Strong recurrent income, upsides from SOE reform; initiating with Buy

Deutsche Bank Markets Research Rating Buy Asia Hong Kong Property Property Company Joy City Property Date 20 May 2015 Initiation of Coverage Strong recurrent income, upsides from SOE reform; initiating with Buy Reuters Bloomberg Exchange Ticker 0207.HK 0207 HK HKG 0207 Forecasts And Ratios Year End Dec 31 2013A 2014A 2015E 2016E 2017E Sales (CNYm) 6,809.1 5,712.8 5,883.0 8,693.7 9,488.5 DB EPS FD (CNY) 0.19 0.08 0.10 0.13 0.20 PER (x) 13.8 18.1 16.2 13.1 8.4 Yield (net) (%) 0.0 0.7 0.6 0.9 1.5 Source: Deutsche Bank estimates, company data A fast-growing state-owned landlord; TP HK$4.50; implied upside 116% ________________________________________________________________________________________________________________ Deutsche Bank AG/Hong Kong Deutsche Bank does and seeks to do business with companies covered in its research reports. Thus, 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. DISCLOSURES AND ANALYST CERTIFICATIONS ARE LOCATED IN APPENDIX 1. MCI (P) 124/04/2015. Price at 19 May 2015 (HKD) 2.08 Price target - 12mth (HKD) 4.50 52-week range (HKD) 2.09 - 1.33 HANG SENG INDEX 27,591 Tony Tsang Research Analyst (+852) 2203 6256 tony.tsang@db.com Jason Ching, CFA Research Analyst (+852) 2203 6205 jason.ching@db.com Price/price relative 1.02.03.04.05.05/1311/135/1411/14Joy City PropertyHANG SENG INDEX (Rebased) Performance (%) 1m 3m 12m Absolute 33.3 41.5 9.5 HANG SENG INDEX -0.2 11.1 21.5 Source: Deutsche Bank Joy City is a 66.8%-owned property flagship of COFCO. Our positive call on Joy City is based on its quality recurrent income base, strong state-owned background (well below-peer interest cost), strong balance sheet, strong organic growth (we expect core net profit growth of 39-66% p.a. in 2015-17 on strong revenue growth with improving margins), and strong additional NAV and earnings upsides from expected further asset injections from COFCO. High-quality IP portfolio providing solid recurrent income with solid growth In contrast to most listed Chinese developers (which focus on property sales), Joy City focuses primarily on prime-location investment properties that generate recurrent income, which in our view should command higher valuation multiples. We see the following unique characteristics: 1) recurrent income makes up a high % of Joy City’s total revenue; 2) the IPs of Joy City are all located in Tier-1 and major Tier-2 cities, where consumption power is relatively strong, consumers are more mature and oversupply of new properties is less serious; and 3) it has a clear IP focus and positioning – Joy City Shopping Malls makes up the bulk of Joy City’s IP portfolio (ex hotels). SOE reform: strong upsides from potential further asset injections from COFCO Given the central government's advocacy of more SOE reforms and the big scale and diverse businesses of COFCO, we see significant NAV and earnings-accretive restructuring potential within COFCO, which should benefit Joy City via further asset injections. According to COFCO, in the next five years Joy City will maintain its strategy of focusing on Tier-1 cities and expanding into Yangtze River Delta, Bohai Rim and other key areas; it will continue to develop Joy Cities in Chengdu, Tianjin Liuwei Road, Beijing Andingmen, Shenzhen and other cities, with a total of 30 Joy City urban complexes. In our view, this implies more asset injections and we expect Tianjin Luiwei Road and Shenzhen Joy City to be the next candidates. Also, we see good potential for Joy City to realize its NAV and recycle capital by spinning off its hotel portfolio. Attractive valuations at 68% NAV discount and 0.9x P/B Our TP of HK$4.50 is based on a 30% discount to our est. NAV of HK$6.43. Our target discount is higher than that for other big state-owned developers like COLI, CR Land and Poly (given the relatively new listing status of Joy City when compared to these big SOE names), but at a premium to other privately owned peers, which we believe is appropriate given Joy City’s state-owned background and stronger financial position and financing capabilities. We adopt NAV as our primary valuation metric, in line with peers under coverage. Key risks: competition in retail market, unexpected policy/economic volatilities. 20 May 2015 Property Joy City Property Page 2 Deutsche Bank AG/Hong Kong Model updated:19 May 2015 Running the numbers Asia Hong Kong Property Joy City Property Reuters: 0207.HK Bloomberg: 0207 HK Buy Price (19 May 15) HKD 2.08 Target Price HKD 4.50 52 Week range HKD 1.33 - 2.09 Market Cap (m) HKDm 19,734 USDm 2,546