E PER
2016E PBR
(USD m) (x) (x) (x) (x) (x) (x)
Agile Property* 3383 HK 1,866 3.8 0.3 3.5 0.3 3.3 0.3
Beijing Capital Land* 2868 HK 1,120 3.1 0.5 3.1 0.5 2.5 0.4
China Jinmao* 817 HK 2,768 5.6 0.5 5.9 0.5 5.2 0.4
China Overseas Grand Oceans 81 HK 768 4.8 0.5 3.5 0.4 2.1 0.4
China Overseas Land 688 HK 28,356 7.7 1.4 7.7 1.1 6.6 1.0
China Resources land 1109 HK 16,853 9.4 1.1 9.4 1.0 8.5 0.9
China Vanke* 2202 HK 39,085 10.0 1.8 9.0 1.6 7.6 1.4
CIFI Holdings* 884 HK 1,251 3.7 0.7 3.3 0.6 2.8 0.5
Country Garden* 2007 HK 8,642 5.2 0.9 5.5 0.8 4.9 0.7
Dalian Wanda Commercial Properties* 3699 HK 21,593 4.6 0.9 7.6 0.8 6.2 0.7
Evergrande Real Estate* 3333 HK 8,934 4.1 1.1 8.4 0.8 6.9 0.8
Greentown China* 3900 HK 1,621 5.0 0.4 3.7 0.3 3.3 0.3
Guangzhou R&F 2777 HK 3,442 5.7 0.6 3.3 0.6 2.9 0.5
Joy City 207 HK 1,864 4.5 0.4 47.5 0.4 17.5 0.4
KWG Property 1813 HK 1,873 4.7 0.6 4.0 0.5 3.4 0.5
Longfor Properties* 960 HK 7,385 5.6 0.9 6.4 0.9 5.7 0.8
Poly Property* 119 HK 982 n.a. 0.2 24.0 0.2 15.8 0.2
Shimao Property* 813 HK 4,815 4.1 0.6 3.6 0.6 3.4 0.5
Sino-Ocean Land* 3377 HK 3,762 5.3 0.5 6.3 0.5 5.5 0.5
SOHO China* 410 HK 2,403 10.0 0.4 17.3 0.4 20.1 0.4
Sunac China* 1918 HK 2,086 3.9 0.8 3.4 0.7 3.0 0.6
Yuexiu Property* 123 HK 1,783 5.6 0.4 6.3 0.4 5.5 0.4
Average 5.5 0.7 8.8 0.6 6.5 0.6
Source: Bloomberg, Daiwa forecasts for stocks not marked with * Note: *are stocks not covered by Daiwa and are based on Bloomberg estimates
Joy City’s high PER
should come down over
2016-17, while its PBR is
below the sector average
29
Joy City Property (207 HK): 29 January 2016
Share-price performance
Slow share-price performance largely factors in the near-term negatives
In the past month (29 December-28 January), share prices in the China property sector
have fallen by 20% on average, in line with the 18% decline in the HSCEI index. During
this period, Joy City’s share price declined by 18%, in line with its peers. Compared to a
year ago, its share price has come down by 36%, vs. the 19% overall decline for the China
property players. We think this could be due to the market expecting lower earnings for the
company for 2015. Besides, Joy City’s contract sales performance for 9M15 was slow in
terms of sales target completion, as it only launched its Shanghai Joy Mansion One and
Hangzhou Joy mansion residential projects in November 2015.
We believe the company’s lagging share-price performance over the past year has largely
factored in the near-term negatives, ie, a significant decline in earnings for 2015. Hence,
we recommend investors Buy into Joy City on its recent share price weakness.
Joy City: share price
Source: Bloomberg, Daiwa
0
1
2
3
4
5
6
Jan-13 Jul-13 Jan-14 Jul-14 Jan-15 Jul-15 Jan-16
(HKD)
Announcement of the first asset injection
Announcement of the second asset injection
We think Joy City’s
lagging share-price
performance over the
past year has largely
factored in its likely
weak 2015 results
30
Joy City Property (207 HK): 29 January 2016
Risks
Deterioration in economy to impact retail sales and rents
Joy City’s rental income from its retail malls account for a decent proportion of its total
revenue and is likely to stay that way in the next few years. With overall growth in the
China economy likely to slow further in 2016, nationwide retail sales growth is likely to be
dragged down as well in the years to come. Daiwa’s house view calls for nationwide retail
sales growth of 9.6% YoY for 2016, down from 10.7% for 2015. Lower retail sales would
have a direct impact on turnover rents and potential indirect impact on base rents. We
would see this as the main risk to our Buy (1) rating on Joy City stock.
The rise of e-commerce
The increase in the number of online retail platforms, such as Alibaba and JD.com, has
meant that online shopping is now playing a more prominent role in the retail environment.
According to the China Internet Information Centre, Internet retail sales in China rose by
41% YoY to CNY1,850bn in 2013, representing a CAGR of 81% over 2005-13. Over that
period, online retail sales’ proportion of China’s total retail sales of consumer goods
increased from just 0.2% of 2005 to 7.8% in 2013. We believe the increasing significance
of online retail poses a threat to physical stores in department stores, shopping malls and
pedestrian streets.
Difficulty in securing projects in good locations going forward
The good operating performance of most of Joy City’s existing malls is to some extent
attributable to their strategic locations. Hence, the success of Joy City’s asset-light strategy
on its retail malls and the operating performance of its new malls would depend to a
degree on whether or not Joy City would be able to secure quality projects in good
locations. With competition over quality projects in the upper-tier becoming more and more
intense, we are concerned that it would be difficult for Joy City to obtain projects that would
offer returns as good as its existing projects.
Slow property sales which would lead to pressure on cash flow
Joy City’s capex for its malls in the next few years would be largely supported by its
proceeds from property sales, which we expect to see strong growth in 2015-17. However,
a slower economy could also lead to slower property sales as well as retail sales, which in
turn could put pressure on cash flow, as incoming cash would not be sufficient to support
capex.
31
Joy City Property (207 HK): 29 January 2016
Appendix I: company background
Commercial property developer and operator
Project exposure in 11 major cities
Joy City is a commercial property developer and manager that focuses on the
development, operation, sales, leasing and management of shopping malls under its “Joy
City” brand and other commercial properties in Mainland China. It also develops residential
properties and operates hotels in a few major cities. As at end-June 2015, the company
had 20 residential and commercial projects and 8 hotels in 11 cities, including Beijing,
Shanghai, Tianjin, Shenyang, Yantai, Chengdu, Hangzhou, Sanya, Hong Kong, Nanchang
and Suzhou. It had 0.9m sqm of leasable commercial properties, 0.4m sqm of attributable
operational area in hotels and 0.6m sqm attributable GFA of property development
projects.
Joy City: map of its landbank
Source: Company, Daiwa Note: The numbers in the boxes next to the city names represent the number of the respective type of properties in each of the cities.
32
Joy City Property (207 HK): 29 January 2016
The sole commercial property business platform of COFCO Corporation
Joy City is 66.83% owned by its parent, COFCO Corporation, and is the only commercial
property business platform of the group. COFCO Corporation is a conglomerate operating
different businesses, of which 8 are listed in Hong Kong or China. It is one of the 21 state-
owned enterprises that has been granted approval by the SASAC to engage in real estate
development, investment and management. Besides Joy City, COFCO Corporation also
has an onshore listed property company, COFCO Property (000031 CH, Not rated), which
is engaged mainly in residential property development.
History of Joy City
Joy City was formerly named The Hong Kong Parkview Group, an investment holding
company engaged in property investment business in Hong Kong. Its principal asset is an
office premises on the 11/F of World-Wide House in Central. In July 2012, COFCO
Corporation acquired a 73.5% interest in The Hong Kong Parkview Group to create a shell
company for its property assets. This was followed by 2 major asset injections by COFCO
Corporation.
The first major asset injection
The first asset injection was announced in September 2013, whereby COFCO Corporation
injected 12 property projects into The Hong Kong Parkview Group, including Chengdu Joy
City, Beijing COFCO Plaza, 2 other commercial properties in Hong Kong and Shanghai, 7
hotels and some properties in Sanya. The total consideration for this asset injection was
HKD14.17bn, representing a 25% discount to the net asset value of the properties of
HKD14.45bn as at end-June 2013 plus HKD3.33bn of shareholders’ loans. The
consideration was satisfied by the placing of 1.955bn of shares at HKD2/share to
professional and institutional investors, and also the issuance of 1.095bn of convertible
preference shares and 5.988bn of consideration shares to COFCO Corporation. The asset
injection was completed in December 2013 and the company name was changed to
COFCO Land Holdings Limited.
The second major asset injection
The second asset injection was announced in September 2014, whereby COFCO
Corporation injected 6 mixed-use complexes under the flagship brand “Joy City” and a
further stake in Beijing COFCO Plaza and Shanghai COFCO Tower into COFCO Land.
The total consideration was HKD12.46bn, which was based on a 42.69% discount to the
net asset value of the properties of HKD20.0bn as at end-June 2014 plus HKD0.996bn of
shareholders’ loans. The consideration was satisfied partly by the issuance of USD800m
3.625% guaranteed notes due in 2019 and partly by a 1-for-2 rights issue at a subscription
price of HKD1.35/share. The asset injection was completed in December 2014 and the
company name was changed to Joy City Property Limited.
Joy City: summary of key milestones
2007 Grand opening of Beijing Xidan Joy City
2009 Grand opening of Shenyang Joy City
2010 Grand opening of Beijing Chaoyang Joy City
Grand opening of Southern Tower of Phase 1 of Shanghai Joy City
2011 Grand opening of Tianjin Joy City
2012 COFCO Corporation acquired 73.5% stake in The Hong Kong Parkview Group Limited
2013 Announced and completed the acquisition of 12 property projects from COFCO Corporation, including Chengdu Joy City, Beijing COFCO Plaza, 2 commercial properties in Hong Kong and Shanghai, 7 hotels and a few properties in Sanya
Company name changed from The Hong Kong Parkview Group Limited to COFCO Land Holdings Limited
2014 Further acquired stake in projects in Shanghai and properties in Sanya
Grand opening of Yantai Joy City
Announced and completed the acquisition of 6 "Joy City" malls
2015 Company name changed from COFCO Land Holdings Limited to Joy City Property Limited
Acquisition of land plots to develop Hangzhou Joy City
Acquisition of 50% stake in Shanghai Qiantan project
Acquisition of further stake in Beijing Andingmen project
Source: Company, Daiwa
Joy City has received 2
asset injections from its
parent in the past and
altogether has acquired
18 projects
33
Joy City Property (207 HK): 29 January 2016
Rental income to account for 39% of total revenue for 2015E
Typically, for Joy City’s mixed-use projects, around 60% of GFA (ie, residential, office and
podium retail portion) would be available for sale while the remaining 40% (ie, shopping
malls) would be held as investment properties. In 2015, we estimate gross rental income
from investment properties accounted for the largest proportion of 39% of Joy City’s total
revenue, followed by 27% from property sales and 20% from hotel operations. However, in
2016-17, while we forecast rental income to see strong growth, we anticipate revenue from
property sales to account for a larger proportion of total revenue due to more saleable
projects and the booking of more projects during the period.
Joy City: total revenue in 2013-17E Joy City: revenue breakdown by business in 2015E
Source: Company, Daiwa forecasts
Source: Company, Daiwa forecasts
Experienced management team
Joy City has an experienced management team. Most of the team have been with the
company for a long time and have extensive experience in operations, management or the
property business.
Joy City: management profile
Position Brief introduction
Zhou Zheng Chairman and executive director Mr Zhou has over 20 years of experience in corporate management and is currently a council member of the China Real estate Association. He was appointed an executive director in August 2012 and was appointed as Chairman in December 2013. He is also the Chairman of COFCO Property (000031 CH) and a vice president of COFCO Corporation.
Han Shi General manager and executive director Mr Han joined COFCO Corporation in August 1990 and has over 20 years of management experience in project management, project investment and general management. Since 2007, he has been responsible for the commercial real estate business of the COFCO Group and also, the establishment and development of the "Joy City" brand.
Shi Zhuowei Non-executive director Mr Shi joined COFCO Corporation in July 1993 and was the chairman of COFCO Land from July 2011 to May 2013. He has extensive experience in project management, project investment, human resources development and general management.
Ma Jianping Non-executive director Mr Ma was Chairman and executive director of Joy City but resigned as Chairman and was re-designated as non-executive director in December 2013. He joined COFCO Corporation in August 1986 and has been its vice president and its strategy department director since May 2010 and January 2006 respectively. He is currently also a director of COFCO Property, the deputy managing director of COFCO (HK) and a director of certain other subsidiaries of COFCO Corporation.
Ma Wangjun Non-executive director Mr Ma joined COFCO Corporation in August 1988 and is currently the chief accountant of COFCO Corporation. He has extensive experience in corporate finance and asset management.
Jiang Hua Non-executive director Ms Jiang joined COFCO Corporation in September 2004 and was a director of COFCO Corporation during September 2004 to December 2012. She was re-appointed as director of COFCO Corporation since December 2013. She has extensive experience in corporation management, administrative management and government relations.
Source: Company, Daiwa
0
3,000
6,000
9,000
12,000
15,000
2013 2014 2015E 2016E 2017E
Sale of properties Gross rental income Hotel operations
Property management Others
6,809
(CNYm)
5,713 5,643
7,976
10,805 Sale of properties
27%
Gross rental income
39%
Hotel operations20%
Property management
6%
Others8%
34
Joy City Property (207 HK): 29 January 2016
Joy City: landbank summary
Name of project City Product type Stake Total GFA Attributable GFA Leasable GFA No. of guestrooms Attributable End-16 NAV
('000 sqm) ('000 sqm) ('000 sqm)
(CNY m)
Property investment
Xidan Joy City Beijing Retail/office 100% 185,654 185,654 66,267 - 10,734
Chaoyang Joy City Beijing Retail 90% 405,570 365,013 112,538 - 4,176
Shenyang Joy City Shenyang Retail 100% 555,146 555,146 121,643 - 1,972
Shanghai Joy City Shanghai Retail 100% 449,849 449,849 94,721 - 6,941
Tianjin Joy City Tianjin Retail 100% 531,369 531,369 83,965 - 4,130
Yantai Joy City Yantai Retail 51% 219,964 112,182 78,267 - 567
Chengdu Joy City Chengdu Retail 100% 314,560 314,560 95,200 - 3,161
Hangzhou Joy City Hangzhou Retail 100% 307,061 307,061 92,118* - 1,714
Beijing COFCO Plaza Beijing Office/retail 100% 118,632 118,632 107,743 - 2,308
Fraser Suites Top Glory Shanghai Shanghai Serviced apartments 100% 49,212 49,212 48,465 - 629
Hong Kong Top Glory Tower Hong Kong Office/retail 100% 20,003 20,003 15,738 - 650
11th floor of Hong Kong World-Wide House Hong Kong Office 100% - - 1,309 - 68
Yuechuan Plaza Sanya Office 51% 2,445 1,247 2,445 - 4
Administration Center Sanya Office 51% 33,392 17,030 28,383*
77
Yalong Bay Mountain Ocean Park Sanya Theme park 51% 26,197 13,360 - - 47
Sub-total
3,219,054 3,040,318 920,419 - 37,177
Property development
Ocean One Shanghai Residential 100% 3,294 3,294 - - 156
Shanghai Joy City Shanghai Residential/retail/office 100% 168,991 168,991 - - 7,371
Shanghai Qiantan Project Shanghai Residential/office 50% 83,613 41,807 - - 1,284
Chengdu Joy City Chengdu Retail/office 100% 23,299 23,299 - - 77
Tianjin Joy City Tianjin Residential/office 100% 61,466 61,466 - - 526
Hangzhou Joy City Hangzhou Residential/retail/office 100% 194,062 194,062 - - 1,837
Brilliant Villa Sanya Residential 41% 64,403 26,405 - - 580
Hongtang Bay Project Sanya Residential 51% 157,768 80,462 - - 1,765
Andingmen Project Beijing Office 65% 62,500 40,625 - - 2,379
Sub-total
819,396 640,410 - - 15,975
Hotel operations
The St. Regis Sanya Yalong Bay Resort Sanya Hotel 51% 90,869 46,343 - 401 650
MGM Grand Sanya Sanya Hotel 100% 108,332 108,332 - 675 1,555
Cactus Resort Sanya By Gloria Sanya Hotel 51% 38,500 19,635 - 563 182
Waldorf Astoria Beijing Beijing Hotel 51% 44,180 22,532 - 173 250
W Beijing - Chang'an Beijing Hotel 100% 62,805 62,805 - 353 630
Xidan Joy City Hotel Beijing Hotel 100% 32,885 32,885 - 300 258
Gloria Grand Hotel Nanchang Nanchang Hotel 100% 37,329 37,329 - 327 187
Gloria Plaza Hotel Suzhou Suzhou Hotel 100% 26,255 26,255 - 288 151
Sub-total
441,155 356,116 - 3,080 3,862
Total
4,479,605 4,036,844 920,419 3,080 57,014
Source: Company, Daiwa forecasts Note: *estimated as not disclosed
35
Joy City Property (207 HK): 29 January 2016
Appendix II: Joy City malls
Beijing Xidan Joy City: description and operating results
Location Xicheng District, Beijing
Stake 100%
Leasable GFA 66,922 sq m
Date of completion January 2008
Retail sales in 2014 CNY3,601m
Foot traffic in 2014 29.5m
Rental income in 2014 CNY600m
Source: Company, Daiwa
Beijing Chaoyang Joy City: description and operating results
Location Chaoyang District, Beijing
Stake 100%
Leasable GFA 112,538 sq m
Date of completion August 2010
Retail sales in 2014 CNY2,517m
Foot traffic in 2014 23.4m
Rental income in 2014 CNY420m
Source: Company, Daiwa
90%
92%
94%
96%
98%
100%
0
10
20
30
40
2011 2012 2013 2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
85%
90%
95%
100%
0
5
10
15
2011 2012 2013 2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
36
Joy City Property (207 HK): 29 January 2016
Tianjin Joy City: description and operating results
Location Gulou District, Tianjin
Stake 100%
Leasable GFA 83,965 sq m
Date of completion 2012
Retail sales in 2014 CNY2,001m
Foot traffic in 2014 18.4m
Rental income in 2014 CNY250m
Source: Company, Daiwa
Shanghai Joy City Phase 1 South: description and operating results
Location Zhabei District, Shanghai
Stake 100%
Leasable GFA 29,272 sq m
Date of completion 2011
Retail sales in 2014 CNY431m
Foot traffic in 2014 5.8 m
Rental income in 2014 CNY85m
Source: Company, Daiwa
Shenyang Joy City: description and operating results
Location Dandong District, Shenyang
Stake 100%
Leasable GFA 121,643 sq m
Date of completion December 2011
Retail sales in 2014 CNY880m
Foot traffic in 2014 22.1 m
Rental income in 2014 CNY130m
Source: Company, Daiwa
80%
85%
90%
95%
100%
0
2
4
6
8
10
2012 2013 2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
90%
92%
94%
96%
98%
100%
0
2
4
6
8
10
2011 2012 2013 2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
60%
70%
80%
90%
100%
0
1
2
3
4
5
2011 2012 2013 2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
37
Joy City Property (207 HK): 29 January 2016
Yantai Joy City: description and operating results
Location Zhifu District, Yantai
Stake 100%
Leasable GFA 78,573 sq m
Date of completion 2014
Retail sales in 2014 CNY242m
Foot traffic in 2014 5.1 m
Rental income in 2014 CNY33m
Source: Company, Daiwa
90%
92%
94%
96%
98%
100%
0
1
2
3
4
2014 1H15
Rent Occupancy rate (RHS)
(CNY/sqm/day)
38
Joy City Property (207 HK): 29 January 2016
Appendix III: overview of the China retail market
10.7% retail sales growth in 2015
China retail market expected to become world’s biggest by 2018
Economic growth in China has decelerated from the double-digit growth in early 2000s to only
6.8% in 2015. However, relative to other developing markets, its economic growth and retail
sales growth are unparalleled, as its retail sales in 2015 grew by a decent 10.7% to reach
CNY30.1tn. According to PricewaterhouseCoopers (PwC), although retail sales growth has
dropped from 15.6% in 2009, China’s retail market is expected to see annual retail volume
growth of 8.7% in the next few years to overtake the US to become the world’s biggest retail
market by 2018.
Annual retail sales volume growth in countries in Asia
Territory 2011 2012 2013 2014 2015 2016 2017 2018
Australia -0.5 0.9 1.5 1.3 2.6 2.3 2.0 2.2
China 9.1 8.7 9.3 8.8 8.7 8.6 8.0 7.9
Hong Kong 18.6 5.5 6.6 * 3.1 2.0 -1.0 0.4 1.3
India 5.7 2.7 1.7 4.0 5.6 6.2 6.2 6.6
Indonesia 6.0 5.3 4.3 3.8 5.1 5.4 5.0 5.0
Japan 0.1 1.5 0.7 0.2 0.0 0.3 0.4 0.6
Malaysia 4.6 4.7 6.4 5.4 5.3 4.6 4.6 4.8
New Zealand -1.9 2.4 6.3 3.2 2.9 2.2 2.7 2.5
Pakistan 9.2 -0.8 5.1 3.9 4.1 3.8 4.3 4.3
Philippines 3.2 5.4 4.4 4.2 5.3 5.4 5.4 5.5
Singapore 1.7 1.1 1.2 4.6 1.5 2.2 3.0 3.5
South Korea 2.1 1.3 -0.1 1.6 2.9 3.1 2.8 2.9
Taiwan 3.6 0.6 2.5 2.9 2.5 2.4 2.7 2.3
Thailand 1.4 4.9 -2.4 -0.6 0.7 3.6 3.4 4.3
Vietnam 6.7 3.9 3.8 9.5 8.4 7.8 6.0 6.5
Source: Economist Intelligence Unit Figure for 2014 onwards are forecast. Prior years are actuals or estimates *0.6% (Growth figure released by the HK Census and Statistics Department on 2 Feb 2015)
Source: PwC
Achieved retail sales of various retail property assets in China in 2014
Source: linkshop.com, Google, Daiwa
Shopping malls to continue gaining market share against department stores
For the retail property sector in China, quality is the key, in our view. In general, we think the
culture of shopping in malls has just started to form in China, and believe shopping malls will
continue to gain market share against department stores and pedestrian streets, which have
been the dominant retail formats in China in the past. While many Chinese cities have
abundant retail space and shopping malls, those under systematic and professional
management are limited, in our view.
0
2,000
4,000
6,000
8,000
Bei
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Pla
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6
(CNYm)
China is expected to
surpass the US to
become the world’s
biggest retail market by
2018
39
Joy City Property (207 HK): 29 January 2016
China retail property sector
Source: Daiwa
40
Joy City Property (207 HK): 29 January 2016
Appendix IV: retail sales in Joy City’s cities
Retail sales in Beijing Retail sales in Shanghai
Source: CEIC, Daiwa Source: CEIC, Daiwa
Retail sales in Tianjin Retail sales in Shenyang
Source: CEIC, Daiwa Source: CEIC, Daiwa
Retail sales in Yantai Retail sales in Chengdu
Source: CEIC, Daiwa Source: CEIC, Daiwa
Retail sales in Hangzhou
Source: CEIC, Daiwa
0
200
400
600
800
1,000
2010 2011 2012 2013 2014 2015
(CNY bn)
0
200
400
600
800
1,000
2010 2011 2012 2013 2014 2015
(CNY bn)
0
100
200
300
400
500
2010 2011 2012 2013 2014 2015
(CNY bn)
0
100
200
300
400
2010 2011 2012 2013 2014
(CNY bn)
0
100
200
300
2010 2011 2012 2013 2014
(CNY bn)
0
100
200
300
400
500
2010 2011 2012 2013 2014
(CNY bn)
0
100
200
300
400
2010 2011 2012 2013 2014
(CNY bn)
41
Joy City Property (207 HK): 29 January 2016
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42
Joy City Property (207 HK): 29 January 2016
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Important Disclosures and Disclaimer
This publication is produced by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, and distributed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates, except to the extent expressly provided herein. This publication and the contents hereof are intended for information purposes only, and may be subject to change without further notice. Any use, disclosure, distribution, dissemination, copying, printing or reliance on this publication for any other purpose without our prior consent or approval is strictly prohibited. Neither Daiwa Securities Group Inc. nor any of its respective parent, holding, subsidiaries or affiliates, nor any of its respective directors, officers, servants and employees, represent nor warrant the accuracy or completeness of the information contained herein or as to the existence of other facts which might be significant, and will not accept any responsibility or liability whatsoever for any use of or reliance upon this publication or any of the contents hereof. Neither this publication, nor any content hereof, constitute, or are to be construed as, an offer or solicitation of an offer to buy or sell any of the securities or investments mentioned herein in any country or jurisdiction nor, unless expressly provided, any recommendation or investment opinion or advice. Any view, recommendation, opinion or advice expressed in this publication may not necessarily reflect those of Daiwa Securities Group Inc., and/or its affiliates nor any of its respective directors, officers, servants and employees except where the publication states otherwise. This research report is not to be relied upon by any person in making any investment decision or otherwise advising with respect to, or dealing in, the securities mentioned, as it does not take into account the specific investment objectives, financial situation and particular needs of any person. Daiwa Securities Group Inc., its subsidiaries or affiliates, or its or their respective directors, officers and employees from time to time have trades as principals, or have positions in, or have other interests in the securities of the company under research including market making activities, derivatives in respect of such securities or may have also performed investment banking and other services for the issuer of such securities. The following are additional disclosures.
Ownership of Securities
For “Ownership of Securities” information, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationship
For “Investment Banking Relationship”, please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Japan
Daiwa Securities Co. Ltd. and Daiwa Securities Group Inc.
Daiwa Securities Co. Ltd. is a subsidiary of Daiwa Securities Group Inc.
Investment Banking Relationship
Within the preceding 12 months, the subsidiaries and/or affiliates of Daiwa Securities Group Inc. * has lead-managed public offerings and/or secondary offerings (excluding straight bonds) of the securities of the following companies: Modern Land (China) Co. Ltd (1107 HK); econtext Asia Ltd (1390 HK); Accordia Golf Trust (AGT SP); GF Securities Co Ltd (1776 HK); Mirae Asset Life Insurance Co Ltd (085620 KS); China Reinsurance Group Corporation (1508 HK).
*Subsidiaries of Daiwa Securities Group Inc. for the purposes of this section shall mean any one or more of: Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司), Daiwa
Capital Markets Singapore Limited, Daiwa Capital Markets Australia Limited, Daiwa Capital Markets India Private Limited, Daiwa-Cathay Capital Markets Co., Ltd., Daiwa Securities Capital Markets Korea Co., Ltd.
Hong Kong
This research is distributed in Hong Kong by Daiwa Capital Markets Hong Kong Limited (大和資本市場香港有限公司) (“DHK”) which is regulated by the Hong Kong Securities and Futures
Commission. Recipients of this research in Hong Kong may contact DHK in respect of any matter arising from or in connection with this research. Relevant Relationship (DHK)
DHK may from time to time have an individual employed by or associated with it serves as an officer of any of the companies under its research coverage.
Singapore
This research is distributed in Singapore by Daiwa Capital Markets Singapore Limited and it may only be distributed in Singapore to accredited investors, expert investors and institutional investors as defined in the Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time. By virtue of distribution to these category of investors, Daiwa Capital Markets Singapore Limited and its representatives are not required to comply with Section 36 of the Financial Advisers Act (Chapter 110) (Section 36 relates to disclosure of Daiwa Capital Markets Singapore Limited’s interest and/or its representative’s interest in securities). Recipients of this research in Singapore may contact Daiwa Capital Markets Singapore Limited in respect of any matter arising from or in connection with the research.
Australia
This research is distributed in Australia by Daiwa Capital Markets Australia Limited and it may only be distributed in Australia to wholesale investors within the meaning of the Corporations Act. Recipients of this research in Australia may contact Daiwa Capital Markets Stockbroking Limited in respect of any matter arising from or in connection with the research.
India
This research is distributed in India to Institutional Clients only by Daiwa Capital Markets India Private Limited (Daiwa India) which is an intermediary registered with Securities & Exchange Board of India as a Stock Broker, Merchant Bank and Research Analyst. Daiwa India, its Research Analyst and their family members and its associates do not have any financial interest save as disclosed or other undisclosed material conflict of interest in the securities or derivatives of any companies under coverage. Daiwa India and its associates may have received compensation for any products other than Investment Banking (as disclosed) or brokerage services from the subject company in this report during the past 12 months. Unless otherwise stated in BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action, Daiwa India and its associates do not hold more than 1% of any companies covered in this research report. There is no material disciplinary action against Daiwa India by any regulatory authority impacting equity research analysis activities as of the date of this report.
Taiwan
This research is distributed in Taiwan by Daiwa-Cathay Capital Markets Co., Ltd and it may only be distributed in Taiwan to institutional investors or specific investors who have signed recommendation contracts with Daiwa-Cathay Capital Markets Co., Ltd in accordance with the Operational Regulations Governing Securities Firms Recommending Trades in Securities to Customers. Recipients of this research in Taiwan may contact Daiwa-Cathay Capital Markets Co., Ltd in respect of any matter arising from or in connection with the research.
Philippines This research is distributed in the Philippines by DBP-Daiwa Capital Markets Philippines, Inc. which is regulated by the Philippines Securities and Exchange Commission and the Phil ippines Stock Exchange, Inc. Recipients of this research in the Philippines may contact DBP-Daiwa Capital Markets Philippines, Inc. in respect of any matter arising from or in connection with the research. DBP-Daiwa Capital Markets Philippines, Inc. recommends that investors independently assess, with a professional advisor, the specific financial risks as well as the legal, regulatory, tax, accounting, and other consequences of a proposed transaction. DBP-Daiwa Capital Markets Philippines, Inc. may have positions or may be materially interested in the securities in any of the markets mentioned in the publication or may have performed other services for the issuers of such securities.
For relevant securities and trading rules please visit SEC and PSE links at http://www.sec.gov.ph/irr/AmendedIRRfinalversion.pdf and http://www.pse.com.ph/ respectively.
Thailand
This research is distributed to only institutional investors in Thailand primarily by Thanachart Securities Public Company Limited (“TNS”).
This report is prepared by analysts who are employed by Daiwa Securities Group Inc. and/or its non-U.S. affiliates. This report is provided to you for informational purposes only and it is not, and is not to be construed as, an offer or an invitation to make an offer to sell or buy any securities. Neither Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees accept any liability whatsoever for any direct or consequential loss arising from any use of this research or its contents.
The information and opinions contained herein have been compiled or arrived at from sources believed to be reliable. However, Thanachart Securities Public Company Limited, Daiwa Securities Group Inc. nor any of their respective parent, holding, subsidiaries or affiliates, nor any of their respective directors, officers, servants and employees make no representation or warranty, express or implied, as to their accuracy or completeness. Expressions of opinion herein are subject to change without notice. The use of any information, forecasts and opinions contained in this report shall be at the sole discretion and risk of the user.
Daiwa Securities Group Inc. and/or its non-U.S. affiliates perform and seek to perform business with companies covered in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates, their respective directors, officers, servants and employees may have positions and financial interest in securities mentioned in this research. Thanachart Securities Public Company Limited, Daiwa Securities Group Inc., their respective parent, holding, subsidiaries or affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this research. Therefore, investors should be aware of conflict of interest that may affect the objectivity of this research.
United Kingdom This research report is produced by Daiwa Securities Co. Ltd. and/or its affiliates and is distributed in the European Union, Iceland, Liechtenstein, Norway and Switzerland. Daiwa Capital Markets Europe Limited is authorised and regulated by The Financial Conduct Authority (“FCA”) and is a member of the London Stock Exchange and Eurex. This publication is intended for investors who are not Retail Clients in the United Kingdom within the meaning of the Rules of the FCA and should not therefore be distributed to such Retail Clients in the United Kingdom. Should you enter into investment business with Daiwa Capital Markets Europe’s affiliates outside the United Kingdom, we are obliged to advise that the protection afforded by the United Kingdom regulatory system may not apply; in particular, the benefits of the Financial Services Compensation Scheme may not be available.
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Joy City Property (207 HK): 29 January 2016
Daiwa Capital Markets Europe Limited has in place organisational arrangements for the prevention and avoidance of conflicts of interest. Our conflict management policy is available at http://www.uk.daiwacm.com/about-us/corporate-governance-regulatory.
Germany
This document is distributed in Germany by Daiwa Capital Markets Europe Limited, Niederlassung Frankfurt which is regulated by BaFin (Bundesanstalt fuer Finanzdienstleistungsaufsicht) for the conduct of business in Germany.
Bahrain
This research material is distributed in Bahrain by Daiwa Capital Markets Europe Limited, Bahrain Branch, regulated by The Central Bank of Bahrain and holds Investment Business Firm – Category 2 license and having its official place of business at the Bahrain World Trade Centre, South Tower, 7th floor, P.O. Box 30069, Manama, Kingdom of Bahrain. Tel No. +973 17534452 Fax No. +973 535113
United States
This report is distributed in the U.S. by Daiwa Capital Markets America Inc. (DCMA). It may not be accurate or complete and should not be relied upon as such. It reflects the preparer’s views at the time of its preparation, but may not reflect events occurring after its preparation; nor does it reflect DCMA’s views at any time. Neither DCMA nor the preparer has any obligation to update this report or to continue to prepare research on this subject. This report is not an offer to sell or the solicitation of any offer to buy securities. Unless this report says otherwise, any recommendation it makes is risky and appropriate only for sophisticated speculative investors able to incur significant losses. Readers should consult their financial advisors to determine whether any such recommendation is consistent with their own investment objectives, financial situation and needs. This report does not recommend to U.S. recipients the use of any of DCMA’s non-U.S. affiliates to effect trades in any security and is not supplied with any understanding that U.S. recipients of this report will direct commission business to such non-U.S. entities. Unless applicable law permits otherwise, non-U.S. customers wishing to effect a transaction in any securities referenced in this material should contact a Daiwa entity in their local jurisdiction. Most countries throughout the world have their own laws regulating the types of securities and other investment products which may be offered to their residents, as well as a process for doing so. As a result, the securities discussed in this report may not be eligible for sales in some jurisdictions. Customers wishing to obtain further information about this report should contact DCMA: Daiwa Capital Markets America Inc., Financial Square, 32 Old Slip, New York, New York 10005 (Tel no. 212-612-7000).
Ownership of Securities
For “Ownership of Securities” information please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Investment Banking Relationships
For “Investment Banking Relationships” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. DCMA Market Making
For “DCMA Market Making” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action.
Research Analyst Conflicts
For updates on “Research Analyst Conflicts” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The principal research analysts who prepared this report have no financial interest in securities of the issuers covered in the report, are not (nor are any members of their household) an officer, director or advisory board member of the issuer(s) covered in the report, and are not aware of any material relevant conflict of interest involving the analyst or DCMA, and did not receive any compensation from the issuer during the past 12 months except as noted: no exceptions.
Research Analyst Certification
For updates on “Research Analyst Certification” and “Rating System” please visit BlueMatrix disclosure link at https://daiwa3.bluematrix.com/sellside/Disclosures.action. The views about any and all of the subject securities and issuers expressed in this Research Report accurately reflect the personal views of the research analyst(s) primarily responsible for this report (or the views of the firm producing the report if no individual analysts[s] is named on the report); and no part of the compensation of such analyst(s) (or no part of the compensation of the firm if no individual analyst[s)] is named on the report) was, is, or will be directly or indirectly related to the specific recommendations or views contained in this Research Report.
The following explains the rating system in the report as compared to relevant local indices, unless otherwise stated, based on the beliefs of the author of the report.
"1": the security could outperform the local index by more than 15% over the next 12 months. "2": the security is expected to outperform the local index by 5-15% over the next 12 months. "3": the security is expected to perform within 5% of the local index (better or worse) over the next 12 months. "4": the security is expected to underperform the local index by 5-15% over the next 12 months. "5": the security could underperform the local index by more than 15% over the next 12 months. Disclosure of investment ratings
Rating Percentage of total
Buy* 63.9%
Hold** 21.3%
Sell*** 14.8%
Source: Daiwa
Notes: data is for single-branded Daiwa research in Asia (ex Japan) and correct as of 31 December 2015. * comprised of Daiwa’s Buy and Outperform ratings. ** comprised of Daiwa’s Hold ratings. *** comprised of Daiwa’s Underperform and Sell ratings. Additional information may be available upon request.
Japan - additional notification items pursuant to Article 37 of the Financial Instruments and Exchange Law
(This Notification is only applicable where report is distributed by Daiwa Securities Co. Ltd.)
If you decide to enter into a business arrangement with us based on the information described in materials presented along with this document, we ask you to pay close attention to the following items.
In addition to the purchase price of a financial instrument, we will collect a trading commission* for each transaction as agreed beforehand with you. Since commissions may be included in the purchase price or may not be charged for certain transactions, we recommend that you confirm the commission for each transaction.
In some cases, we may also charge a maximum of ¥ 2 million (including tax) per year as a standing proxy fee for our deposit of your securities, if you are a non-resident of Japan.
For derivative and margin transactions etc., we may require collateral or margin requirements in accordance with an agreement made beforehand with you. Ordinarily in such cases, the amount of the transaction will be in excess of the required collateral or margin requirements.
There is a risk that you will incur losses on your transactions due to changes in the market price of financial instruments based on fluctuations in interest rates, exchange rates, stock prices, real estate prices, commodity prices, and others. In addition, depending on the content of the transaction, the loss could exceed the amount of the collateral or margin requirements.
There may be a difference between bid price etc. and ask price etc. of OTC derivatives handled by us.
Before engaging in any trading, please thoroughly confirm accounting and tax treatments regarding your trading in financial instruments with such experts as certified public accountants. *The amount of the trading commission cannot be stated here in advance because it will be determined between our company and you based on current market conditions and the content of each transaction etc.
When making an actual transaction, please be sure to carefully read the materials presented to you prior to the execution of agreement, and to take responsibility for your own decisions regarding the signing of the agreement with us.
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