Citi Investment Research & Analysis is a division of Citigroup Global Markets Inc. (the "Firm"), which does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Citigroup Global Markets Asia Pacific │ China Diversified Real Estate Activities (GICS) │ Real Estate/Property (Citi) 20 April 2012 │ 48 pages Yuexiu Property (0123.HK) Initiate at Buy: Old Red Chip, New Focus, Turnaround Story Compelling turnaround story; initiate at Buy – We initiate coverage on Yuexiu Property shares with a Buy rating and HK$2.70 target price (based on 40% disc to 2012E NAV). Listed in HK in 1992, Yuexiu ballooned to include businesses such as toll roads, newsprint and supermarkets. New mgmt took over in 2008, and after years of restructuring, Yuexiu has shed non-core assets and refocused on its core property business. It now boasts a robust investment property portfolio combined with improved asset turnover and profitability. Moreover, Yuexiu is the only Chinese developer to own a listed REIT platform in HK, providing opportunity to unlock IP portfolio value and facilitate capital needs. We believe current valuations at 63% disc to NAV, ‘12E PE of 6.8x and PB of 0.6x are attractive, even after the recent share price rally. Commercial biz – Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations. Rental income in FY12 should exceed RMB600mn. Guangzhou IFC, with full operation targeted for 2H12, is a near-term catalyst. 1.2msm of major investment properties are in the pipeline. Residential biz – Over past few years, mgmt has successfully improved profitability and asset turnover. Over the coming several years, Yuexiu will turn its focus to development capability. Mgmt’s execution skills were evidenced in 1Q12 with 31% of the FY12 sales target achieved. We believe improved asset turnover should further alleviate capital requirements for commercial property development. Potential stock catalysts – 1) beating its RMB10bn sales target and earnings surprises; 2) faster asset turnover from disposing of quality IPs such as GZ IFC to its REIT; and 3) further gear-down to address concerns on balance sheet. Key risks – Property market weakness or economic slowdown in China or Guangdong; policy risks; interactions with REIT; and geographic expansion. Equities Statistical Abstract Year to Net Profit Diluted EPS EPS growth P/E P/B ROE Yield 31 Dec (RmbM) (Rmb) (%) (x) (x) (%) (%) 2010A 725 0.097 363.9 13.9 0.8 5.2 0.0 2011A 1,607 0.173 78.7 7.8 0.6 8.9 5.2 2012E 1,850 0.199 15.1 6.8 0.6 8.8 5.2 2013E 2,133 0.230 15.3 5.9 0.5 9.5 5.5 2014E 2,580 0.278 20.9 4.9 0.5 10.7 6.2 Source: Powered by dataCentral Buy 1 Price (19 Apr 12) HK$1.66 Target price HK$2.70 Expected share price return 62.7% Expected dividend yield 5.4% Expected total return 68.1% Market Cap HK$15,413M US$1,986M Price Performance (RIC: 0123.HK, BB: 123 HK) See Appendix A-1 for Analyst Certification, Important Disclosures and non-US research analyst disclosures. Griffin Chan +852-2501-2438 [email protected]Oscar Choi +852-2501-2737 [email protected]Marco Sze +852-2501-2466 [email protected]Company Update Initiation of Coverage
Transcript
Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc (the Firm) which does and seeks to do business with companies covered in its research reports As a result investors should be aware that the Firm may have a conflict of interest that could affect the objectivity of this report Investors should consider this report as only a single factor in making their investment decision
Citigroup Global Markets
Asia Pacific China Diversified Real Estate Activities (GICS) Real EstateProperty (Citi)
20 April 2012 48 pages
Yuexiu Property (0123HK) Initiate at Buy Old Red Chip New Focus Turnaround Story
Compelling turnaround story initiate at Buy ndash We initiate coverage on Yuexiu Property shares with a Buy rating and HK$270 target price (based on 40 disc to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New mgmt took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock IP portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV lsquo12E PE of 68x and PB of 06x are attractive even after the recent share price rally
Commercial biz ndash Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations Rental income in FY12 should exceed RMB600mn Guangzhou IFC with full operation targeted for 2H12 is a near-term catalyst 12msm of major investment properties are in the pipeline
Residential biz ndash Over past few years mgmt has successfully improved profitability and asset turnover Over the coming several years Yuexiu will turn its focus to development capability Mgmtrsquos execution skills were evidenced in 1Q12 with 31 of the FY12 sales target achieved We believe improved asset turnover should further alleviate capital requirements for commercial property development
Potential stock catalysts ndash 1) beating its RMB10bn sales target and earnings surprises 2) faster asset turnover from disposing of quality IPs such as GZ IFC to its REIT and 3) further gear-down to address concerns on balance sheet
Key risks ndash Property market weakness or economic slowdown in China or Guangdong policy risks interactions with REIT and geographic expansion
Equities
Statistical Abstract
Year to Net Profit Diluted EPS EPS growth PE PB ROE Yield
For further data queries on Citis full coverage universe please contact CIRA Data Services Asia Pacific at CIRADataServicesAsiaPacificciticom or +852-2501-2791
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 3
Investment Thesis 4 Old lsquoRed Chiprsquo new focus a turnaround story 4
Company Background 6 Old lsquoRed Chiprsquo new focus 6 Strong SOE background sound management quality 6
Valuations Undervalued Quality Assets 8 Market still too skeptical 8 Target price of HK$270 on 40 disc to NAV 8 PE and PB valuations look undemanding 9 Regional valuation comparison 9
Risks 10 Macro risks 10 Company-specific risks 10
Commercial Business 11 Leading commercial property portfolio in Guangzhou 11 Four up-and-coming investment properties in pipeline 12 GZ IFC rental income over RMB600mn in FY12E 12 Analyzing capital tied up in investment properties 13 Access to attractive REIT value-unlocking channel 13
Residential Business 14 Growing profitability on faster asset turnover 14 Contracted sales ndash steady growth with low risk profile 15 Profitability ndash Decent earnings growth in FY10-13E 24
Operating and Financial Analysis 29 Land bank 29 Financial position ndash somewhat stretched but precautionary mindset in place 30 Stable growth 43 profit CAGR in FY10-13E 33 Financial statements 34
Company description 38 Investment strategy 38 Valuation 38 Risks 39
Appendix A-1 43
Contents
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 4
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
New management took over in 2008 and began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability We believe managementrsquos guidance and positive outlook carry enhanced plausibility after a strong track record of execution during the past two years
Commercial biz rich portfolio access to value-unlocking channel
Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations Rental income in FY12 should exceed RMB600mn Guangzhou IFC with full operation targeted for 2H12 is a near-term catalyst while 12msm of major investment properties are in the pipeline Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to realize IP portfolio value and facilitate capital needs
Residential biz improving profitability on faster asset turnover
Over the past few years management has successfully improved profitability and asset turnover Over the coming several years Yuexiu will turn its focus to development capability Mgmtrsquos execution skills were evidenced in 1Q12 with 31 of the FY12 sales target achieved We believe improved asset turnover should further alleviate capital requirements for commercial property development
Why now Stock catalysts
The disposal of non-core businesses including toll roads newsprint and supermarkets was finally completed in late 2010 We see both commercial and residential property businesses as the twin engines for future growth Over the coming several years Yuexiu will turn its focus to development capability to shorten the development cycle increase asset turnover and enhance profitability Potential rerating catalysts include 1) beating its RMB10bn sales target and earnings surprises 2) faster asset turnover from disposing of quality investment properties such as GZ IFC to its REIT and 3) further gear-down to address investor concerns on balance sheet
Valuation Quality Assets Portfolio at Unjustified Valuation
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On a full valuation basis GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount
Source Company Citi Investment Research and Analysis
Risks
Weaker-than expected GDP growth for the global economy China or Guangdong Province
Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers
Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales
Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan
Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders
Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges
Somewhat stretched financial position
Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
For further data queries on Citis full coverage universe please contact CIRA Data Services Asia Pacific at CIRADataServicesAsiaPacificciticom or +852-2501-2791
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 3
Investment Thesis 4 Old lsquoRed Chiprsquo new focus a turnaround story 4
Company Background 6 Old lsquoRed Chiprsquo new focus 6 Strong SOE background sound management quality 6
Valuations Undervalued Quality Assets 8 Market still too skeptical 8 Target price of HK$270 on 40 disc to NAV 8 PE and PB valuations look undemanding 9 Regional valuation comparison 9
Risks 10 Macro risks 10 Company-specific risks 10
Commercial Business 11 Leading commercial property portfolio in Guangzhou 11 Four up-and-coming investment properties in pipeline 12 GZ IFC rental income over RMB600mn in FY12E 12 Analyzing capital tied up in investment properties 13 Access to attractive REIT value-unlocking channel 13
Residential Business 14 Growing profitability on faster asset turnover 14 Contracted sales ndash steady growth with low risk profile 15 Profitability ndash Decent earnings growth in FY10-13E 24
Operating and Financial Analysis 29 Land bank 29 Financial position ndash somewhat stretched but precautionary mindset in place 30 Stable growth 43 profit CAGR in FY10-13E 33 Financial statements 34
Company description 38 Investment strategy 38 Valuation 38 Risks 39
Appendix A-1 43
Contents
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 4
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
New management took over in 2008 and began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability We believe managementrsquos guidance and positive outlook carry enhanced plausibility after a strong track record of execution during the past two years
Commercial biz rich portfolio access to value-unlocking channel
Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations Rental income in FY12 should exceed RMB600mn Guangzhou IFC with full operation targeted for 2H12 is a near-term catalyst while 12msm of major investment properties are in the pipeline Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to realize IP portfolio value and facilitate capital needs
Residential biz improving profitability on faster asset turnover
Over the past few years management has successfully improved profitability and asset turnover Over the coming several years Yuexiu will turn its focus to development capability Mgmtrsquos execution skills were evidenced in 1Q12 with 31 of the FY12 sales target achieved We believe improved asset turnover should further alleviate capital requirements for commercial property development
Why now Stock catalysts
The disposal of non-core businesses including toll roads newsprint and supermarkets was finally completed in late 2010 We see both commercial and residential property businesses as the twin engines for future growth Over the coming several years Yuexiu will turn its focus to development capability to shorten the development cycle increase asset turnover and enhance profitability Potential rerating catalysts include 1) beating its RMB10bn sales target and earnings surprises 2) faster asset turnover from disposing of quality investment properties such as GZ IFC to its REIT and 3) further gear-down to address investor concerns on balance sheet
Valuation Quality Assets Portfolio at Unjustified Valuation
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On a full valuation basis GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount
Source Company Citi Investment Research and Analysis
Risks
Weaker-than expected GDP growth for the global economy China or Guangdong Province
Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers
Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales
Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan
Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders
Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges
Somewhat stretched financial position
Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
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Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
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The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 3
Investment Thesis 4 Old lsquoRed Chiprsquo new focus a turnaround story 4
Company Background 6 Old lsquoRed Chiprsquo new focus 6 Strong SOE background sound management quality 6
Valuations Undervalued Quality Assets 8 Market still too skeptical 8 Target price of HK$270 on 40 disc to NAV 8 PE and PB valuations look undemanding 9 Regional valuation comparison 9
Risks 10 Macro risks 10 Company-specific risks 10
Commercial Business 11 Leading commercial property portfolio in Guangzhou 11 Four up-and-coming investment properties in pipeline 12 GZ IFC rental income over RMB600mn in FY12E 12 Analyzing capital tied up in investment properties 13 Access to attractive REIT value-unlocking channel 13
Residential Business 14 Growing profitability on faster asset turnover 14 Contracted sales ndash steady growth with low risk profile 15 Profitability ndash Decent earnings growth in FY10-13E 24
Operating and Financial Analysis 29 Land bank 29 Financial position ndash somewhat stretched but precautionary mindset in place 30 Stable growth 43 profit CAGR in FY10-13E 33 Financial statements 34
Company description 38 Investment strategy 38 Valuation 38 Risks 39
Appendix A-1 43
Contents
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 4
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
New management took over in 2008 and began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability We believe managementrsquos guidance and positive outlook carry enhanced plausibility after a strong track record of execution during the past two years
Commercial biz rich portfolio access to value-unlocking channel
Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations Rental income in FY12 should exceed RMB600mn Guangzhou IFC with full operation targeted for 2H12 is a near-term catalyst while 12msm of major investment properties are in the pipeline Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to realize IP portfolio value and facilitate capital needs
Residential biz improving profitability on faster asset turnover
Over the past few years management has successfully improved profitability and asset turnover Over the coming several years Yuexiu will turn its focus to development capability Mgmtrsquos execution skills were evidenced in 1Q12 with 31 of the FY12 sales target achieved We believe improved asset turnover should further alleviate capital requirements for commercial property development
Why now Stock catalysts
The disposal of non-core businesses including toll roads newsprint and supermarkets was finally completed in late 2010 We see both commercial and residential property businesses as the twin engines for future growth Over the coming several years Yuexiu will turn its focus to development capability to shorten the development cycle increase asset turnover and enhance profitability Potential rerating catalysts include 1) beating its RMB10bn sales target and earnings surprises 2) faster asset turnover from disposing of quality investment properties such as GZ IFC to its REIT and 3) further gear-down to address investor concerns on balance sheet
Valuation Quality Assets Portfolio at Unjustified Valuation
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On a full valuation basis GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount
Source Company Citi Investment Research and Analysis
Risks
Weaker-than expected GDP growth for the global economy China or Guangdong Province
Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers
Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales
Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan
Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders
Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges
Somewhat stretched financial position
Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 4
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
New management took over in 2008 and began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability We believe managementrsquos guidance and positive outlook carry enhanced plausibility after a strong track record of execution during the past two years
Commercial biz rich portfolio access to value-unlocking channel
Yuexiu holds the leading investment property portfolio in Guangzhou with most properties in prime locations Rental income in FY12 should exceed RMB600mn Guangzhou IFC with full operation targeted for 2H12 is a near-term catalyst while 12msm of major investment properties are in the pipeline Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to realize IP portfolio value and facilitate capital needs
Residential biz improving profitability on faster asset turnover
Over the past few years management has successfully improved profitability and asset turnover Over the coming several years Yuexiu will turn its focus to development capability Mgmtrsquos execution skills were evidenced in 1Q12 with 31 of the FY12 sales target achieved We believe improved asset turnover should further alleviate capital requirements for commercial property development
Why now Stock catalysts
The disposal of non-core businesses including toll roads newsprint and supermarkets was finally completed in late 2010 We see both commercial and residential property businesses as the twin engines for future growth Over the coming several years Yuexiu will turn its focus to development capability to shorten the development cycle increase asset turnover and enhance profitability Potential rerating catalysts include 1) beating its RMB10bn sales target and earnings surprises 2) faster asset turnover from disposing of quality investment properties such as GZ IFC to its REIT and 3) further gear-down to address investor concerns on balance sheet
Valuation Quality Assets Portfolio at Unjustified Valuation
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On a full valuation basis GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount
Source Company Citi Investment Research and Analysis
Risks
Weaker-than expected GDP growth for the global economy China or Guangdong Province
Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers
Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales
Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan
Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders
Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges
Somewhat stretched financial position
Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Company Citi Investment Research and Analysis
Risks
Weaker-than expected GDP growth for the global economy China or Guangdong Province
Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers
Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales
Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan
Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders
Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges
Somewhat stretched financial position
Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 6
Old lsquoRed Chiprsquo new focus
Yuexiu Property is a turnaround story Listed in Hong Kong in December 1992 and formerly known as Guangzhou Investment (GZI) the ldquowindow companyrdquo for the booming southern China city of Guangzhou it was given a wide business scope and ballooned to include enterprises such as toll roads newsprint and supermarkets A well-known name in the investment community as one of the pioneering China ldquowindow companyrdquo Red Chips the stock later fell off many investorsrsquo radar screens due in part to its operational complexity and corporate structure
After Chairman Lu Zhifeng and other senior management came on board in July 2008 they began restructuring and refining the business focus After years of efforts Yuexiu has shed non-core assets and refocused on its core property business in Guangdong Province It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Management aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Figure 2 Yuexiu ndash History of Development
Year Major Event 1992 Listed in HKEX 1993 Acquired a 51 stake in each of Zhujiang Cement Plant Guangzhou Cement Plant and Guangzhou
Paper Ltd 1996 Started OTC trading of shares in the United States and launched secondary listing on the Singapore
Stock Exchange 1997 Spun off its toll road business to establish GZI Transport Ltd for separate listing on HKEX 2002 Acquired the property and related businesses of Guangzhou City Construction amp Development Holdings
CoLtd and disposed of the cement business with consideration close to HK$5bn 2005 Won the tender for the West Tower project of Pearl River New City in Guangzhou (Guangzhou IFC)
which commenced construction in December 2007 Subscribed for 6724 of the offer shares in GZI Transport Ltd increasing its shareholding in GZI
Transport Ltd to 4528 2008 Topping out of Guangzhou IFC 2009 Guangzhou IFC a 432-meter mega tower the tallest in Southern China entered into relevant
management cooperative and agency agreements with Four Seasons Group Jones Lang LaSalle and CB Richard Ellis respectively
Distributed and disposed toll road business focused on property development and investment and changed the company name to Yuexiu Property Co Ltd
2010 Issued 2141822374 new shares at the offer price of HK$161 per share by way of an open offer and raised cHK$34bn offer underwritten by Yue Xiu Enterprises (Holdings) Ltd
2010 Disposed of the supermarket business to China Resources Enterprise Ltd thus realizing its goal of divesting the non-property businesses
2011 Commercial area of Guangzhou IFC opened with Guangzhou Friendship Store and office commenced full operations
Source Company Citi Investment Research and Analysis
Strong SOE background sound management quality
We view Yuexiu Propertyrsquos solid management and its SOE background as key strengths of the company Yuexiu has a professional team equipped with solid integrated project development expertise Meanwhile parent company and controlling shareholder Guangzhou Yue Xiu Holdings is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government The SOE identity should further boosted its landbanking and refinancing abilities
Company Background
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 7
Figure 3 Yuexiu Property ndash Complex Group Structure in 2008hellip Figure 4 Yuexiu Property ndash Simpler Group Structure in 2012
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4696
Guangzhou InvestmentSupermarket business (renamed as Yuexiu Prop) Newsprint business
(123HK)
GZI Transport Ltd GZI REIT(now Yuexiu Transport) Property Business (renamed as Yuexiu REIT)
(1052HK) (405HK)
Guangzhou Municipal Government
Guangzhou Yuexiu Holdings(PRC Co)
Yuexiu Enterprises (Holdings)(HK Hold Co)
4988
Yuexiu Property (123HK)
3558
Yuexiu REIT(405HK)
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Figure 5 Yuexiu ndash Awards and Honors
Year Achievement Issuing entities 2011 Gold Award for Social Responsibility and Investor Relations
2011 The Asset
Chinarsquos Most Promising Companies 2011 The Asset Outstanding Chinese Property Developer Award 2011 Economic Digest Excellence of Listed Enterprise Awards 2011 Capital Weekly 2010 The Outstanding Mainland Property Stock Awards 2010 Economic Digest 2009 The Outstanding Mainland Property Stock Awards 2009 Economic Digest Top 100 Real Estate Enterprises in China China Industrial Information Issuing Centre Top 20 Best-Seller Real Estate Enterprises in Guangzhou 2009 China Real Estate Appraisal Centre Top 20 Most Creditworthy Real Estate Enterprises in
Guangdong Peoples Daily
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 8
Market still too skeptical
The shares have rallied sharply by 48 year to date vs the sector average of 28 However we believe current valuations at 63 discount to NAV 2012E PE of 68x and PB of 06x are still attractive At current levels we think the market still is not giving Yuexiu full credit for its refined business model and quality assets Meanwhile we believe the market price has not fully priced in the full valuation of Guangzhou IFC On book the investment properties portion (office retail and conference facilities) are now carried at fair value while the hotel and service apartments are still carried at cost On a full valuation basis according to FY11 results GZ IFC alone should be worth cRMB11bn (~HK$134bn) almost 90 of Yuexiursquos current market cap of HK$15bn Excluding the underappreciated GZ IFC the market appears to price Yuexiursquos other properties at a deep discount If Yuexiu Property sells out the Guangzhou IFC following a successful transaction we think the steep NAV discount should narrow
Target price of HK$270 on 40 disc to NAV
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Source Company Citi Investment Research and Analysis estimates
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our estimated NAV is derived using sum of the parts DCF for development properties capitalization rates of 9-10 for rental properties and book values for unlisted subsidiaries and non-property investments less net debt
We applied a DCF approach to value its development properties for which we have assume different selling prices for properties with different locations asset types qualities and years of completion in our net cash flow projections
Valuations Undervalued Quality Assets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 9
Depending on their location asset type and asset quality our assumed capitalization rates and rental growth forecasts for the rental properties of Yuexiu Property would be different for different properties In our view our estimated values for investment properties represent fair values that individual properties could command in the event of a disposal
PE and PB valuations look undemanding
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view
In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Regional valuation comparison
Figure 7 China Property ndash Valuations (19 Apr 2012)
Source DataCentral Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 10
Macro risks
Fundamentally Yuexiu Property is exposed principally to the property market in Mainland China In China the most notable downside risks to Yuexiu Propertyrsquos share price are economy- and policy-related With regard to economic risks any weaker-than expected GDP growth for the global economy China or Guangdong Province could negatively affect buyer sentiment in the China property market which could render our sales and earnings estimates for Yuexiu Property inaccurate
In addition a stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers This could also attract government attention and lead to changes in its supportive policy stance toward the property market On the policy front any tightening measures and policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales could adversely affect the bottom line and cash flow of property developers and homebuyer sentiment
Company-specific risks
Yuexiu Property depends heavily on the performance of the property market in the PRC particularly the target markets of Guangzhou Yantai Hangzhou and Wuhan Meanwhile Yuexiu Property has significant exposure to the Guangzhou retail and office properties market while most of the investment properties are located in Guangzhou Any property market downturn in the PRC in general or in these cities could materially adversely affect the business results of operations and financial condition
Meanwhile the interaction between Yuexiu Property and its REIT including but not limited to the sales of completed investment properties is subject to further approval of the shareunit holders As a result management may be prevented from implementing decisions which are beneficial to the business on improving asset turnover and enhancing cash flow
Yuexiu Property face risks associated with national expansion and acquiring property development projects in new cities which may involve higher costs lower profitability or execution challenges
Any delay in new launches commencement and completion schedule may adversely affect the companyrsquos earnings and cash flows
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Lastly the company performance depends in part upon the continued service and performance of key management team members including Chairman Luk and General Manager Zhang Key management staff could leave the company in the future The loss of any of these individuals could have material adverse effect on Yuexiu Propertyrsquos operation
Risks
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 11
Leading commercial property portfolio in Guangzhou
Yuexiu Property holds the leading position in Guangzhou commercial property market On existing investment properties Yuexiu Property directly holds 698k sqm of investment properties (including part of Guangzhou IFC) mainly in Guangzhou and generating RMB445mn rental income in FY11
Yuexiu Property indirectly holds five investment properties in prime locations in Guangzhou through its 3558-owned associate Yuexiu REIT with gross rental income of RMB522mn in FY11
Thanks to its strong SOE background and well-established government network all the investment properties in Guangzhou are located in prime locations
Figure 8 Yuexiu REIT ndash Investment Properties
Source Company Citi Investment Research and Analysis
Figure 9 Yuexiu Property - Guangzhou IFC Figure 10 Yuexiu Property - Fortune World Plaza (財富天地廣場)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Commercial Business
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 12
Four up-and-coming investment properties in pipeline
in the pipeline Yuexiu Property is developing c12msm investment properties portfolio including Guangzhou IFC (442K sqm incl hotel and service apartments) Fortune Center (210K sqm) Fortune World Plaza (266K sqm) and Asia Pacific Century Plaza (400k sqm) Management expect to open one landmark commercial property each year between 2012 and 2014
Despite concerns on increased supply in the office market in Guangzhou we believe Guangzhou should remain the leading city in the Pearl River Delta while existing supply should be fully take up by the strong demand by 2014
Figure 11 Yuexiu Property ndash Major Investment Properties in the Pipeline
1 Guangzhou IFC 442000 Office Retail Hotel and Serviced apartment Tianhe Guangzhou 2011-2012 by phases 79 2 Fortune World Plaza 386000 Retail Liwan Guangzhou 2013 25 3 Fortune Center 210400 Retail and Office Tianhe Guangzhou 2014 2-3 4 Asia Pacific Century Plaza 232000 Retail and Office Hotel Tianhe Guangzhou 2015 2-3 Total 1270400 144-164
Source Company Citi Investment Research and Analysis estimates
GZ IFC rental income over RMB600mn in FY12E
In the near term Guangzhou IFC is becoming more mature Commercial areas have opened with the Guangzhou Friendship Store in early 2011 and offices became fully operational in July 2011 The occupancy rate has reached over 54 with average rental of RMB210psm per month The Four Seasons Hotel and Ascott Service Apartment is expected to open in 2H12 Management expects Guangzhou IFC to generate rental income of RMB09bn by 2014 We expect the rental income in FY12 should reach over RMB600mn (~HK$739mn)
Figure 12 China Property ndash Rental League of Real Estate Players in China Market
Total Rental Income from CHINA In Million RIC Mkt Cap
NAV of Commercial Prop FY10 FY11 FY12E YOY Growth CAGR
Source Companies Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the 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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon request in respect of this material Citigroup Centre Canada Square Canary Wharf London E14 5LB The Product is made available in United States by Citigroup Global Markets Inc which is a member of FINRA and registered with the US Securities and Exchange Commission 388 Greenwich Street New York NY 10013 Unless specified to the contrary within EU Member States the Product is made available by Citigroup Global Markets Limited which is regulated by Financial Services Authority
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 13
Analyzing capital tied up in investment properties
A critical factor for building the investment properties portfolio is the longer gestation and cash conversion cycles for investment properties coupled with the huge investment amount In general it takes around 25 to 3 years for office or retail building to be completed from the planning stage and can take another 2-3 years for lease up and rent stabilization The lengthened development period heightens the reinvestment risk and also pressures the capital chain
Back in 2009 investors were concerned with the high construction capex tied up with Guangzhou IFC According to the companyrsquos latest estimates the total investment cost was RMB79bn while full market valuation is over RMB11bn
Access to attractive REIT value-unlocking channel
Yuexiu Property is the only listed Chinese developer to own a listed REIT platform in Hong Kong As of 13 April 2012 Yuexiu Properties owned 3558 of Yuexiu REIT (405HK) According to management Yuexiu Property again plans to leverage this platform as an important part of the future strategy
In the past Yuexiu Property has sold completed and mature commercial investment properties to its REIT to realize the value of the investment property portfolio and speed asset turnover In January 2008 Yuexiu Property (formerly known as GZI) sold the Neo Metropolis to Yuexiu REIT (formerly known as GZI REIT) for HK$6773mn and Yuexiu REIT settled the bill with issuance of new trust units and by cash funded by a bridging loan facility For Guangzhou IFC now maturing into final phases Yuexiu Property could also decide to leverage on its REIT providing opportunities to realize the value of the IP portfolio and speed asset turnover
Figure 13 Yuexiu Property ndash Interactive Model with Yuexiu REIT
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 14
Growing profitability on faster asset turnover
Yuexiu Property aims to strengthen development and construction capability to shorten the development cycle increase asset turnover and enhance profitability
Improving metrics
Thanks more effective cost control Yuexiu Property reported a core net profit margin of 168 in 2011 further improved by 136 pct pts from 2009 Over the past three years Yuexiu Property has maintained a consistent improvement in profitability and now managed to maintain decent profitability compared to the sectorrsquos average 167 Management is confident to maintain profit margins amid the pressure from expansion to Shenyang and Hangzhou
Figure 14 Yuexiu ndash Gross Profit Margin and Net Profit Margin 2009 ndash 2011
418
334
350
129
32
168
0
5
10
15
20
25
30
35
40
45
2009 2010 2011
Gross Profit Margin Core Profit Margin
Source Company Citi Investment Research and Analysis
Meanwhile management has improved asset turnover from 126 in 2009 to 171 in 2011 and further refined its focus on asset turnover in 2012-2015 As a result ROE improved from 12 in 2009 to 89 in 2011 although lower than the sector average of 147 due to the slower payback from investment properties However we foresee a continuous improvement in ROE as investment properties become more mature for realizing the value en-bloc
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
We believe 2012 will be a special year for Yuexiu Property to prove its execution capability on several aspects including sales execution profitability and land replenishment
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Yuexiu Property has presented a stable contract sales growth picture since 2007 Following a mild 86 YoY growth in 2008 the companyrsquos sales performance ramped up to RMB61bn and RMB89bn in FY09 and FY10 up 61 and 46 respectively In 2011 Yuexiu Property again fully achieved the RMB9bn sales target which was driven by the meaningful sales contribution of projects such as Jiang Nan New Mansion Starry Winking Rayon Jardin Ling Nan Riverside and Southern Le Sand etc In the future management indicated their focus on the Guangzhou market with stable geographic expansion to other cities including Wuhan Hangzhou and Yantai Yuexiu Property is now preparing for another breakthrough in sales while management set a preliminary target of RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
In other to secure stable growth on contracted sales by sensible geographical expansion Yuexiu has traded off the uptrend of the ASP but not profit margin After the surge in ASP from RMB9459psm in 2008 to RMB16091psm in 2010 the average selling price for contracted sales has retraced to RMB14885psm in 2011 on geographic expansion beyond Guangzhou and Guangdong province Management has set a minimum gross profit margin of at least 30 on every project at time of land acquisition Therefore the lower ASP in cities beyond Guangdong Province should not transform into a significant decline in profit margin Managementrsquos efforts to further penetrate existing cities with geographic expansion should extend the sustainability of contracted sales in our view
Figure 19 Yuexiu ndash Annual Contracted and Recognized ASP 2008 ndash 2011
14473
7098 929710144
14885
16091
9459
13152
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
2008 2009 2010 2011
RM
Bp
s
Recognised ASP Contracted ASP
Source Company Citi Investment Research and Analysis
In 2011 on average the developers we track achieved 90 of their sales targets while only a few names like COLI Evergrande CR Land and Yuexiu fully achieved the target given tough market starts especially in 4Q11 Yuexiu Property successfully achieved its RMB9bn sales target in 2011 We believe management is likely to extend their execution track record of meeting targets
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 17
Figure 20 China Property ndash Chinese Developersrsquo Contracted Sales in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the 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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon request in respect of this material Citigroup Centre Canada Square Canary Wharf London E14 5LB The Product is made available in United States by Citigroup Global Markets Inc which is a member of FINRA and registered with the US Securities and Exchange Commission 388 Greenwich Street New York NY 10013 Unless specified to the contrary within EU Member States the Product is made available by Citigroup Global Markets Limited which is regulated by Financial Services Authority
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Companies Citi Investment Research and Analysis estimates
Note - RampFrsquos Target cut to RMB32bn Greentownrsquos Target cut to RMB40bn and Yanlordrsquos Target cut to RMB85bn subsequently
RMB10bn sales target presents 11 YoY growth
Most developers guided a flat to 10 sales growth target compared to 2011 actual figures Comparing to the ldquohigh-growthrdquo expectation attached to the sector developersrsquo more realistic mindset has been reflected in this target Rather than seeking strong growth in absolute sales terms developers have put increasing weight on the quality of growth such as underlying profitability We view this as a healthy and sustainable trend for longer-term development Yuexiu Propertyrsquos RMB10bn sales target in FY12 represents a stable annual growth of 11
Figure 21 Yuexiu ndash Recognized GFA in 2009 ndash 2011 (in sqm) Figure 22 Yuexiu - Contracted GFA in 2008 ndash 2011 (in sqm)
374
424
586
300
350
400
450
500
550
600
2009 2010 2011
000
sq
2009-2011 CGAR 25
370
527549
608
300
350
400
450
500
550
600
650
2008 2009 2010 2011
sqm
2008-2011 CGAR 18
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Management has set RMB12bn as an internal sales target with RMB3bn to be achieved evenly at each quarter By 2015 management targets to achieve RMB20bn contracted sales backed by abundant saleable resources
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 18
Geographic spread
Management guided that Guangzhou will remain the major contributor in FY12 with around 55 contribution in GFA terms The remaining targeted sales will come from Zhongshan (12) Hangzhou (13) Jiangmen (7) Yantai (7) Shenyang (4) and Wuhan (4)
Figure 23 Yuexiu Property ndash Estimated Contracted Sales by Regions in 2012
Wuhan 2 Yantai 5
Shenyang 3
Zhongshan 10
Guangzhou 68
Jiangmen 4
Hangzhou 8
Source Company Citi Investment Research and Analysis estimates
Corresponding to the RMB10 sales target Yuexiu Property should have an evenly distributed sales pipeline in 2012 Aggregating the RMB3bn brought forward from 2011 and the additional RMB19bn newly available in 2012 Yuexiu Property has around RMB22bn saleable resources for 2012
The implied sale-through rate of 45 for the year is reasonable in our view compared to the 52 sector average as well as the actual 75 achieved in FY11 Meanwhile management emphasizes its even higher internal target of RMB12bn which implies a 55 sell-through rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 19
Figure 24 China Property ndash Saleable Resources in 2011 and 2012E
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
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The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Companies Citi Investment Research and Analysis estimates
Further analyzing the sell-through rates on city by GFA basis we note the sell-through rate is around 63 for the key Guangzhou market which appears to be reasonable in our view Observations in the past also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery We believe while the sales pace for long-selling projects such as Fortune Century Square may be low sales responses in some brand new projects such as Southern Le Sand Fortune Apartment and the Starry series may turn out bring positive sales surprises The 76 in Zhongshan may look aggressive given the current sluggish market Nevertheless with the majority of sales to be contributed by Zhongshan Starry Winking with 65 targeted sell-through we believe the sell-through may also not be too challenging Potential sales shortfalls may come from Hangzhou (mainly the Hangzhou Linrsquoan Land) and Jiangmen projects (mainly Jiangmen Starry Regal Court) However a RMB10bn contracted sale is in our comfort zone while management still maintains their internal-guided target of RMB12bn
Figure 25 Yuexiu Property ndash 2012 Saleable Resources by Cities in GFA Terms
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Project Chinese Name Type Location Time weighted Saleable GFA
GFA target Target sell-thru
1 Fortune Apartment 財富公館 RC Liwan Guangzhou 78700 73500 93 2 Southern Le Sand 南沙海濱花園 R Nansha Guangzhou 163300 142400 87 3 Huadu Glade Greenland 花都逸泉韻翠 R Huadu Guangzhou 59500 35700 60 4 Jiangmen Starry Regal Court 江門星匯名庭 R Beixin Jiangmen 74700 56900 76 5 Zhongshan Starry Winking 中山星匯雲錦 R Nanqu Zhongshan 95800 62100 65 6 Zhongshan Starry Junting 中山星匯隽庭 R Shiqi Zhongshan 38300 38300 100 7 Shenyang Yuexiu Hill Lake 瀋陽越秀玥湖郡 R Xinqu Shenyang 73600 33300 45 8 Fortune Century Square 財富世紀廣場 OS Tianhe guangzhou 70800 36300 51 9 Yantai Starry Phoenix 煙台星匯鳳凰 R Zhifu Yantai 95400 57200 60 10 Starry Golden Sands 星匯金沙 R Baiyun Guangzhou 114200 52900 46 11 Starry Wenhua 星匯文華 R Panyu Guangzhou 104500 26100 25 12 Starry Wenyu 星匯文宇 R Panyu Guangzhou 37200 22300 60 13 Starry Wenhan 星匯文翰 R Panyu Guangzhou 54600 27300 50 14 Panyu Southern District Plot 番禺南區項目 R Panyu Guangzhou 63300 51700 82 15 Wuhan Qiankou Project 武漢硚口項目 R Qiaokou Wuhan 62200 32000 51 16 Hangzhou Linrsquoan Land 杭州臨安項目 R Linan Hangzhou 128000 110100 86 Others - NA 79100 74000 94 Investment Properties C NA 55500 29100 52 Total 1446900 961200 66
Source Company Citi Investment Research and Analysis estimates Notes C Commercial R Residential O Office S Serviced Apartment
In 1Q12 30 of full-year target achieved among highest in sector
By end-March 2012 Yuexiu Property achieved contracted sales area of about 276400 sqm with contract value of RMB31bn This represented around 31 of its FY12 sales target of RMB10bn which is higher than the sector average of 18 and one of the highest among its peers
While overall sales performance for key listed names in 1Q12 are encouraging we note particularly names such as COLI Yuexiu Shimao and Vanke are outperforming within which Yuexiu has further stood out in 1Q12 An accelerating sales pace later this year is possible given the pickup of end-user demand and easing first-home mortgages
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 21
Figure 27 China Property ndash Monthly Contracted Sales (March 2012)
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
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The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Companies Citi Investment Research and Analysis Note - Estimated figures for March 2012
Potential sales beat can be a re-rating catalyst
The sales pattern of Yuexiu Property this year should be evenly distributed in terms of the timing of project launches Management expects another RMB3bn contracted sales can be achieved in each quarter with around 60 of the sales target to be completed in 1H12 If that is the case managementrsquos internal target of RMB12bn is possible beating the formal target of RMB10bn by 20
Jan Feb Mar April May June Jul Aug Sep Oct Nov Dec
RM
B b
n
2009 2010 2011 2012
Source Company Citi Investment Research and Analysis estimates
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 22
Figure 29 Yuexiu Property ndash Location Map of Projects in Guangzhou
Source Company Citi Investment Research and Analysis
Healthy recovery in Guangzhou market
Guangzhou market depicted a gentle recovery in March and April with mid and mid-to-high end projects continuing to outperform on volume surge Our recent site visits reaffirm our understanding that rigid demand from end-users has really been picking up in March and April
Figures from local agencies indicated only a mild downtrend on the cityrsquos ASP slipping slightly 07 MoM and mildly 11 YoY to RMB11164psm Our visit identified that price cuts are not common in city-center projects while suburban projects like those in Huada selling at 5-10 discount are also not as aggressive as expected Majority purchasing power from pent-up demand is fueled by the more supportive mortgage policy for end-users A 15 disc to the PBoC lending rate for these first-home buyers was confirmed in our visit For second-homes itrsquos stayed at around 5-10 premium to the rate
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 23
Figure 30 Guangzhou ndash Monthly ASP and Transaction Volume
-
200
400
600
800
1000
1200
1400
1600
1800
Jan-
05
Jul-0
5
Jan-
06
Jul-0
6
Jan-
07
Jul-0
7
Jan-
08
Jul-0
8
Jan-
09
Jul-0
9
Jan-
10
Jul-1
0
Jan-
11
Jul-1
1
Jan-
12
00
0 s
q
-
2000
4000
6000
8000
10000
12000
14000
16000
18000
20000
RM
Bp
s
Transaction Area - LHS Average Selling Price - RHS
Source Soufun Citi Investment Research and Analysis
The Guangzhou office market continues to be impacted by huge supply which resulted in its rent level underperformed compared to Beijing and Shanghai That said we note stabilizing signs (especially in Pearl River New Town) Asking spot rents in Yuexiu IFC attains levels like RMB280-300psm per month (60 occupancy) while IFPrsquos rent also climbed to RMB260-280psm Hotel space is also getting popular with Four Seasons Hotel in IFC to start trial runs in MayJune (full operation in late-FY12)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the 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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon request in respect of this material Citigroup Centre Canada Square Canary Wharf London E14 5LB The Product is made available in United States by Citigroup Global Markets Inc which is a member of FINRA and registered with the US Securities and Exchange Commission 388 Greenwich Street New York NY 10013 Unless specified to the contrary within EU Member States the Product is made available by Citigroup Global Markets Limited which is regulated by Financial Services Authority
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 24
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
After Yuexiursquos disposal of non-core businesses we forecast 43 core earnings CAGR over 2010-2013E underpinned by continuous sales volume growth We expect 15 core profit growth in 2012E followed by another 15 earnings growth in 2013E The earnings growth in 2012E is based on our conservative assumptions of 10 ASP decline and 10-15 decrease in national GFA sold Any upside surprise from the assumptions can be one of the catalysts for another round of share price rally
Figure 31 China Property ndash Core Profit Leagues from 2010 to 2013E
Source Company Citi Investment Research and Analysis estimates
Management stresses earnings quality in 2012E
Yuexiu management also stressed earnings quality and profitability While profits were mostly derived from residential projects in Guangzhou and Guangdong Province with a few disposal gains from non-core investment properties in FY11 projects in other cities such as Yantai Jiangmen and Shenyang should make fresh contributions in 2012E and 2013E Disposal gains on non-core investment properties should also fade out gradually in 2012E and 2013E
Figure 32 Yuexiu Property ndash Disposal Gains on Non-Core Investment Properties to Fade
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 25
72 lock-in in FY12 presents visible growth momentum
While Yuexiu Property met its targets in FY11 which has strengthened our confidence on its guided target we believe the 72 lock-in in FY12 property sales by March-12 has further enhanced growth visibility in FY12 By the end of FY11 Yuexiu Property had around RMB73bn unrecognized resources Aggregating the additional RMB31bn sales fetched YTD the total unrecognized sales has reached RMB65bn by March-12 This has effectively locked in around 72 of our estimated RMB9bn property sales in FY12 securing robust earnings visibility for 2012
Unrecognized sales at 2011end a 73 Incremental sales in Jan- Mar 2012 b 31 Unrecognized sales as of end Mar 2012 c=a+b 104 within which to be recognized in 2012 D 65 Citi Estimated 2012 Property Sales revenues E 90 Lock- in of 2012 estimated revenues F=DE 72
Source Company Citi Investment Research and Analysis estimates
Rational expansion and stick to a rule of 30 margin
Achieving stable and sustainable growth in revenue at reducing cost can be difficult for some developers We believe small- to medium-size developers have trouble replicating the business model especially those without quality landbank and the right geographical presence We noted the geographic expansion of Yuexiu Property may results in the sacrifice of some profitability on higher land costs due to limited landbank edge beyond Guangdong Province Right now the overall land cost of the company is below RMB3000psm which still appears to be reasonable in comparison to many of the peers
To prevent scaling up at the expense of profitability management has set a disciplined rule of at least 30 gross profit margin for any new project acquisitions As said management still plans to focus on markets in Guangzhou and Guangdong Province and they target the overall landbank outside Guangdong Province should account for less than 25 of total landbank We believe the competitive land cost on rational expansion is the first criterion for the company to ensure its profitability in the coming few years
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 26
Figure 34 China Property Developers ndash Land bank Cost Relative to ASP Analysis (Dec2011)
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Company Citi Investment Research and Analysis estimates
More effective cost control to defend margin deterioration post restructuring
Apart from the pressure from ASP and land costs we believe the stricter and more effective cost controls should also play an important role to defend against margin deterioration
Yuexiu Property should have achieved better cost control after the restructuring from disposing of non-core businesses and non-core investment properties In particular while the sale amount should continue to grow at moderate pace other costs including materials cost selling amp administrative expenses as well as other overheads should not be raised in similar scale More procedures such as procurement should be carried on a centralized basis and benefit from economies of scale In particular total SGampA accounted for only 97 of turnover in 2011 compared to 143 in 2009 before the restructuring
Figure 35 Yuexiu ndash SGampA As a Percentage of Turnover 2009 - 2011
38 31 25
105
8572
0
2
4
6
8
10
12
14
16
2009 2010 2011
Selling Expenses General and Admin Expenses
1430
1160
970
Source Soufun Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 27
Figure 36 Yuexiu ndash Southern Le Sand (南沙海濱花園) Figure 37 Yuexiu ndash Ling Nan Riverside (嶺南灣畔)
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Company Citi Investment Research and Analysis Source Company Citi Investment Research and Analysis
Forecast FY12 profit RMB18bn
With strong contracted sales in 2011 earnings this year should grow 15 Looking forward management guided revenue in 2013E can spike up by 30 and core profit significantly rise to RMB2-21bn
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 28
Figure 40 China Property Developers ndash Gross Profit Margin and Core Profit Margin
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Companies Citi Investment Research and Analysis estimates
Sector Average is calculated based on weighted average basis
Generous dividend payout of 40
On FY11 results announcement management declared a final DPS of HK$0045 Adding the interim dividend of HK$004sh full-year DPS total HK$0085sh and represents a generous dividend payout of 40 based on core EPS
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 29
Land bank
1116msm Landbank at competitive AV below RMB3000psm
By March 2012 Yuexiu had landbank of c1116msm (comprising completed PUD properties held for future development and investment properties) in eight cities
49 of landbank is located in Guangzhou city
23 of landbank is located elsewhere in Guangdong Province
28 of landbank is located in cities outside Guangdong including Yantai Shenyang Hangzhou and Wuhan
30 of the landbank is commercial property development According to management the average land cost of Yuexiu Propertyrsquos landbank is below RMB3000psm which still appears to be reasonable in comparison to many peers
Figure 42 Yuexiu Property ndash Project Distributions in Mainland China (As of Apr 2012)
Source Citi Investment Research and Analysis
Geographic focus should remain Guangdong Province
Yuexiu Property developed its existing landbank with main focus in Guangzhou and Guangdong Province and gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai Management clearly stated that Guangdong Province will remain Yuexiu Propertyrsquos focus in future development while the company will also step into other cities when there are appealing opportunities Management cited that the city picks will be made based on the growth potential by considering a range of factors including GDP and average income level outlook development of urban infrastructure property market supply and demand dynamics and the ability to attract purchasers from outside the city Management believes effective penetration in the existing market and limited geographic expansion can generate more stable sales but also enhance its pricing power and profit level In 2012 management expects to maintain a high development margin of at least 40
Operating and Financial Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 30
Figure 43 Yuexiu ndash Attributable Landbank by Cities (As of 31 Dec 2011)
Wuhan06mn 6
Hangzhou12mn 11
Shenyang10mn 9
Yantai02mn 2
Others01mn 1
Jiangmen06mn 5
Foshan03mn 3
Guangzhou55mn 49
Zhongshan17mn 15
Source Company Citi Investment Research and Analysis
Landbank in Tier12 cities focus should outperform
In the past observations also suggest that Tier 12 cities with more rigid demand should outperform in the early stage of recovery This should be favorable for Yuexiu with its exposure to ready-to-go pipelines in Guangzhou and leading cities We believe Yuexiu Property is well equipped for that from a ldquohardwarerdquo perspective Thanks to its steady landbanking strategy in the past we see a strong pipeline for Yuexiu Property from its existing landbank in which focusing most in tier 12 cities including Guangzhou and leading cities in Guangdong Province such as Foshan Zhongshan
Sophisticated developer but unwise for national expansion
Yuexiu Property is gradually expanding into the Yangtze River Delta and Bohai Rim Central Region including Hangzhou Wuhan Shenyang and Yantai since 2009 Preliminary administrative and set-up costs on expanding to a new city can be huge By focusing on existing cities and cities in the Pearl River Delta such as Foshan Zhongshan Jiangmen etc Yuexiu Property should be well positioned to capitalize on significant growth opportunities at acceptable risk levels and achieve a higher return on the investment We expect Yuexiu will focus on making use of the advantage of its SOE background and the government networks in existing cities
Financial position ndash somewhat stretched but precautionary mindset in place
Despite the prudent land acquisitions pace in 2010 and 2011 Yuexiu Property reported a relatively stretched balance sheet with net gearing of 77 at end-2011 due to large capex spending on Guangzhou IFC
Looking ahead we believe Yuexiu Property should still be able to maintain a gearing level of below 80 given its minimal outstanding land premium of RMB11bn (only RMB04bn outstanding as of Mar 12) Although it is still higher than the sector average the capital pressures from construction capex of Guangzhou IFC should gradually ease We believe effective capital management is critical for a small developer such as Yuexiu Property
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 31
Figure 44 Yuexiu ndash Financial Position in FY10 ndash FY11
FY2010 FY2011 RMBmn RMBmn Change Interest-bearing Debt 17736 21782 23 Less Total Cash 7473 6128 -18 Net Debt 10263 15654 53 Shareholders equity 15860 20288 28 Total Assets 50780 61196 21 Net Gearing (Net Interest-bearing debt to Equity) 65 77 12pts Book value per share (HKD) 2007 2696 34
Source Company Citi Investment Research and Analysis
Figure 45 China Property ndash Financial Position
End 2010 Jun-11 End 2011 Est End 2012E Change Stock RIC Net Gearing Net Gearing Net Gearing Net Gearing End 10 vs End 2011 Jun 2011 vs End
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Source Companies Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 32
Cautious expansion well managed cashflow in 2012
In 2012 Yuexiu Property is expected to maintain its healthy balance sheet by funding most of its outflow with the contracted sales Assuming it can achieve its RMB10bn sales target that should be sufficient to manage the expected outflow of RMB11bn for land premium (RMB04bn outstanding as of Mar 12) RMB76bn for construction CAPEX RMB08bn tax (BT LAT CIT etc) as well as around RMB21bn SGampA expenses interest and others
Figure 46 Yuexiu Propertyndash Cash Flow Analysis in 2012 (RMbrsquobn)
In 2012 Cash inflow - Property Sales (incl sales receivable bf in 2011) 100 - Rental income 06 Cash Outflow - Land Premium payment (11) - Construction CAPEX (76) - Tax expenses (08) - Finance expenses (12) - SGampA expenses (09) Net operating outflow in 2012 1bn outflow Est net gearing ratio as at Dec 2012 79 Source Citi Investment Research and Analysis estimates
Looking forward management said that on the basis of prudent financial policy and sufficient cash flow Yuexiu Property will continue the acquisition of land reserve with no more than RMB56bn in 2012 But achieving the RMB10bn sales target with sufficient cash collection should be the prerequisite for such land replenishment
Meanwhile if Yuexiu Property realizes the value of its investment properties portfolio including the GZ IFC asset turnover should be faster with easing cash flow pressure
Figure 47 Yuexiu Property ndash Debt Repayment Profile as of 31 Dec 2011
10590
4842
33493000
Within 1 year Between 1 yearto 2 years
Between 2 yearsto 5 years
Beyond 5 years
RM
Bm
n
Source Company Citi Investment Research and Analysis
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 33
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Similar to peers Yuexiu Property put cash flow as higher priority than land replenishment and construction pace in FY12 Management previously budgeted RMB54bn for new land acquisitions in FY12 and according to the management Yuexiu Property should only replenish land if sales target in 2012 can successfully be achieved Moreover on GFA commencement compared to the actual 16msm GFA in FY11 Yuexiu Property will slightly scale up the GFA start by 11 to 18msm and the budgeted capex climbed up to RMB76bn slightly more than last year
Figure 48 Yuexiu Property ndash GFA Starts in FY09-FY12E Figure 49 Yuexiu Property ndash GFA Completion in FY09-FY12E
06
13
16
18
-
02
04
06
08
10
12
14
16
18
20
2009 2010 2011 2012E
mn
sq
m G
2009-2012E CAGR 44
410
560585
800
300
400
500
600
700
800
900
2009 2010 2011 2012E
2009-2012E CAGR 25
Source Company Citi Investment Research and Analysis estimates Source Company Citi Investment Research and Analysis estimates
Stable growth 43 profit CAGR in FY10-13E
We estimate Yuexiu Property will continue its stable growth trajectory in the coming few years with forecast 43 core earnings CAGR over 2010-2013E While this is not the fastest in the sector we believe it nonetheless demonstrates stable and sustainable growth with a relatively low risk profile
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
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Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
Name Role in Yuexiu Property Profile Mr LU Zhifeng 1) Chairman of the Board 1) Also the Chairman of Guangzhou Yue Xiu Holdings Limited (GZ Yuexiu) the controlling shareholder of the Yuexiu
Property 2) Master of Business Administration degree and the qualification of senior economist in China 3) 40 years of experience in production operation capital and corporate management 4) Ex-managing director of Guangzhou Automobile Industry Group Ex-chairman of Guangzhou Honda Automobile and Ex-
vice chairman and executive director of Denway Motors Limited Mr ZHANG Zhaoxing 1) General Manager 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited and chairman of Yuexiu Transport
Infrastructure (1052HK) 2) Vice Chairman 2) Executive Master of Business Administration degree awarded by Huazhong University of Science and Technology and
possesses the qualification of senior accountant in China 3) Executive Director 3) Extensive experience in the financial management industrial operation capital operation and corporate culture
development of large enterprises 4) Ex-director and general manager of Guangzhou Radio Group Co Ltd Ex-chairman and general manager of Haihua
Electronics Enterprise (China) Ex-chairman of Guangzhou Guangdian Real Estate Development and Ex-director of GRG Banking Equipment Co (002152sz)
Mr LIANG Yi 1) Executive Director 1) Also the vice-chairman of and GM of Guangzhou Yue Xiu Holdings Limited 2) Graduated from the Chinese Peoplersquos Liberation Army Engineering Soldierrsquos University majoring in public administration 3) Leading rule in Guangzhou Chemical Industry Bureau and organizations under the party Committee of Guangzhou
Municipal Peoplersquos Government 4) Over 20 years of experience in public administration Mr TANG Shouchun 1) Executive Director 1) Also deputy general manager of GZ Yue Xiu 2) Responsible for overseeing the Grouprsquos financial and treasury affairs 3) Graduated from Nanjing Agricultural University and is a senior accountant senior economist and registered asset
appraiser in China and Doctor degree in Agricultural Economics and Management 4) Ex-director and chief accountant of Guangzhou City Construction amp Development Group Mr CHEN Zhihong 1) Executive Director 1) Extensive experience in the real estate industry and is familiar with the regulatory policies for the real estate industry in
China 2) Holds a master of business administration degree of the South China University of Technology and the qualifications of
economist and engineer in China 3) Ex- deputy general manager of the Company and as a deputy managing director of Guangzhou City Construction amp
Development Co Ltd Mr Lam Yau Fung Curt 1) Executive Director 1) Group capital officer of Yuexiu Property 2) Ex-Head of Corporate Finance and Business Development at GOME Electrical Appliances (493HK) 3) Over 10 years working in investment banking and capital markets at Schroders Asia ABN AMRO Rothschild and
Deutsche Bank
Source Company Citi Investment Research and Analysis
Management Profile
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 37
Yuexiu Property Co lies in the Attractive quadrant of our Value-Momentum map with strong value and momentum scores The stock has moved from the Contrarian quadrant to the Attractive quadrant in the past two months indicating rising momentum (while valuations remain cheap) ndash which suggests the market has recognized the fact that the stock is an attractive investment proposition Compared with its peers in the Real Estate sector Yuexiu Property Co fares better on the valuation metric but worse on the momentum metric On the other hand compared with its peers in its home market of China Yuexiu Property Co fares better on the valuation metric and on the momentum metric
From a macro perspective Yuexiu Property Co has a high beta to the region and so is likely to rise (or fall) faster than the region It is also likely to benefit from growth outperformance value outperformance large cap outperformance rising commodity (ex-oil) prices and a weaker US dollar
Figure 55 Radar Quadrant Chart History Figure 56 Radar Valuation and Momentum Scores
13-Apr-12
31-Jan-12
31-Oct-1129-Jul-
11
29-Apr-11
-
02
04
06
08
10
- 02 04 06 08 10Real Estate China
-01020304050607080910
Mar
-09
Sep-
09
Mar
-10
Sep-
10
Mar
-11
Sep-
11
Mar
-12
Comp Momentum Comp Value
Source CIRA
Source CIRA
Figure 57 Radar Model Inputs
IBES EPS (Actual and Estimates) FY(-2) 009 Implied Trend Growth () 2341 FY(-1) 012 Trailing PE (x) 250 FY0 017 Implied Cost of Debt () 454 FY1 019 Standardised MCap (005) FY2 024 Note Standardised MCap calculated as a Z score minus (mkt cap - mean)std dev minus capped at 3
Source Citi Investment Research and Analysis Worldscope IBES
Figure 58 Stock Performance Sensitivity to Key Macro Factors
Region 146 Commodity ex Oil 061 Widening APACxJ CDS (012) Rising Oil Prices (013) Growth 242 Rising Asian IRs (004) Value 122 Rising EM Yields 010 Small Caps Outperform Large Caps (236) Weaker US$ (vs Asia) 215 Widening US Credit Spreads (006) Weaker yen (vs US$) 020 Source Citi Investment Research and Analysis
Quants View minus Attractive
Paul Chanin +65-6432-1153 paulchaninciticom
Data as of 13-Apr-12
Radar Screen Quadrant Definitions
Glamour Poor relative value but superior relative momentum
Attractive Superior relative value and superior relative momentum
Unattractive
Poor relative value and poor relative momentum
Contrarian
Superior relative value but poor relative momentum
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 38
Yuexiu Property Company description
Yuexiu Property Co Ltd (formerly Guangzhou Investment Co Ltd) was listed on Hong Kong Stock Exchange in December 1992 Yuexiu Property is one of the leading China property developers with a main focus in Guangzhou and additional properties in the Yangtze River Delta Bohai Rim Region and Central Region Yuexiu Property also holds a 3558 interest in GZI Real Estate Investment Trust (GZI REIT) the first listed real estate investment trust in HKEX The controlling shareholder Guangzhou Yue Xiu Holdings Ltd is a state-owned enterprise under the supervision of the State-owned Assets Supervision and Administration Commission of the Guangzhou Municipal Peoplersquos Government As at 31 Dec 2012 the group had investment properties properties under development and undeveloped properties with total GFA of c1116 msm sqm Investment strategy
We rate Yuexiu Property shares as Buy with an HK$270 target price (based on 40 discount to 2012E NAV) Listed in HK in 1992 Yuexiu ballooned to include businesses such as toll roads newsprint and supermarkets New management took over in 2008 and after years of restructuring Yuexiu has shed non-core assets and refocused on its core property business It now boasts a robust investment property portfolio combined with improved asset turnover and profitability Moreover Yuexiu is the only Chinese developer to own a listed REIT platform in HK providing opportunity to unlock investment property portfolio value and facilitate capital needs We believe current valuations at 63 disc to NAV 2012E PE of 68x and PB of 06x are attractive even after the recent share price rally Valuation
Our HK$270 target price is based on a 40 discount to our estimated NAV of HK$450share When determining our target price we apply a 40 discount to our estimated NAV which is in-line to the discounts we applied to most of the other smallmid-cap developers in the HK-listed developersrsquo universe
Discount to NAV is the most widely used method to value Hong Kong and China property stocks NAV measures the value of a stock based on the market value of its assets for a property company those would be its development and investment properties The NAV discount is then adjusted for the realizability of those assets and growth potential in that NAV the more realizable the NAV is or the larger the growth potential the NAV carries the lower the discount to NAV should be
Our target price also represents 098x our estimated book value of HK$276share at end-2011 We believe this is justified by a quality landbank solid property sales volume strong brand identity in China and good product quality Given that development and uncompleted investment properties are valued at cost in the calculation of book value and the potential for further value-enhancing asset acquisitions by the company we argue that a price-to-book of merely equal to 1x is justifiable The stock currently trades at about 06x of its estimated book value of HK$276sh as at Dec-2012E which is undemanding in our view In term of PE valuation our bullish view is also underpinned by the 2012E PE of 68x (2011 PE of 78x) lower than the sector average of 82x (2011 PE of 100)
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 39
Risks
Key risks that could prevent the shares from reaching our target price include (a) Weaker-than expected GDP growth for the global economy China or Guangdong Province (b) Stronger-than-expected pickup in inflation and property prices could affect housing affordability for homebuyers (c) Any policy tightening measures or other policy changes by the central government with regard to mortgage applications and approvals project financing and property pre-sales (d) Heavy exposure to the Guangzhou retail and office property markets exposure in target markets of Guangzhou Yantai Hangzhou and Wuhan (e) Interaction between Yuexiu and its REIT including but not limited to sales of completed investment properties is subject to approval of shareunit holders (f) Risks associated with national expansion and acquiring projects in new cities which may involve higher costs lower profitability or execution challenges (g) Somewhat stretched financial position (h) Any delay in new launches commencement and completion schedule may adversely affect companyrsquos earnings and cash flows
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the 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Product is made available in Spain by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority 29 Jose Ortega Y Gassef 4th Floor Madrid 28006 Spain The Product is made available in the Republic of China through Citigroup Global Markets Taiwan Securities Company Ltd (CGMTS) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan andor through Citibank Securities (Taiwan) Company Limited (CSTL) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan subject to the respective license scope of each entity and the applicable laws and regulations in the Republic of China CGMTS and CSTL are both regulated by the Securities and Futures Bureau of the Financial Supervisory Commission of Taiwan the Republic of China No portion of the Product may be reproduced or quoted in the Republic of China by the press or any third parties [without the written authorization of CGMTS and CSTL] If the Product covers securities which are not allowed to be offered or traded in the Republic of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 40
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
The Citigroup legal entity that takes responsibility for the production of the Product is the legal entity which the first named author is employed by The Product is made available in Australia through Citigroup Global Markets Australia Pty Ltd (ABN 64 003 114 832 and AFSL No 240992) participant of the ASX Group and regulated by the Australian Securities amp Investments Commission Citigroup Centre 2 Park Street Sydney NSW 2000 The Product is made available in Australia to Private Banking wholesale clients through Citigroup Pty Limited (ABN 88 004 325 080 and AFSL 238098) Citigroup Pty Limited provides all financial product advice to Australian Private Banking wholesale clients through bankers and relationship managers If there is any doubt about the suitability of investments held in Citigroup Private Bank accounts investors should contact the Citigroup Private Bank in Australia Citigroup companies may compensate affiliates and their representatives for providing products and services to clients The Product is made available in Brazil by Citigroup Global Markets Brasil - CCTVM SA which is regulated by CVM - Comissatildeo de Valores Mobiliaacuterios BACEN - Brazilian Central Bank APIMEC - Associaccedilatildeo dos Analistas e Profissionais de Investimento do Mercado de Capitais and ANBID - Associaccedilatildeo Nacional dos Bancos de Investimento Av Paulista 1111 - 11ordm andar - CEP 01311920 - Satildeo Paulo - SP If the Product is being made available in certain provinces of Canada by Citigroup Global Markets (Canada) Inc (CGM Canada) CGM Canada has approved the Product Citigroup Place 123 Front Street West Suite 1100 Toronto Ontario M5J 2M3 This product is available in Chile through Banchile Corredores de Bolsa SA an indirect subsidiary of Citigroup Inc which is regulated by the Superintendencia de Valores y Seguros Agustinas 975 piso 2 Santiago Chile The Product is made available in France by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority 1-5 Rue Paul Ceacutezanne 8egraveme Paris France The Product is distributed in Germany by Citigroup Global Markets Deutschland AG (CGMD) which is regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin) CGMD Reuterweg 16 60323 Frankfurt am Main Research which relates to securities (as defined in the Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong)) is issued in Hong Kong by or on behalf of Citigroup Global Markets Asia Limited which takes full responsibility for its content Citigroup Global Markets Asia Ltd is regulated by Hong Kong Securities and Futures Commission If the Research is made available through Citibank NA Hong Kong Branch for its clients in Citi Private Bank it is made available by Citibank NA Citibank Tower Citibank Plaza 3 Garden Road Hong Kong Citibank NA is regulated by the Hong Kong Monetary Authority Please contact your Private Banker in Citibank NA Hong Kong Branch if you have any queries on or any matters arising from or in connection with this document The Product is made available in India by Citigroup Global Markets India Private Limited which is regulated by Securities and Exchange Board of India Bakhtawar Nariman Point Mumbai 400-021 The Product is made available in Indonesia through PT Citigroup Securities Indonesia 5F Citibank Tower Bapindo Plaza Jl Jend Sudirman Kav 54-55 Jakarta 12190 Neither this Product nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable capital market laws and regulations This Product is not an offer of securities in Indonesia The securities referred to in this Product have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market laws and regulations The Product is made available in Israel through Citibank NA regulated by the Bank of Israel and the Israeli Securities Authority Citibank NA Platinum Building 21 Haarbaah St Tel Aviv Israel The Product is made available in Italy by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority Via dei Mercanti 12 Milan 20121 Italy The Product is made available in Japan by Citigroup Global Markets Japan Inc (CGMJ) which is regulated by Financial Services Agency Securities
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the 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Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 41
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 42
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 43
Appendix A-1 Analyst Certification
The research analyst(s) primarily responsible for the preparation and content of this research report are named in bold text in the author block at the front of the product except for those sections where an analysts name appears in bold alongside content which is attributable to that analyst Each of these analyst(s) certify with respect to the section(s) of the report for which they are responsible that the views expressed therein accurately reflect their personal views about each issuer and security referenced and were prepared in an independent manner including with respect to Citigroup Global Markets Inc and its affiliates No part of the research analysts compensation was is or will be directly or indirectly related to the specific recommendation(s) or view(s) expressed by that research analyst in this report
IMPORTANT DISCLOSURES
05
10
15
20
25
M J J A S O N D J2010
F M A M J J A S O N D J2011
F M A M J J A S O N D J2012
F M A
1
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Date Rating Target Price Closing Price1 7-Oct-11 Stock rating system changed
Yuexiu Property (0123HK)Ratings and Target Price HistoryFundamental Research
HKD
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
Indicates change Ratingtarget price changes above reflect Eastern Standard Time
CoveredNot covered
Citigroup Global Markets Inc or its affiliates beneficially owns 1 or more of any class of common equity securities of Vanke Poly (Hong Kong) Investments China Overseas Land amp Investment Shimao Property Holdings Guangzhou RampF Properties Evergrande Real Estate Group This position reflects information available as of the prior business day
Within the past 12 months Citigroup Global Markets Inc or its affiliates has acted as manager or co-manager of an offering of securities of Franshion Properties New World China Land China Resources Land Guangzhou RampF Properties
Citigroup Global Markets Inc or its affiliates has received compensation for investment banking services provided within the past 12 months from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc or its affiliates expects to receive or intends to seek within the next three months compensation for investment banking services from Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties China Resources Land
Citigroup Global Markets Inc or an affiliate received compensation for products and services other than investment banking services from Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group Agile Property Holdings Yanlord in the past 12 months
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 44
Citigroup Global Markets Inc currently has or had within the past 12 months the following as investment banking client(s) Yuexiu Property Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land Longfor Properties China Resources Land KWG Prop Guangzhou RampF Properties Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking securities-related Poly (Hong Kong) Investments China Overseas Land amp Investment Franshion Properties New World China Land China Resources Land KWG Prop Evergrande Real Estate Group
Citigroup Global Markets Inc currently has or had within the past 12 months the following as clients and the services provided were non-investment-banking non-securities-related Yuexiu Property Poly (Hong Kong) Investments SPG Land China Overseas Land amp Investment Shimao Property Holdings Franshion Properties New World China Land Longfor Properties China Resources Land Powerlong Real Estate Holdings KWG Prop Guangzhou RampF Properties Agile Property Holdings Yanlord
Analysts compensation is determined based upon activities and services intended to benefit the investor clients of Citigroup Global Markets Inc and its affiliates (the Firm) Like all Firm employees analysts receive compensation that is impacted by overall firm profitability which includes investment banking revenues
The Firm is a market maker in the publicly traded equity securities of China Overseas Land amp Investment Shimao Property Holdings China Resources Land Renhe Commercial Guangzhou RampF Properties Evergrande Real Estate Group
For important disclosures (including copies of historical disclosures) regarding the companies that are the subject of this Citi Investment Research amp Analysis product (the Product) please contact Citi Investment Research amp Analysis 388 Greenwich Street 28th Floor New York NY 10013 Attention LegalCompliance [E6WYB6412478] In addition the same important disclosures with the exception of the Valuation and Risk assessments and historical disclosures are contained on the Firms disclosure website at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Valuation and Risk assessments can be found in the text of the most recent research notereport regarding the subject company Historical disclosures (for up to the past three years) will be provided upon request
Citi Investment Research amp Analysis Ratings Distribution 12 Month Rating Relative Rating Data current as of 31 Mar 2012 Buy Hold Sell Buy Hold SellCiti Investment Research amp Analysis Global Fundamental Coverage 52 37 11 10 79 10
of companies in each rating category that are investment banking clients 44 42 40 47 42 43Citi Investment Research amp Analysis Quantitative World Radar Screen Model Coverage 30 40 30
of companies in each rating category that are investment banking clients 23 23 19 Citi Investment Research amp Analysis Quantitative Decision Tree Model Coverage 47 0 53
of companies in each rating category that are investment banking clients 48 0 47 Citi Investment Research amp Analysis Asia Quantitative Radar Screen Model Coverage 20 60 20
of companies in each rating category that are investment banking clients 24 22 21 Citi Investment Research amp Analysis Australia Radar Model Coverage 51 0 49
of companies in each rating category that are investment banking clients 37 0 13 Guide to Citi Investment Research amp Analysis (CIRA) Fundamental Research Investment Ratings CIRAs stock recommendations include an investment rating and an optional risk rating to highlight high risk stocks Risk rating takes into account both price volatility and fundamental criteria Stocks will either have no risk rating or a High risk rating assigned Investment Ratings CIRAs investment ratings are Buy Neutral and Sell Our ratings are a function of analyst expectations of expected total return (ETR) and risk ETR is the sum of the forecast price appreciation (or depreciation) plus the dividend yield for a stock within the next 12 months The Investment rating definitions are Buy (1) ETR of 15 or more or 25 or more for High risk stocks and Sell (3) for negative ETR Any covered stock not assigned a Buy or a Sell is a Neutral (2) For stocks rated Neutral (2) if an analyst believes that there are insufficient valuation drivers andor investment catalysts to derive a positive or negative investment view they may elect with the approval of CIRA management not to assign a target price and thus not derive an ETR Analysts may place covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company and or trading in the companys securities (eg trading suspension) As soon as practically possible the analyst will publish a note re-establishing a rating and investment thesis To satisfy regulatory requirements we correspond Under Review and Neutral to Hold in our ratings distribution table for our 12-month fundamental rating system However we reiterate that we do not consider Under Review to be a recommendation Relative three-month ratings CIRA may also assign a three-month relative call (or rating) to a stock to highlight expected out-performance (most preferred) or under-performance (least preferred) versus the geographic and industry sector over a 3 month period The relative call may highlight a specific near-term catalyst or event impacting the company or the market that is anticipated to have a short-term price impact on the equity securities of the company Absent any specific catalyst the analyst(s) will indicate the most and least preferred stocks in the universe of stocks under consideration explaining the basis for this short-term view This three-month view may be different from and does not affect a stocks fundamental equity rating which reflects a longer-term total absolute return expectation For purposes of NASDNYSE ratings-distribution-disclosure rules most preferred calls correspond to a buy recommendation and least preferred calls correspond to a sell recommendation Any stock not assigned to a most preferred or least preferred call is considered non-relative-rated (NRR) For purposes of NASDNYSE ratings-distribution-disclosure rules we correspond NRR to Hold in our ratings distribution table for our 3-month relative rating system However we reiterate that we do not consider NRR to be a recommendation
Prior to October 8 2011 the firms stock recommendation system included a risk rating and an investment rating Risk ratings which took into account both price volatility and fundamental criteria were Low (L) Medium (M) High (H) and Speculative (S) Investment Ratings of Buy Hold and Sell were a function of CIRAs expectation of total return (forecast price appreciation and dividend yield within the next 12 months) and risk rating Additionally analysts could have placed covered stocks Under Review in response to exceptional circumstances (eg lack of information critical to the analysts thesis) affecting the company andor trading in the companys securities (eg trading suspension) Stocks placed Under Review were monitored daily by management and as practically possible the analyst published a note re-establishing a rating and investment thesis For securities in developed markets (US UK Europe
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
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Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 45
Japan and AustraliaNew Zealand) investment ratings wereBuy (1) (expected total return of 10 or more for Low-Risk stocks 15 or more for Medium-Risk stocks 20 or more for High-Risk stocks and 35 or more for Speculative stocks) Hold (2) (0-10 for Low-Risk stocks 0-15 for Medium-Risk stocks 0-20 for High-Risk stocks and 0-35 for Speculative stocks) and Sell (3) (negative total return) For securities in emerging markets (Asia Pacific Emerging EuropeMiddle EastAfrica and Latin America) investment ratings wereBuy (1) (expected total return of 15 or more for Low-Risk stocks 20 or more for Medium-Risk stocks 30 or more for High-Risk stocks and 40 or more for Speculative stocks) Hold (2) (5-15 for Low-Risk stocks 10-20 for Medium-Risk stocks 15-30 for High-Risk stocks and 20-40 for Speculative stocks) and Sell (3) (5 or less for Low-Risk stocks 10 or less for Medium-Risk stocks 15 or less for High-Risk stocks and 20 or less for Speculative stocks)
Investment ratings are determined by the ranges described above at the time of initiation of coverage a change in investment andor risk rating or a change in target price (subject to limited management discretion) At other times the expected total returns may fall outside of these ranges because of market price movements andor other short-term volatility or trading patterns Such interim deviations from specified ranges will be permitted but will become subject to review by Research Management Your decision to buy or sell a security should be based upon your personal investment objectives and should be made only after evaluating the stocks expected performance and risk
Guide to Citi Investment Research amp Analysis (CIRA) Quantitative Research Investment Ratings CIRA Quantitative Research World Radar Screen recommendations are based on a globally consistent framework to measure relative value and momentum for a large number of stocks across global developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into deciles A stock with a decile rating of 1 denotes an attractiveness score in the top 10 of the universe (most attractive) A stock with a decile rating of 10 denotes an attractiveness score in the bottom 10 of the universe (least attractive) CIRA Asia Quantitative Radar Screen model recommendations are based on a regionally consistent framework to measure relative value and momentum for a large number of stocks across regional developed and emerging markets Relative value and momentum rankings are equally weighted to produce a global attractiveness score for each stock The scores are then ranked and put into quintiles A stock with a quintile rating of 1 denotes an attractiveness score in the top 20 of the universe (most attractive) A stock with a quintile rating of 5 denotes an attractiveness score in the bottom 20 of the universe (least attractive) CIRA Australia Quantitative Radar Screen model recommendations are based on a robust framework to measure relative value and momentum for a large number of stocks across the Australian market Stocks with a ranking of 1 denotes a stock that is above average in terms of both value and momentum relative to the stocks in the Australian market A ranking of 10 denotes a stock that is below average in terms of both value and momentum relative to the stocks in the Australian market CIRA Quantitative Decision Tree model recommendations are based on a predetermined set of factors to rate the relative attractiveness of stocks These factors are detailed in the text of the report The Decision Tree model forecasts whether stocks are attractive or unattractive relative to other stocks in the same sector (based on the Russell 1000 sector classifications)
For purposes of NASDNYSE ratings-distribution-disclosure rules a Citi Investment Research amp Analysis (CIRA) Quantitative World Radar Screen recommendation of (1) (2) or (3) most closely corresponds to a buy recommendation a recommendation from this product group of (4) (5) (6) or (7) most closely corresponds to a hold recommendation and a recommendation of (8) (9) or (10) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings distribution disclosure rules a CIRA Asia Quantitative Radar Screen recommendation of (1) most closely corresponds to a buy recommendation a CIRA Asia Quantitative Radar Screen recommendation of (2) (3) (4) most closely corresponds to a hold recommendation and a recommendation of (5) most closely corresponds to a sell recommendation An (NR) recommendation indicates that the stock is no longer in the screen For purposes of NASDNYSE ratings-distribution-disclosure rules a CIRA Quantitative Research Decision Tree model or Quantitative Research Australia Radar Screen recommendation of attractive (1) most closely corresponds to a buy recommendation All other stocks in the sector are considered to be unattractive (10) which most closely corresponds to a sell recommendation An (NR)(0) recommendation indicates that the stock is no longer in the screen Recommendations are based on the relative attractiveness of a stock thus can not be directly equated to buy hold and sell categories Accordingly your decision to buy or sell a security should be based on your personal investment objectives and only after evaluating the stocks expected relative performance
NON-US RESEARCH ANALYST DISCLOSURES Non-US research analysts who have prepared this report (ie all research analysts listed below other than those identified as employed by Citigroup Global Markets Inc) are not registeredqualified as research analysts with FINRA Such research analysts may not be associated persons of the member organization and therefore may not be subject to the NYSE Rule 472 and NASD Rule 2711 restrictions on communications with a subject company public appearances and trading securities held by a research analyst account The legal entities employing the authors of this report are listed below
Citigroup Global Markets Asia Griffin Chan Oscar Choi Marco Sze Ken Yeung Citigroup Global Markets Singapore PTE LIMITED Paul R Chanin
OTHER DISCLOSURES
The subject companys share price set out on the front page of this Product is quoted as at 19 April 2012 0410 PM on the issuers primary market
For securities recommended in the Product in which the Firm is not a market maker the Firm is a liquidity provider in the issuers financial instruments and may act as principal in connection with such transactions The Firm is a regular issuer of traded financial instruments linked to securities that may have been recommended in the Product The Firm regularly trades in the securities of the issuer(s) discussed in the Product The Firm may engage in securities transactions in a manner inconsistent with the Product and with respect to securities covered by the Product will buy or sell from customers on a principal basis
Securities recommended offered or sold by the Firm (i) are not insured by the Federal Deposit Insurance Corporation (ii) are not deposits or other obligations of any insured depository institution (including Citibank) and (iii) are subject to investment risks including the possible loss of the principal
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
Investing in non-US securities including ADRs may entail certain risks The securities of non-US issuers may not be registered with nor be subject to the reporting requirements of the US Securities and Exchange Commission There may be limited information available on foreign securities Foreign companies are generally not subject to uniform audit and reporting standards practices and requirements comparable to those in the US Securities of some foreign companies may be less liquid and their prices more volatile than securities of comparable US companies In addition exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend payment for US investors Net dividends to ADR investors are estimated using withholding tax rates conventions deemed accurate but investors are urged to consult their tax advisor for exact dividend computations Investors who have received the Product from the Firm may be prohibited in certain states or other jurisdictions from purchasing securities mentioned in the Product from the Firm Please ask your Financial Consultant for additional details Citigroup Global Markets Inc takes responsibility for the Product in the United States Any orders by US investors resulting from the information contained in the Product may be placed only through Citigroup Global Markets Inc
Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
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of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon 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Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 46
amount invested Although information has been obtained from and is based upon sources that the Firm believes to be reliable we do not guarantee its accuracy and it may be incomplete and condensed Note however that the Firm has taken all reasonable steps to determine the accuracy and completeness of the disclosures made in the Important Disclosures section of the Product The Firms research department has received assistance from the subject company(ies) referred to in this Product including but not limited to discussions with management of the subject company(ies) Firm policy prohibits research analysts from sending draft research to subject companies However it should be presumed that the author of the Product has had discussions with the subject company to ensure factual accuracy prior to publication All opinions projections and estimates constitute the judgment of the author as of the date of the Product and these plus any other information contained in the Product are subject to change without notice Prices and availability of financial instruments also are subject to change without notice Notwithstanding other departments within the Firm advising the companies discussed in this Product information obtained in such role is not used in the preparation of the Product Although Citi Investment Research amp Analysis (CIRA) does not set a predetermined frequency for publication if the Product is a fundamental research report it is the intention of CIRA to provide research coverage of thethose issuer(s) mentioned therein including in response to news affecting this issuer subject to applicable quiet periods and capacity constraints The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security Any decision to purchase securities mentioned in the Product must take into account existing public information on such security or any registered prospectus
Investing in non-US securities including ADRs may entail certain risks The securities of non-US issuers may not be registered with nor be subject to the reporting requirements of the US Securities and Exchange Commission There may be limited information available on foreign securities Foreign companies are generally not subject to uniform audit and reporting standards practices and requirements comparable to those in the US Securities of some foreign companies may be less liquid and their prices more volatile than securities of comparable US companies In addition exchange rate movements may have an adverse effect on the value of an investment in a foreign stock and its corresponding dividend payment for US investors Net dividends to ADR investors are estimated using withholding tax rates conventions deemed accurate but investors are urged to consult their tax advisor for exact dividend computations Investors who have received the Product from the Firm may be prohibited in certain states or other jurisdictions from purchasing securities mentioned in the Product from the Firm Please ask your Financial Consultant for additional details Citigroup Global Markets Inc takes responsibility for the Product in the United States Any orders by US investors resulting from the information contained in the Product may be placed only through Citigroup Global Markets Inc
Important Disclosures for Morgan Stanley Smith Barney LLC Customers Morgan Stanley amp Co LLC (Morgan Stanley) research reports may be available about the companies that are the subject of this Citi Investment Research amp Analysis (CIRA) research report Ask your Financial Advisor or use smithbarneycom to view any available Morgan Stanley research reports in addition to CIRA research reports Important disclosure regarding the relationship between the companies that are the subject of this CIRA research report and Morgan Stanley Smith Barney LLC and its affiliates are available at the Morgan Stanley Smith Barney disclosure website at wwwmorganstanleysmithbarneycomresearchdisclosures For Morgan Stanley and Citigroup Global Markets Inc specific disclosures you may refer to wwwmorganstanleycomresearchdisclosures and httpswwwcitivelocitycomcvreppublicciti_research_disclosures This CIRA research report has been reviewed and approved on behalf of Morgan Stanley Smith Barney LLC This review and approval was conducted by the same person who reviewed this research report on behalf of CIRA This could create a conflict of interest
The Citigroup legal entity that takes responsibility for the production of the Product is the legal entity which the first named author is employed by The Product is made available in Australia through Citigroup Global Markets Australia Pty Ltd (ABN 64 003 114 832 and AFSL No 240992) participant of the ASX Group and regulated by the Australian Securities amp Investments Commission Citigroup Centre 2 Park Street Sydney NSW 2000 The Product is made available in Australia to Private Banking wholesale clients through Citigroup Pty Limited (ABN 88 004 325 080 and AFSL 238098) Citigroup Pty Limited provides all financial product advice to Australian Private Banking wholesale clients through bankers and relationship managers If there is any doubt about the suitability of investments held in Citigroup Private Bank accounts investors should contact the Citigroup Private Bank in Australia Citigroup companies may compensate affiliates and their representatives for providing products and services to clients The Product is made available in Brazil by Citigroup Global Markets Brasil - CCTVM SA which is regulated by CVM - Comissatildeo de Valores Mobiliaacuterios BACEN - Brazilian Central Bank APIMEC - Associaccedilatildeo dos Analistas e Profissionais de Investimento do Mercado de Capitais and ANBID - Associaccedilatildeo Nacional dos Bancos de Investimento Av Paulista 1111 - 11ordm andar - CEP 01311920 - Satildeo Paulo - SP If the Product is being made available in certain provinces of Canada by Citigroup Global Markets (Canada) Inc (CGM Canada) CGM Canada has approved the Product Citigroup Place 123 Front Street West Suite 1100 Toronto Ontario M5J 2M3 This product is available in Chile through Banchile Corredores de Bolsa SA an indirect subsidiary of Citigroup Inc which is regulated by the Superintendencia de Valores y Seguros Agustinas 975 piso 2 Santiago Chile The Product is made available in France by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority 1-5 Rue Paul Ceacutezanne 8egraveme Paris France The Product is distributed in Germany by Citigroup Global Markets Deutschland AG (CGMD) which is regulated by Bundesanstalt fuer Finanzdienstleistungsaufsicht (BaFin) CGMD Reuterweg 16 60323 Frankfurt am Main Research which relates to securities (as defined in the Securities and Futures Ordinance (Cap 571 of the Laws of Hong Kong)) is issued in Hong Kong by or on behalf of Citigroup Global Markets Asia Limited which takes full responsibility for its content Citigroup Global Markets Asia Ltd is regulated by Hong Kong Securities and Futures Commission If the Research is made available through Citibank NA Hong Kong Branch for its clients in Citi Private Bank it is made available by Citibank NA Citibank Tower Citibank Plaza 3 Garden Road Hong Kong Citibank NA is regulated by the Hong Kong Monetary Authority Please contact your Private Banker in Citibank NA Hong Kong Branch if you have any queries on or any matters arising from or in connection with this document The Product is made available in India by Citigroup Global Markets India Private Limited which is regulated by Securities and Exchange Board of India Bakhtawar Nariman Point Mumbai 400-021 The Product is made available in Indonesia through PT Citigroup Securities Indonesia 5F Citibank Tower Bapindo Plaza Jl Jend Sudirman Kav 54-55 Jakarta 12190 Neither this Product nor any copy hereof may be distributed in Indonesia or to any Indonesian citizens wherever they are domiciled or to Indonesian residents except in compliance with applicable capital market laws and regulations This Product is not an offer of securities in Indonesia The securities referred to in this Product have not been registered with the Capital Market and Financial Institutions Supervisory Agency (BAPEPAM-LK) pursuant to relevant capital market laws and regulations and may not be offered or sold within the territory of the Republic of Indonesia or to Indonesian citizens through a public offering or in circumstances which constitute an offer within the meaning of the Indonesian capital market laws and regulations The Product is made available in Israel through Citibank NA regulated by the Bank of Israel and the Israeli Securities Authority Citibank NA Platinum Building 21 Haarbaah St Tel Aviv Israel The Product is made available in Italy by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority Via dei Mercanti 12 Milan 20121 Italy The Product is made available in Japan by Citigroup Global Markets Japan Inc (CGMJ) which is regulated by Financial Services Agency Securities
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
and Exchange Surveillance Commission Japan Securities Dealers Association Tokyo Stock Exchange and Osaka Securities Exchange Shin-Marunouchi Building 1-5-1 Marunouchi Chiyoda-ku Tokyo 100-6520 Japan If the Product was distributed by SMBC Nikko Securities Inc it is being so distributed under license In the event that an error is found in an CGMJ research report a revised version will be posted on the Firms Citi Velocity website If you have questions regarding Citi Velocity please call (81 3) 6270-3019 for help The Product is made available in Korea by Citigroup Global Markets Korea Securities Ltd which is regulated by the Financial Services Commission the Financial Supervisory Service and the Korea Financial Investment Association (KOFIA) Citibank Building 39 Da-dong Jung-gu Seoul 110-180 Korea KOFIA makes available registration information of research analysts on its website Please visit the following website if you wish to find KOFIA registration information on research analysts of Citigroup Global Markets Korea Securities Ltd httpdiskofiaorkrfsdis2fundMgrDISFundMgrAnalystPopjspcompanyCd2=A03030amppageDiv=02 The Product is made available in Malaysia by Citigroup Global Markets Malaysia Sdn Bhd (Company No 460819-D) (ldquoCGMMrdquo) to its clients and CGMM takes responsibility for its contents CGMM is regulated by the Securities Commission of Malaysia Please contact CGMM at Level 43 Menara Citibank 165 Jalan Ampang 50450 Kuala Lumpur Malaysia in respect of any matters arising from or in connection with the Product The Product is made available in Mexico by Acciones y Valores Banamex SA De C V Casa de Bolsa Integrante del Grupo Financiero Banamex (Accival) which is a wholly owned subsidiary of Citigroup Inc and is regulated by Comision Nacional Bancaria y de Valores Reforma 398 Col Juarez 06600 Mexico DF In New Zealand the Product is made available to lsquowholesale clientsrsquo only as defined by s5C(1) of the Financial Advisers Act 2008 (lsquoFAArsquo) through Citigroup Global Markets Australia Pty Ltd (ABN 64 003 114 832 and AFSL No 240992) an overseas financial adviser as defined by the FAA participant of the ASX Group and regulated by the Australian Securities amp Investments Commission Citigroup Centre 2 Park Street Sydney NSW 2000 The Product is made available in Pakistan by Citibank NA Pakistan branch which is regulated by the State Bank of Pakistan and Securities Exchange Commission Pakistan AWT Plaza 11 Chundrigar Road PO Box 4889 Karachi-74200 The Product is made available in the Philippines through Citicorp Financial Services and Insurance Brokerage Philippines Inc which is regulated by the Philippines Securities and Exchange Commission 20th Floor Citibank Square Bldg The Product is made available in the Philippines through Citibank NA Philippines branch Citibank Tower 8741 Paseo De Roxas Makati City Manila Citibank NA Philippines NA is regulated by The Bangko Sentral ng Pilipinas The Product is made available in Poland by Dom Maklerski Banku Handlowego SA an indirect subsidiary of Citigroup Inc which is regulated by Komisja Nadzoru Finansowego Dom Maklerski Banku Handlowego SA ulSenatorska 16 00-923 Warszawa The Product is made available in the Russian Federation through ZAO Citibank which is licensed to carry out banking activities in the Russian Federation in accordance with the general banking license issued by the Central Bank of the Russian Federation and brokerage activities in accordance with the license issued by the Federal Service for Financial Markets Neither the Product nor any information contained in the Product shall be considered as advertising the securities mentioned in this report within the territory of the Russian Federation or outside the Russian Federation The Product does not constitute an appraisal within the meaning of the Federal Law of the Russian Federation of 29 July 1998 No 135-FZ (as amended) On Appraisal Activities in the Russian Federation 8-10 Gasheka Street 125047 Moscow The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) This report is distributed in Singapore by Citibank Singapore Ltd (CSL) to selected CitigoldCitigold Private Clients CSL provides no independent research or analysis of the substance or in preparation of this report Please contact your CitigoldCitigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this report This report is intended for recipients who are accredited investors as defined under the Securities and Futures Act (Cap 289) Citigroup Global Markets (Pty) Ltd is incorporated in the Republic of South Africa (company registration number 200002586607) and its registered office is at 145 West Street Sandton 2196 Saxonwold Citigroup Global Markets (Pty) Ltd is regulated by JSE Securities Exchange South Africa South African Reserve Bank and the Financial Services Board The investments and services contained herein are not available to private customers in South Africa The Product is made available in Spain by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority 29 Jose Ortega Y Gassef 4th Floor Madrid 28006 Spain The Product is made available in the Republic of China through Citigroup Global Markets Taiwan Securities Company Ltd (CGMTS) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan andor through Citibank Securities (Taiwan) Company Limited (CSTL) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan subject to the respective license scope of each entity and the applicable laws and regulations in the Republic of China CGMTS and CSTL are both regulated by the Securities and Futures Bureau of the Financial Supervisory Commission of Taiwan the Republic of China No portion of the Product may be reproduced or quoted in the Republic of China by the press or any third parties [without the written authorization of CGMTS and CSTL] If the Product covers securities which are not allowed to be offered or traded in the Republic of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon request in respect of this material Citigroup Centre Canada Square Canary Wharf London E14 5LB The Product is made available in United States by Citigroup Global Markets Inc which is a member of FINRA and registered with the US Securities and Exchange Commission 388 Greenwich Street New York NY 10013 Unless specified to the contrary within EU Member States the Product is made available by Citigroup Global Markets Limited which is regulated by Financial Services Authority
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 47
and Exchange Surveillance Commission Japan Securities Dealers Association Tokyo Stock Exchange and Osaka Securities Exchange Shin-Marunouchi Building 1-5-1 Marunouchi Chiyoda-ku Tokyo 100-6520 Japan If the Product was distributed by SMBC Nikko Securities Inc it is being so distributed under license In the event that an error is found in an CGMJ research report a revised version will be posted on the Firms Citi Velocity website If you have questions regarding Citi Velocity please call (81 3) 6270-3019 for help The Product is made available in Korea by Citigroup Global Markets Korea Securities Ltd which is regulated by the Financial Services Commission the Financial Supervisory Service and the Korea Financial Investment Association (KOFIA) Citibank Building 39 Da-dong Jung-gu Seoul 110-180 Korea KOFIA makes available registration information of research analysts on its website Please visit the following website if you wish to find KOFIA registration information on research analysts of Citigroup Global Markets Korea Securities Ltd httpdiskofiaorkrfsdis2fundMgrDISFundMgrAnalystPopjspcompanyCd2=A03030amppageDiv=02 The Product is made available in Malaysia by Citigroup Global Markets Malaysia Sdn Bhd (Company No 460819-D) (ldquoCGMMrdquo) to its clients and CGMM takes responsibility for its contents CGMM is regulated by the Securities Commission of Malaysia Please contact CGMM at Level 43 Menara Citibank 165 Jalan Ampang 50450 Kuala Lumpur Malaysia in respect of any matters arising from or in connection with the Product The Product is made available in Mexico by Acciones y Valores Banamex SA De C V Casa de Bolsa Integrante del Grupo Financiero Banamex (Accival) which is a wholly owned subsidiary of Citigroup Inc and is regulated by Comision Nacional Bancaria y de Valores Reforma 398 Col Juarez 06600 Mexico DF In New Zealand the Product is made available to lsquowholesale clientsrsquo only as defined by s5C(1) of the Financial Advisers Act 2008 (lsquoFAArsquo) through Citigroup Global Markets Australia Pty Ltd (ABN 64 003 114 832 and AFSL No 240992) an overseas financial adviser as defined by the FAA participant of the ASX Group and regulated by the Australian Securities amp Investments Commission Citigroup Centre 2 Park Street Sydney NSW 2000 The Product is made available in Pakistan by Citibank NA Pakistan branch which is regulated by the State Bank of Pakistan and Securities Exchange Commission Pakistan AWT Plaza 11 Chundrigar Road PO Box 4889 Karachi-74200 The Product is made available in the Philippines through Citicorp Financial Services and Insurance Brokerage Philippines Inc which is regulated by the Philippines Securities and Exchange Commission 20th Floor Citibank Square Bldg The Product is made available in the Philippines through Citibank NA Philippines branch Citibank Tower 8741 Paseo De Roxas Makati City Manila Citibank NA Philippines NA is regulated by The Bangko Sentral ng Pilipinas The Product is made available in Poland by Dom Maklerski Banku Handlowego SA an indirect subsidiary of Citigroup Inc which is regulated by Komisja Nadzoru Finansowego Dom Maklerski Banku Handlowego SA ulSenatorska 16 00-923 Warszawa The Product is made available in the Russian Federation through ZAO Citibank which is licensed to carry out banking activities in the Russian Federation in accordance with the general banking license issued by the Central Bank of the Russian Federation and brokerage activities in accordance with the license issued by the Federal Service for Financial Markets Neither the Product nor any information contained in the Product shall be considered as advertising the securities mentioned in this report within the territory of the Russian Federation or outside the Russian Federation The Product does not constitute an appraisal within the meaning of the Federal Law of the Russian Federation of 29 July 1998 No 135-FZ (as amended) On Appraisal Activities in the Russian Federation 8-10 Gasheka Street 125047 Moscow The Product is made available in Singapore through Citigroup Global Markets Singapore Pte Ltd (ldquoCGMSPLrdquo) a capital markets services license holder and regulated by Monetary Authority of Singapore Please contact CGMSPL at 8 Marina View 21st Floor Asia Square Tower 1 Singapore 018960 in respect of any matters arising from or in connection with the analysis of this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) The Product is made available by The Citigroup Private Bank in Singapore through Citibank NA Singapore Branch a licensed bank in Singapore that is regulated by Monetary Authority of Singapore Please contact your Private Banker in Citibank NA Singapore Branch if you have any queries on or any matters arising from or in connection with this document This report is intended for recipients who are accredited expert and institutional investors as defined under the Securities and Futures Act (Cap 289) This report is distributed in Singapore by Citibank Singapore Ltd (CSL) to selected CitigoldCitigold Private Clients CSL provides no independent research or analysis of the substance or in preparation of this report Please contact your CitigoldCitigold Private Client Relationship Manager in CSL if you have any queries on or any matters arising from or in connection with this report This report is intended for recipients who are accredited investors as defined under the Securities and Futures Act (Cap 289) Citigroup Global Markets (Pty) Ltd is incorporated in the Republic of South Africa (company registration number 200002586607) and its registered office is at 145 West Street Sandton 2196 Saxonwold Citigroup Global Markets (Pty) Ltd is regulated by JSE Securities Exchange South Africa South African Reserve Bank and the Financial Services Board The investments and services contained herein are not available to private customers in South Africa The Product is made available in Spain by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority 29 Jose Ortega Y Gassef 4th Floor Madrid 28006 Spain The Product is made available in the Republic of China through Citigroup Global Markets Taiwan Securities Company Ltd (CGMTS) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan andor through Citibank Securities (Taiwan) Company Limited (CSTL) 14 and 15F No 1 Songzhi Road Taipei 110 Taiwan subject to the respective license scope of each entity and the applicable laws and regulations in the Republic of China CGMTS and CSTL are both regulated by the Securities and Futures Bureau of the Financial Supervisory Commission of Taiwan the Republic of China No portion of the Product may be reproduced or quoted in the Republic of China by the press or any third parties [without the written authorization of CGMTS and CSTL] If the Product covers securities which are not allowed to be offered or traded in the Republic of China neither the Product nor any information contained in the Product shall be considered as advertising the securities or making recommendation of the securities in the Republic of China The Product is for informational purposes only and is not intended as an offer or solicitation for the purchase or sale of a security or financial products Any decision to purchase securities or financial products mentioned in the Product must take into account existing public information on such security or the financial products or any registered prospectus The Product is made available in Thailand through Citicorp Securities (Thailand) Ltd which is regulated by the Securities and Exchange Commission of Thailand 18F 22F and 29F 82 North Sathorn Road Silom Bangrak Bangkok 10500 Thailand The Product is made available in Turkey through Citibank AS which is regulated by Capital Markets Board Tekfen Tower Eski Buyukdere Caddesi 209 Kat 2B 23294 Levent Istanbul Turkey In the UAE these materials (the Materials) are communicated by Citigroup Global Markets Limited DIFC branch (CGML) an entity registered in the Dubai International Financial Center (DIFC) and licensed and regulated by the Dubai Financial Services Authority (DFSA) to Professional Clients and Market Counterparties only and should not be relied upon or distributed to Retail Clients A distribution of the different CIRA ratings distribution in percentage terms for Investments in each sector covered is made available on request Financial products andor services to which the Materials relate will only be made available to Professional Clients and Market Counterparties The Product is made available in United Kingdom by Citigroup Global Markets Limited which is authorised and regulated by Financial Services Authority This material may relate to investments or services of a person outside of the UK or to other matters which are not regulated by the FSA and further details as to where this may be the case are available upon request in respect of this material Citigroup Centre Canada Square Canary Wharf London E14 5LB The Product is made available in United States by Citigroup Global Markets Inc which is a member of FINRA and registered with the US Securities and Exchange Commission 388 Greenwich Street New York NY 10013 Unless specified to the contrary within EU Member States the Product is made available by Citigroup Global Markets Limited which is regulated by Financial Services Authority
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
copy 2012 Citigroup Global Markets Inc Citi Investment Research amp Analysis is a division of Citigroup Global Markets Inc Citi and Citi with Arc Design are trademarks and service marks of Citigroup Inc and its affiliates and are used and registered throughout the world All rights reserved Any unauthorized use duplication redistribution or disclosure of this report (the ldquoProductrdquo) including but not limited to redistribution of the Product by electronic mail posting of the Product on a website or page andor providing to a third party a link to the Product is prohibited by law and will result in prosecution The information contained in the Product is intended solely for the recipient and may not be further distributed by the recipient to any third party Where included in this report MSCI sourced information is the exclusive property of Morgan Stanley Capital International Inc (MSCI) Without prior written permission of MSCI this information and any other MSCI intellectual property may not be reproduced redisseminated or used to create any financial products including any indices This information is provided on an as is basis The user assumes the entire risk of any use made of this information MSCI its affiliates and any third party involved in or related to computing or compiling the information hereby expressly disclaim all warranties of originality accuracy completeness merchantability or fitness for a particular purpose with respect to any of this information Without limiting any of the foregoing in no event shall MSCI any of its affiliates or any third party involved in or related to computing or compiling the information have any liability for any damages of any kind MSCI Morgan Stanley Capital International and the MSCI indexes are services marks of MSCI and its affiliates The Firm accepts no liability whatsoever for the actions of third parties The Product may provide the addresses of or contain hyperlinks to websites Except to the extent to which the Product refers to website material of the Firm the Firm has not reviewed the linked site Equally except to the extent to which the Product refers to website material of the Firm the Firm takes no responsibility for and makes no representations or warranties whatsoever as to the data and information contained therein Such address or hyperlink (including addresses or hyperlinks to website material of the Firm) is provided solely for your convenience and information and the content of the linked site does not in anyway form part of this document Accessing such website or following such link through the Product or the website of the Firm shall be at your own risk and the Firm shall have no liability arising out of or in connection with any such referenced website
ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
In 1Q12 30 of full-year target achieved among highest in sector
Potential sales beat can be a re-rating catalyst
Healthy recovery in Guangzhou market
Profitability ndash Decent earnings growth in FY10-13E
Decent earnings growth through 2010-2013E possible earnings surprise on conservative assumptions
Management stresses earnings quality in 2012E
72 lock-in in FY12 presents visible growth momentum
Rational expansion and stick to a rule of 30 margin
More effective cost control to defend margin deterioration post restructuring
Forecast FY12 profit RMB18bn
Generous dividend payout of 40
Land bank
1116msm Landbank at competitive AV below RMB3000psm
Geographic focus should remain Guangdong Province
Landbank in Tier12 cities focus should outperform
Sophisticated developer but unwise for national expansion
Financial position ndash somewhat stretched but precautionary mindset in place
Cautious expansion well managed cashflow in 2012
Disciplined land acquisition GFA commencement climbed to 18msm GFA in FY12
Stable growth 43 profit CAGR in FY10-13E
Financial statements
Yuexiu Property
Company description
Investment strategy
Valuation
Risks
Notes
Notes
Notes
Yuexiu Property (0123HK) 20 April 2012
Citigroup Global Markets 48
Pursuant to Comissatildeo de Valores Mobiliaacuterios Rule 483 Citi is required to disclose whether a Citi related company or business has a commercial relationship with the subject company Considering that Citi operates multiple businesses in more than 100 countries around the world it is likely that Citi has a commercial relationship with the subject company Many European regulators require that a firm must establish implement and make available a policy for managing conflicts of interest arising as a result of publication or distribution of investment research The policy applicable to CIRAs Products can be found at httpswwwcitivelocitycomcvreppublicciti_research_disclosures Compensation of equity research analysts is determined by equity research management and Citigroups senior management and is not linked to specific transactions or recommendations The Product may have been distributed simultaneously in multiple formats to the Firms worldwide institutional and retail customers The Product is not to be construed as providing investment services in any jurisdiction where the provision of such services would not be permitted Subject to the nature and contents of the Product the investments described therein are subject to fluctuations in price andor value and investors may get back less than originally invested Certain high-volatility investments can be subject to sudden and large falls in value that could equal or exceed the amount invested Certain investments contained in the Product may have tax implications for private customers whereby levels and basis of taxation may be subject to change If in doubt investors should seek advice from a tax adviser The Product does not purport to identify the nature of the specific market or other risks associated with a particular transaction Advice in the Product is general and should not be construed as personal advice given it has been prepared without taking account of the objectives financial situation or needs of any particular investor Accordingly investors should before acting on the advice consider the appropriateness of the advice having regard to their objectives financial situation and needs Prior to acquiring any financial product it is the clients responsibility to obtain the relevant offer document for the product and consider it before making a decision as to whether to purchase the product With the exception of our product that is made available only to Qualified Institutional Buyers (QIBs) CIRA concurrently disseminates its research via proprietary and non-proprietary electronic distribution platforms Periodically individual CIRA analysts may also opt to circulate research posted on such platforms to one or more clients by email Such email distribution is discretionary and is done only after the research has been disseminated via the aforementioned distribution channels CIRA simultaneously distributes product that is limited to QIBs only through email distribution The level and types of services provided by CIRA analysts to clients may vary depending on various factors such as the clientrsquos individual preferences as to the frequency and manner of receiving communications from analysts the clientrsquos risk profile and investment focus and perspective (eg market-wide sector specific long term short-term etc) the size and scope of the overall client relationship with Citi and legal and regulatory constraints CIRA product may source data from dataCentral dataCentral is a CIRA proprietary database which includes Citi estimates data from company reports and feeds from Reuters and Datastream
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ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Old lsquoRed Chiprsquo new focus a turnaround story
Fallen lsquoRed Chiprsquo reborn
Commercial biz rich portfolio access to value-unlocking channel
Residential biz improving profitability on faster asset turnover
Why now Stock catalysts
Valuation Quality Assets Portfolio at Unjustified Valuation
Risks
Old lsquoRed Chiprsquo new focus
Strong SOE background sound management quality
Market still too skeptical
Target price of HK$270 on 40 disc to NAV
PE and PB valuations look undemanding
Regional valuation comparison
Macro risks
Company-specific risks
Leading commercial property portfolio in Guangzhou
Four up-and-coming investment properties in pipeline
GZ IFC rental income over RMB600mn in FY12E
Analyzing capital tied up in investment properties
Access to attractive REIT value-unlocking channel
Growing profitability on faster asset turnover
Improving metrics
Contracted sales ndash steady growth with low risk profile
CAGR growth of 27 achieved in FY07-11 target RMB20bn by 2015
