yum cha 飲茶 · china's monthly import of polysilicon (t) - lhs import price (us$/kg)...

Yum Cha 飲茶 July 29, 2013

DIARY NOTES FOR THIS WEEK

July 29 Leading Index (Jun) [previous: 99.6]

August 1 Manufacturing PMI (Jul)

[previous: 50.1]

August 1 HSBC Manufacturing PMI (Jul)

[previous: 48.2]

August 3 Non-Manufacturing PMI (Jul)

[previous: 53.9]

August 5 HSBC Services PMI (Jul)

[previous: 51.3]

Source: Bloomberg

SOLAR SECTOR—Agreement between China and EU is favourable to Chinese

downstream players. We expect the Chinese government to impose an significant tariffs on the import polysilicon from EU, which will be unfavourable to GCL Poly. Comtec will likely a beneficiary given that it consumes mainly import polysilicon from OCI and Wacker.

CHINA CEMENT WEEKLY – Total railway fixed asset investment (FAI) is likely to be

revised up by 6% this year, according to Beijing News. In addition, total railway FAI during the 12th Five-Year Plan will also be lifted by RMB500bn to RMB3.3trn. These two measures will largely reduce the risk of a ―railway FAI cliff‖ and avoid a sharp fall in cement demand in 2014 and 2015. Meanwhile, we believe the new target list to close down obsolete capacity is likely to benefit CR Cement (1313.HK) and Anhui Conch (0914.HK) based on regional breakdown.

KAISA GROUP HOLDINGS [1638.HK; HK$1.71] —We initiate coverage of develop-

er Kaisa with a BUY recommendation, based on our view that the market has not yet given credit to the company for its constructive shift in strategy, from a focus on low-er-tier cities to a more balanced landbank. The company’s earnings visibility is clear through to 2014, and although debt has been increased to acquire additional tier-1 and tier-2 land, cash flows are strong, and the company has successfully re-financed its long-term debt, reducing borrowing costs and extending maturities. Trading at a deep discount to NAV, we see upside of >30% to our target price of HK$2.27.

INDICES Closing DoD%

Hang Seng Index 21,969.0

0.3

HSCEI 9,755.7

0.0

Shanghai COMP 2,010.9

(0.5)

Shenzhen COMP 960.0

(0.2)

Gold 1,330.0

(0.3)

BDIY 1,082.0

(0.9)

Crude Oil, WTI(US$/BBL) 104.6

(0.1)

Crude Oil, BRENT(US$/BBL) 107.2

0.1

HIBOR, 3-M 0.4

-

SHIBOR, 3-M 4.7

0.1

RMB/USD 6.13

(0.1)

Analyst: John Mulcahy, Managing Director, Research

CHART OF THE DAY— INDUSTRIAL PROFITS SLUMP, BUT SOME STIMULUS COMING

TALKING POINTS

Profits in the coal and non-ferrous metals sectors fell sharply in the first half of this year,

while profits in agriculture, food processing, textiles and autos surged, as overall industrial

profit growth slowed. It is clear that the Chinese government’s more proactive reform strat-

egy is gaining momentum, as the Ministry of Industry and Information Technology issued

instructions to 1,400 companies in 19 industries to reduce surplus production capacity. This

approach is the most extreme example yet of the different approach adopted by the current

leadership compared with the previous government. Excess capacity in sectors such as

steel, cement and paper have undermined profits in these sectors, and as our China Ce-

ment Weekly notes, the removal of excess capacity will benefit more efficient producers in

certain regions, helping companies such as CR Cement and Anhui Conch. Industrial com-

pany profits grew 6.3% year-on-year (YoY) in June, much slower than the YoY growth of

15.5% in May. The data for June are a rear-view mirror, and will have fed into the decisions

to reduce capacity, on the one hand, and on the other hand to boost spending on high-

speed rail in central and western provinces. By declaring a ―bottom line‖ for GDP growth of

7%, in effect Premier Li Keqiang is saying that measures will be taken to protect that level.

Industry Note

July 29, 2013

Wayne Fung, CFA— Analyst

(852) 3698-6319

[email protected]

John Mulcahy—Head of Research

(852) 3698-6889

[email protected]

Agreement Between China And EU Favourable to Chi-

nese Downstream Players

China’s Ministry of Commerce (MOFCOM) announced on July 27 that China’s Chamber of

Commerce for Import and Export of Machinery and Electronic Products (CCCME) and

four other industry associations have finally reached an agreement with the EU (source:

http://www.mofcom.gov.cn/article/ae/ai/201307/20130700218112.shtml). According to

Bloomberg news, the minimum export price of solar panels from China to EU is set at

EUR0.56/watt while the maximum export volume will be 7GW (for two years). We believe

the agreement is favourable to the Chinese downstream players given that the minimum

price is only 5% above the current module price. Despite a cap set on export volume, we

believe explosive Chinese demand will help offset the negative impact (China targets to

add 10GW of solar power installation per year between 2013 and 2015).

Importance of EU market will gradually reduce. Despite declining solar installa-

tions in Europe (down from 22.4GW in 2011 to 17GW in 2012), the European market

still accounted for 55% of global demand of 31.1GW in 2012, according to EPIA

(figure 1). While Europe has long been the major source of demand for Chinese solar

modules, a potential slowdown in Europe and a explosive growth in China will help

lower the trade impact on Chinese modules players in future, in our view.

What’s next? We believe MOFCOM will release the result of the import tariff for

EU polysilicon shortly. Given that an agreement has already been reached on the

solar panel side, we believe a potential tariff imposed by the Chinese government on

polysilicon imported from the EU will be much lower than that for the US (Tariff for the

US polysilicon ranged from 53.3% to 57%). We expect MOFCOM to announce a deci-

sion in the near future.

Impact on GCL Poly [3800.HK; HK$1.96] and Comtec [712.HK; HK$2.27]. We

believe the result of the trade dispute is positive news to most Chinese downstream

players. On the upstream side, however, the market previously expected the polysili-

con price to increase due to the launch of more import tariffs. We believe the potential

increase in the domestic polysilicon price will likely be constrained as we expect the

Chinese government to impose a significant tariff on imported polysilicon from EU,

which will be unfavourable to GCL Poly. On the contrary, Comtec will likely a benefi-

ciary given that it consumes mainly imported polysilicon from OCI and Wacker.

China Solar Sector

http://www.mofcom.gov.cn/article/ae/ai/201307/20130700218112.shtml

Note: MEA represents the Middle East and Africa

Sources: EPIA, CGIHK Research

Figure 1: Global Solar Annual Installation (MW)

Figure 2: China Polysilicon Import (Country Breakdown) Figure 3: China Polysilicon Import and Average Import Price

Sources: PVinsights, CGIHK Research

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China's monthly import of polysilicon (t) - LHS Import price (US$/kg)

Sources: SiliconChina, China Customs, CGIHK Research

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

2010 2011 2012 5M13

Tonne

Others

US

Norway

Italy

Germany

Taiwan

Korea

Japan

Sources: SiliconChina, China Customs, CGIHK Research

Wafer price (US$/watt) Cell and module price (US$/watt)

Polysilicon price (US$/kg) Price spread (US$/Watt)

$0.00

$0.20

$0.40

$0.60

$0.80

$1.00

$1.20

$1.40

1/7

/200

9

1/1

0/2

00

9

1/1

/201

0

1/4

/201

0

1/7

/201

0

1/1

0/2

01

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1/1

/201

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1/4

/201

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1/7

/201

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Cell/wafer spread (US$/W) Module/cell spread (US$/W) Module/wafer spread (US$/W)

$10

$20

$30

$40

$50

$60

$70

$80

Polysilicon (US$/kg) - 1st grade

$0.3

$0.5

$0.7

$0.9

$1.1

$1.3

$1.5

$1.7

$1.9

$2.1

Module price (US$/W) Cell price (US$/W)

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

$0.70

$0.80

$0.90

$1.00

Wafer price (US$/Wp) (156mm multi) Wafer price (US$/Wp) (156mm mono)

Figure 4: Solar Pricing

China Cement Weekly

July 29, 2013

Wong Chi Man—Senior Analyst

(852) 3698-6317

[email protected]


(852) 3698-6889

[email protected]

Accelerated Railway FAI to Provide Down-side Protection to Cement Demand Railway investment to be revised up by 6% this year. The National Development and Re-

form Commission (NDRC) will raise total fixed asset investment (FAI) in railway projects this

year to RMB690bn (original target: RMB650bn), according to Beijing News. [Note: Beijing News

was the first newspaper to quote Premier Li Keqiang’s speech on 7% as the baseline of GDP

growth therefore we believe the source is reliable.]

Extra funding to smooth railway investment in 2014 and 2015. The news report also said

the total railway FAI in the 12th Five-Year Plan is raised by RMB500bn to RMB3.3trn. Based on

the original target, annual total railway FAI in 2014 and 2015 may drop to about RMB300bn to

RMB400bn. The risk of a ―railway FAI cliff‖ is largely reduced based on the new target, which

implies total railway FAI will be no less than RMB600bn per year in 2014 and 2015. Given that

infrastructure projects account for about one-third of cement consumption, it will avoid a sharp

fall in cement demand in the next two years.

New list to close down obsolete capacity: CR Cement and Anhui Conch to benefit most.

Separately, the Ministry of Industry and Information Technology (MIIT) released the target list

(first batch) to close down obsolete capacity for 2013, involving annual capacity of 93m tonnes.

Of this, Guangdong and Fujian accounted for 16.1% and 8.2%, respectively. For stocks under

our coverage, CR Cement is the major beneficiary with 27% cement capacity in Guangdong

and 13% in Fujian at end-2012. It is also positive to Anhui Conch, with about 6% of its clinker

capacity in Guangdong last year.

Follow-up on funding cost. We discussed last week the higher cost of bond refinancing.

BBMG is the latest victim of the ―cash crunch‖, which priced its short-term commercial paper at

5.2% on 24 July, representing an increase of 93bps compared with the issue in March. We will

closely monitor market bond yields and revise our forecasts if tight market liquidity lingers.

Cement stocks under our coverage up 6.8% last week. Premier Li’s positive tone on railway

construction supported share prices. BBMG was the leader last week, surging 9.8%. Average

cement price on a nation-wide basis was largely flat last week. Major price changes: southern

Zhejiang +RMB20-30/tonne (+ve CNBM); Guangxi +RMB10-20/tonne (+ve CR Cement, Anhui

Conch); Jiangxi (Nanchang) - RMB30/tonne (low-grade) (-ve Anhui Conch, CNBM). Please

refer to the price charts in the following pages.

China Cement Sector

Sources: Company, Bloomberg, CGIHK Research estimates

Valuation Table

Market cap

Company Ticker Rating Price (HK$) (US$m) 2012 2013E 2014E 2012 2013E 2014E 2012 2013E 2014E

Anhui Conch 914 HK Equity BUY 23.75 13,714 16.3 12.8 10.6 2.1 1.8 1.6 9.7 8.0 6.8

CNBM 3323 HK Equity HOLD 7.42 5,136 6.0 5.0 4.1 1.1 0.9 0.7 8.7 6.7 5.7

BBMG 2009 HK Equity BUY 5.01 3,241 8.2 8.3 6.9 0.8 0.7 0.6 8.2 7.9 6.7

CR Cement 1313 HK Equity HOLD 4.36 3,644 12.2 11.2 9.4 1.3 1.2 1.1 9.0 7.8 6.7

Shanshui Cement 691 HK Equity HOLD 3.22 1,162 4.9 6.2 5.4 0.9 0.8 0.7 5.0 5.2 4.6

TCC International 1136 equity NR 2.04 862 13.0 5.9 5.0 0.4 0.4 0.4 9.0 6.2 5.6

China National Materials 1893 equity NR 1.71 783 10.2 8.1 6.5 0.4 0.4 0.4 7.3 6.2 5.5

Asia Cement 743 equity NR 3.63 724 11.2 6.0 4.7 0.5 0.5 0.4 6.6 4.7 4.0

West China Cement 2233 equity NR 1.15 670 11.0 6.8 5.5 0.9 0.8 0.7 7.3 5.7 4.9

Tianrui Cement 1252 equity NR 2.18 671 5.2 4.5 4.0 0.7 0.6 0.5 6.1 5.2 4.8

Simple average 9.8 7.5 6.2 0.9 0.8 0.7 7.7 6.3 5.5

Weighted average 12.1 9.8 8.1 1.5 1.3 1.1 8.8 7.3 6.3

PER (x) PBR (x) EV/EBITDA(x)

Figure 1: Source of funding of total railway FAI (2013) (Unit: RMB bn; Total RMB690bn)

Vehicle purchase

tax, 15

Direct financing by China Railway Corporation, 23

Local governments and

others, 90

Bonds, 150Bank loans, 317

SOEs, 30

Railway construction

fund, 45

From NDRC budget, 20

Source: Beijing News

Capacity (m tonnes) % of total

Tianjin 2.02 2.2%

Hebei 7.40 8.0%

Shanxi 3.50 3.8%

Inner Mongolia 4.11 4.4%

Liaoning 0.75 0.8%

Jilin 0.50 0.5%

Heilongjiang 0.10 0.1%

Jiangsu 2.32 2.5%

Zhejiang 0.12 0.1%

Anhui 0.58 0.6%

Fujian 7.64 8.2%

Jiangxi 2.85 3.1%

Shandong 6.75 7.3%

Henan 1.24 1.3%

Hubei 0.88 0.9%

Hunan 5.70 6.1%

Guangdong 14.98 16.1%

Guangxi 4.50 4.8%

Chongqing 2.01 2.2%

Sichuan 6.99 7.5%

Guizhou 7.01 7.5%

Yunnan 1.01 1.1%

Shaanxi 2.02 2.2%

Gansu 3.66 3.9%

Qinghai 0.10 0.1%

Ningxia 0.20 0.2%

Xinjiang 3.72 4.0%

Tibet 0.20 0.2%

Total 92.85

Figure 2: Obsolete Cement Capacity to be Closed Down in 2013 (Kilns and grinding mills)

Source: MIIT (first batch)

Figure 3: Regional Cement Price

Sources: Digital Cement, CGIHK Research

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Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec

National Average (P.O 42.5)

2010 2011 2012 2013

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430


North China

2010 2011 2012 2013

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Northeast China

2010 2011 2012 2013

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East China

2010 2011 2012 2013

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South Central China

2010 2011 2012 2013

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Southwest China

2010 2011 2012 2013

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Northwest China

2010 2011 2012 2013

BUY

Close: 1.71 (July 26, 2013)

Target Price: 2.27

Price Performance

Market Cap US$1,129m

Shares Outstanding 5,525m

Auditor PWC

Free Float 30.9%

52W range HK$1.32-2.87

3M average daily T/O US$2.5m

Major Shareholding Kwok’s family

(62.4%)

Source: Company, Bloomberg

Frank Miao —Senior Analyst

(852) 3698-6320

[email protected]


(852) 3698 6889

[email protected]

Kaisa Group Holdings Ltd

July 29, 2013

Kaisa Group Holdings Ltd [1638.HK]

Improving fundamentals call for richer valuation

We see high earnings visibility for Kaisa into 2014E, based on its current unrec-

ognized revenue and strong sales in 1H13. The company’s effort to increase its pres-

ence in first- and second-tier cities should gradually change the current market per-

ception of it being a low-tier city developer. Kaisa’s recent land acquisitions stirred

market concerns as it will temporarily push up interim net gearing. However, we ex-

pect net gearing to decrease by year-end 2013 and believe Kaisa’s diverse debt

composition and maturity profile translates into a stable balance sheet.

We see a high probability of Kaisa achieving, and possibly beating its full-year

sales target. Any better-than-expected monthly sales performance could trigger

an upward adjustment in sales target and/or upward revision of the consensus

earnings forecast, prompting a re-rating.

Kaisa started restructuring its landbank in 2012 with a re-focus on first-and se-

cond-tier cities. This effort has begun to yield results, and we believe it should

mitigate market’s perception of it being exclusively a low-tier city developer.

We believe the market’s concern over Kaisa’s land acquisitions (RMB8.6bn) in

1H13 is overdone. In spite of a climbing net gearing ratio, Kaisa has a diverse

mix of domestic and offshore debt, and a balance of maturities that we believe is

manageable given its cash flow and sales prospects.

We initiate coverage on Kaisa with a BUY rating and a target price (TP) of HK$2.27,

based on 50% discount to our estimated FY13E Net Asset Value (NAV) of HK$ 4.54

and represents 4.2x FY13E PER. Kaisa’s current share price implies 3.1x FY13E

PER (versus historical average of 7.2x and peer average of 4.4X) and 62% discount

to our estimated NAV. The low valuation—with ~33% upside to our TP of $2.27—

Source: Company data, CGIHK Research

Key financials FY2011 FY2012 FY2013E FY2014E FY2015E

Revenue (RMB m) 10,835 11,955 16,161 20,925 28,231

Revenue growth 40% 10% 35% 29% 35%

Core net profit (RMB m) 1,467 1,762 2,381 3,256 4,461

Core net profit growth 7% 17% 39% 37% 37%

Fully diluted core EPS (RMB) 0.3 0.3 0.4 0.6 0.8

Price to earning (x) 5.2 4.4 3.1 2.3 1.7

Net gearing 77% 67% 76% 59% 42%

EBIT interest coverage (x) 1.8 1.5 2.1 3.0 4.3

Cash interest coverage (x) 3.1 2.9 3.4 3.8 4.8

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Financials and ratios: FY2011 - FY2015E


Profit & loss (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Cash flow statement (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E

Revenue 10,835 11,955 16,161 20,925 28,231 PBT 2,825 3,269 3,604 6,008 7,355

Property development 10,576 11,598 15,778 20,433 27,568 Adjustments for

Property investment 151 220 232 326 480 Finance Cost 69 39 133 172 194

Property management services 108 137 151 166 183 Fank interest income (21) (22) (65) (79) (94)

COGS (7,601) (8,070) (10,593) (13,639) (18,350) Fair value gains (433) (501) - (1,178) (435)

Gross profit 3,234 3,885 5,568 7,285 9,881 Depreciation 31 43 - - -

Other income and expenses 43 24 24 24 24 Share of results of associates/JCEs 1 (242) - - -

Selling expenses (405) (578) (810) (1,006) (1,217) Gain on disposal 2 (54) - - -

Administrative expenses (565) (818) (1,111) (1,380) (1,669) Share buy back/issuance 51 57 - - -

EBIT 2,307 2,513 3,671 4,923 7,020 Impairment loss - 41 - - -

Finance expenses (48) (17) (68) (93) (100) Other (exchange (112) (28) - - -

Interest income 21 22 65 79 94 Operating cashflows before movements in WC 2,413 2,602 3,671 4,923 7,020

Interest captilized 1,210 1,603 1,598 1,460 1,438 Increase in inventory of properties (6,577) (9,667) (13,446) (10,270) (8,115)

Total borrowing cost (1,280) (1,642) (1,730) (1,632) (1,632) increase in properites for development (Land) (1,089) (693) - - -

Revaluation gains from Investment property 433 501 - 1,178 435 increase in properties under development (5,488) (8,973) (13,446) (10,270) (8,115)

Other gains 134 272 - - - (Increase) in receivables and deposites (1,205) (1,873) (245) (1,812) (2,607)

Pre-tax profit 2,825 3,269 3,604 6,008 7,355 Increase in presale deposit 2,748 10,002 5,682 6,196 5,896

Tax (926) (1,153) (1,077) (1,718) (2,307) increase in trade and other payables 455 264 2,585 2,858 1,561

Reported net income 1,899 2,116 2,526 4,289 5,048 Increase in tax payable - - 370 463 578

Attributable to equity holder of 1,901 2,072 2,381 4,139 4,787 Restricted cash (11) (129) - - -

Minority interests (2) 44 (145) (150) (260) Increase in other working capitals (34) 448 - - -

Deduction of post-tax gains (431) (398) - (884) (326) Cash used in operations (2,211) 1,649 (1,382) 2,358 4,333

Core earning 1,467 1,762 2,381 3,256 4,461 Corporate Tax paid (743) (906) (1,077) (1,718) (2,307)

Interest paid (1,096) (1,468) 119 (37) (124)

Basic EPS - core (RMB) 0.30 0.35 0.49 0.66 0.91 Net cash used in operating activities (4,050) (725) (2,341) 603 1,902

Diluted EPS - core (RMB) 0.26 0.32 0.43 0.59 0.81 Purchase of PPE (70) (73) (41) (47) (53)

DPS - - - - - Purchase of Land use right - - - - -

Proceeds from Disposal of PPE 0 0 - - -

Balance sheet (RMB m) FY2011 FY2012 FY2013E FY2014E FY2015E Investments in Associates/JCEs - 442 - - -

Stocks of inventory 23,502 34,840 48,286 58,556 66,671 Addition to investment properties (473) (531) - - -

Completed properties Held for Sale 1,343 3,170 4,452 5,165 4,789 Acquisition of subsidiaries (1,469) (1,017) - - -

Properties under development 22,160 31,670 43,833 53,391 61,882 Others (repurchase of notes etcs) (11) - (134) (94) (145)

Prepayment, Deposit and other recievable 6,613 9,452 9,696 11,509 14,116 Interest received 21 22 65 79 94

Income tax recoverable 154 192 323 418 565 Net cash from investing activities (2,002) (1,157) (110) (62) (104)

Restricted deposits 541 670 670 670 670 Free cash flow after investment (6,052) (1,883) (2,451) 542 1,798

Bank deposits and cash 3,945 4,683 5,890 6,260 7,864 Proceeds from issuing shares and expenses 1 1 - - -

Total current assets 34,756 49,836 64,865 77,412 89,885 Disposals - 966 - - -

Interest paid - - (133) (172) (194)

Investment properties 6,375 7,540 7,540 8,718 9,152 Proceeds from borrowing 9,345 5,216 3,791 - -

PPE 149 308 349 396 448 Repayments of borrowings (3,634) (3,533) - - -

Interest in Subsidiaries - - - - - Capital contribution fromto minority shareholders 0 (30) - - -

Interest in assocates 299 - - - - Net cash from financing activities 5,712 2,619 3,658 (172) (194)

Defered Taxation 209 90 127 251 -

Land Use Right 21 60 60 60 60 Net Increase in cash and cash equivalents (340) 736 1,208 369 1,604

Total non-current assets 6,949 8,117 8,039 9,300 9,912 Cash and cash equivalents at 1 Jan 4,340 3,945 4,683 5,890 6,260

Effect of Forex (54) 1 - - -

Short term borrowings 2,067 3,150 3,150 3,150 3,150 Cash and cash equialents at 31 December 3,945 4,683 5,890 6,260 7,864

Presales deposit 7,242 17,244 22,926 29,122 35,018

Trade and other payable 6,797 7,112 9,696 12,555 14,116 Key ratios FY2011 FY2012 FY2013E FY2014E FY2015E

Taxation payable 989 1,481 1,851 2,314 2,892 Revenue Growth (YoY) 39.7% 10.3% 35.2% 29.5% 34.9%

Amount due to related companies 3 452 452 452 452 Core net profit growth (YoY) 6.5% 17.0% 38.6% 36.7% 37.0%

Total current Liability 17,657 20,397 26,790 29,819 34,256 Gross margin 29.8% 32.5% 34.5% 34.8% 35.0%

Core net profit margin 13.5% 14.7% 14.7% 15.6% 15.8%

Interest-bearing loans 11,577 12,257 16,048 16,048 16,048 PER (x) 5.2 4.4 3.1 2.3 1.7

Other - 59 59 59 59 PBR (x) 0.6 0.5 0.4 0.4 0.3

Deferred tax liabilities 1,079 1,143 1,143 1,143 1,143 Dividend yield n.a n.a n.a n.a n.a

Total non-current liabilities 12,657 12,657 12,657 12,657 12,657 ROA - core 3.5% 3.0% 3.3% 3.8% 4.5%

ROE - core 13.4% 13.1% 14.6% 16.5% 18.3%

Equity

Share capital 432 432 432 432 432 Net gearing 76.6% 67.2% 75.9% 59.1% 41.8%

Share premium 3,817 3,818 3,815 3,817 3,818 Net debt to total asset 22.0% 17.4% 17.3% 14.1% 10.7%

Reserves 7,693 10,100 10,100 10,100 10,100 Total debt to total asset 32.7% 26.6% 26.3% 22.1% 19.2%

Retained earnings/(accumulated losses) - - - - - EBITD interest coverage 1.8 1.5 2.1 3.0 4.3

Attributable Equity 11,942 14,350 16,729 20,870 25,658 Cash interest coverage 3.1 2.9 3.4 3.8 4.8

Minority interests 8 704 849 999 1,259 ST debt as % of total debt 15% 20% 16% 16% 16%

Total equity 11,949 15,054 17,578 21,869 26,918 Overall financing costs 11.9% 11.3% 10.0% 8.5% 8.5%

Historical share price underperformance—why?

Share price underperformance: Kaisa Group (Kaisa) grew contracted sales by

72% from Rmb10.1bn in 2010, its first full year of operation after public listing in

December 2009, to Rmb17.2bn in 2012, beating industry average of 43% and

national residential property sales growth of 21% during the same period. Kaisa is

also one of the few companies that have consistently met contracted sales targets,

even in rough years such as in 2011.

Kaisa’s new growth trajectory not yet

appreciated...

Figure 2: 2011 Contracted sales target hit rate by major developers


Figure 1: Contracted sales growth versus share price movement, 2010 to date

Source: Company data, Bloomberg, CGIHK Research

120%115%

109%

107%

103%

101%

100%96%

90%

89% 88% 85%84%77%

73%69%

45%

0%

20%

40%

60%

80%

100%

120%

140%

(40)

(20)

-

20

40

60

80

100

Over/under achievement (LHS, RMB bn)Sales target (LHS, RMB bn)Target hit rate (RHS)

-80%

-60%

-40%

-20%

0%

20%

40%

60%

-50% 0% 50% 100% 150% 200% 250% 300% 350%

Sh

are

pric

e m

ove

me

nt 2

01

0 to

da

te Glorious

Sunac

CR Land

COLI

Country Garden

Shimao

Longfor

Greentown

YuexiuEvergrande

Kaisa

Sino Ocean Land

C C Land

Agile

GZ R&F

KWG Property

Contracted sales growth FY10 - FY12

Poor historical performance has left

Kaisa deeply undervalued

In spite of the above-average sales growth and consistent track record, Kaisa’s

share price declined by 41% from 2010 and 29% year-to-date (YTD) 2013, making

it one of the worst performers among comparable peers with similar market capi-

talization and/or business focus. Kaisa’s current FY13e PER of 3.1x, versus his-

torical average of 7.2x and peer average of 4.4x, also suggests market’s current

under-appreciation of the company’s shares, in our view.

Figure 3: Historical share price underperformance

Source: Bloomberg, CGIHK Research

*Note: Sunac listed in October 2010

Since Kaisa Poly Sunac* KWG Evergrande Yuexiu SZ Investment Average

2010 -41% -59% 51% -27% -25% -13% -13% -18%

2013 -29% -34% -15% -27% -27% -22% -16% -24%

2010 trough 27% 81% 325% 81% 65% 98% 122% 114%

2010 peak -51% -66% -29% -41% -48% -33% -32% -43%

2013 trough 8% 3% 13% 13% 11% 8% 7% 9%

2013 peak -40% -41% -29% -35% -33% -33% -32% -35%

Figure 4: Share performance for comparable peers Figure 5: FY13E PER comparasion

Source: Bloomberg, CGIHK Research Source: CapitalIQ, CGIHK Research

-30%

20%

70%

120%

170%

220%

Ja

n-1

0

Mar-

10

May-1

0

Ju

l-10

Sep

-10

No

v-1

0

Ja

n-1

1

Mar-

11

May-1

1

Ju

l-11

Sep

-11

No

v-1

1

Ja

n-1

2

Mar-

12

May-1

2

Ju

l-12

Sep

-12

No

v-1

2

Ja

n-1

3

Mar-

13

May-1

3

Ju

l-13

Kaisa Poly

Sunac KWG

Evergrande SZ Investment

Yuexiu

6.0 5.8

4.3 4.2 3.9

3.6

3.1

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

SZ INV Yuexiu Poly KWG Evergrande Sunac Kaisa

Methodology, valuation, and risks

Property developers becoming space

manufacturers, and PER worth con-

sidering, but…

...NAV still key metric, and Kaisa trad-

ing at 62% discount

At our target price of $2.27 discount to

NAV still comfortable 50%

Real estate developers in China are becoming more focused on volume churning

and thus similar to mass manufacturers. Consequently, price/earnings ratio (PER)

has become an increasingly relevant valuation basis. However, due to the current

disconnection between pre-sales cash-flows and revenue recognition, PER does

not reflect actual cash flow dynamics and is highly sensitive to project completion.

As such, we adopt price vs. estimated net asset value (NAV) as our primary valua-

tion methodology, and cross-check with PER.

Our built-in property price growth assumptions for 2013F to 2015F are 4%, 9%,

and 6%, respectively. We use a weighted average cost of capital of 12.1% for Kai-

sa, based on a risk-free rate of 6%, required market return of 11%, adjusted beta

of 1.9, and long-term equity to total asset assumption of 63%.

Kaisa is currently trading at 62% discount to NAV and 3.1 FY13E PER. The low

valuation reflects the market’s under-appreciation of the company’s improving

fundamentals, in our view.

We initiate coverage on Kaisa with a BUY rating and a price target of HK$2.27,

based on 50% discount to our estimated NAV of HK$4.54/share, implying 33%

upside. Our target prices represent 4.2/FY13F EPS of RMB0.43/share. A 5% and

10% increase/decrease in our property price growth assumption in FY13 could

result in changed target prices implying 62% and 91% upside and 3% upside and

26% downside to current price. Key risks to our estimates are 1) unexpected tight-

ening policies 2) overall economic condition and 3) execution risks.

Figure 23: 12 month rolling forward PER Figure 24: 12 month rolling forward PBR

Source: Company data, Bloomberg, CGIHK Research Source: Company data, Bloomberg, CGIHK Research

0.0

5.0

10.0

15.0

20.0

25.0

30.0

De

c-0

9

Feb

-10

Apr-

10

Ju

n-1

0

Aug

-10

Oct-

10

De

c-1

0

Feb

-11

Apr-

11

Ju

n-1

1

Aug

-11

Oct-

11

De

c-1

1

Feb

-12

Apr-

12

Ju

n-1

2

Aug

-12

Oct-

12

De

c-1

2

Feb

-13

Apr-

13

Ju

n-1

3

PER

Average

+1 STD

-1 STD

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

De

c-0

9

Feb

-10

Apr-

10

Ju

n-1

0

Aug

-10

Oct-

10

De

c-1

0

Feb

-11

Apr-

11

Ju

n-1

1

Aug

-11

Oct-

11

De

c-1

1

Feb

-12

Apr-

12

Ju

n-1

2

Aug

-12

Oct-

12

De

c-1

2

Feb

-13

Apr-

13

Ju

n-1

3

BPR

Average

+1 STD

-1 STD

NAV breakdown

Figure 25: NAV breakdown


Economic Residential NAV Value per % of PRC Investment NAV Value per % of

Region Development Rmb m Share (Rmb) GAV Properties Rmb m Share (Rmb) GAV

Northern China 5,341 1.1 16% Office 4,500 0.9 13%

Northern China Anshan 1,800 0.4 5% Retail - - 0%

Northern China Benxi 185 0.0 1% Hotel - - 0%

Northern China Dandong 306 0.1 1% Carpark - - 0%

Northern China Huludao 630 0.1 2% Other - - 0%

Northern China Liaoyang 98 0.0 0% Total 4,500 0.9 13%

Northern China Panjin 74 0.0 0%

Northern China Qingdao 653 0.1 2% Gross property asset 33,546 6.8

Northern China Shenyang 468 0.1 1% Investment at cost - -

Northern China Weifang 68 0.0 0% Gross asset value (Rmb) 33,546 6.8

Northern China Yingkou 1,058 0.2 3%

Central and West 4,228 0.9 13% Gross asset value (HK$) 41,932 8.5

Central and West Changsha 1,023 0.2 3% Less Land cost (HK$) - -

Central and West Chengdu 898 0.2 3% Less Net debt (HK$) (15,809) (3.2)

Central and West Chongqing 205 0.0 1% Less MSHI (HK$) (1,057) (0.2)

Central and West Nanchong 878 0.2 3% Net Asset Value 25,067

Central and West Wuhan 1,137 0.2 3% Share outstanding (m shares) 5,525

Central and West Zhuzhou 86 0.0 0% Net Asset Value per share (HK$) 4.54

YRD 5,207 1.1 16% Discount to NAV 50%

YRD Changzhou 333 0.1 1% Target price 2.27

YRD Hangzhou 1,903 0.4 6%

YRD Jiangyin 1,667 0.3 5%

YRD Shanghai 1,235 0.2 4%

YRD Taizhou 69 0.0 0%

PRD 14,270 2.9 43%

PRD Dongguan 2,050 0.4 6%

PRD Foshan 413 0.1 1%

PRD Guangzhou 2,241 0.5 7%

PRD Huizhou 1,808 0.4 5%

PRD Shenzhen 6,959 1.4 21%

PRD Zhuhai 800 0.2 2%

Development GAV 29,046 5.9

DISCLAIMER

For private perusal only. This report (including any information attached) is issued by China Galaxy Internation-

al Securities (Hong Kong) Co., Limited, one of the subsidiaries of the China Galaxy International Financial

Holdings Limited, to individual addressee whether they are professional, institutional client or otherwise, in

good faith from sources believed to be reliable but no representation or warranty (expressly or implied) is made

as to their accuracy, correctness and/or completeness. Where any part of the information, opinions or esti-

mates contained herein reflects the personal views and opinions of the analysts who prepared this report, such

views and opinions may not correspond to the published view of China Galaxy International Financial Holdings

Limited and any of its subsidiaries. This report shall not be construed as an offer, invitation or solicitation to buy

or sell any securities of the company or companies referred to herein. All opinions and estimates reflect the

judgment of the analyst on the date of this report and are subject to change without notice.

Please take note that member companies of China Galaxy International Financial Holdings Limited (including

but not limited to China Galaxy International Securities (Hong Kong) Co., Ltd) and/or their directors, officers,

agents and employees (―the Relevant Parties‖) may have an interest in securities of the company or companies

referred to in this report. The Relevant Parties hereby disclaim any of their liabilities arising from the inaccura-

cy, incorrectness and incompleteness of this report and its attachment/s and/or any action or omission made in

reliance thereof. Accordingly, this report must be read in conjunction with this disclaimer.

COPYRIGHT RESERVED

China Galaxy International Securities (Hong Kong) Co. Limited, CE No.AXM459, Room 3501-3507, 35/F,

Cosco Tower, Grand Millennium Plaza, 183 Queen’s Road Central, Sheung Wan, Hong Kong. General line:

3698-6888.

John Mulcahy [email protected]

Wong Chi Man, CFA [email protected]

Eric Tomter, CFA [email protected]

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Vicky Lai [email protected]

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