H O N G K O N G. R e t a i l M a r k e t M o n i t o r Wednes day, 05 Ma rch 20 14

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1 STOCK FOC US SOHO China (410 HK) Slowdown Of Commercial Property Market A Major Concern SOHO China delivered a sturdy set of 2013 results: above consensus core profit, strong margins and low gearing. It achieved better-than-expected leasing progress on its office/retail space, but we are still concerned about the possible slowdown in the office/retail rental markets in Beijing and Shanghai in coming years. Maintain HOLD with target price raised slightly to HK$6.34 to factor in the recent sale of two Shanghai projects. Entry price is HK$5.50. Net gearing maintained at a low level. SOHO China s net gearing as at end-13 was 17.5%, up slightly from 14.3% as at end-jun 13. Net debt was Rmb6,545m, above Rmb4,430m as at end-jun 13. Management guided Rmb3b-4b of construction capex and about Rmb4b of tax to be paid in each of the next few years. Hence, we expect the company s net gearing to go up in the following years as a result of its huge capex needs but cash inflow to decrease on lower sales and the still small revenue contribution from its investment properties. Management is comfortable with a net gearing level of ~40% Sales of non-core projects to boost cash. Last week, the company sold its two Shanghai projects, SOHO Hailun Plaza and SOHO Jing an Plaza, to Financial Street Holdings for a total consideration of Rmb5.23b. Gross profit from the sale of these two projects will amount to Rmb497m, according to the company, implying very thin margins. Management s explanation for this sale is that they are anticipating a downcycle for the commercial property market in China and that liquidity is likely to remain tight during the downcycle. Hence, the company would like to sell some of its non-core projects with poorer locations to obtain cash in preparation for opportunities to buy good projects at distressed levels. Besides SOHO Hailun Plaza and SOHO Jing an Plaza, other projects that could potentially be sold include Hongkou SOHO. SOHO China acquired two new projects in In 2013, SOHO China spent Rmb5.1b to acquire two commercial land plots with total GFA of about 230,000sqm in Shanghai and Beijing. The Shanghai Gubei project is primely-located in the Hongqiao Foreign Trade Center area, whereas the Beijing project is located in the Beijing Lize Financial Business District, which is a newly-planned financial CBD. Management reiterated that for its land acquisitions going forward, the location of the plot will be the top consideration. KEY INDICES Prev Close YTD HSI Index 22, HSI Futures 22, HSCEI index 9, SHCOMP 2, DJI index 16, SPX index 1, NKY index 14, DAX index 9, CAC index 4, Source: Bloomberg TOP VOLUME TENCENT HOLDINGS % HUTCHISON % WHAMPO 10 CHINA PETROLEU-H % CHINA CONST BA-H % HSBC HLDGS PLC % TOP GAINERS CHINA NETCOM TEC % BEIJINGWEST INDU % JC GROUP HOLDING % 14.9 LAUNCH TECH-H % ZHEJIANG PROS-H % 0.3 TOP LOSERS CISCO SYSTEMS % CHINA AUTOMOTIVE % 50.2 CHINA BIO-MED RE % 42.4 ZHONG FA ZHAN % 4.0 GLORY MARK LTD % 0.7 Satisfactory leasing progress. SOHO China has achieved good leasing progress at its fully-owned projects in the past year. Its first fully-owned office project, SOHO Century Plaza, is already 100% leased out, with 50% leased out to Shanghai Futures Exchange at a rental of Rmb9/sqm/day. Galaxy SOHO, its office project in Beijing, achieved a 77% occupancy rate and rental has gone up by 27% from Rmb7.5/sqm/day to reach the current Rmb9.5/sqm/day. Another of its star projects in Beijing, Wangjing SOHO, also saw strong leasing momentum with 29,000sqm of office space being leased out in less than two months. Meanwhile, its mixed-use project in Shanghai, SOHO Fuxing Plaza, has already pre-leased 41% of its retail space even though construction will not be completed until six months later. This project is located close to Xintiandi and its main tenants are in the food and beverage business, ie restaurants, bars and coffee shops. VALUATION/RECOMMENDATION SOHO China delivered a sturdy set of 2013 results with above-consensus core profit, strong margins and a low gearing. Even though the company adopted a more prudent land acquisition strategy in the past year and the progress of its leasing of its investment properties was better than expected, we are concerned about its potentially higher gearing in the following years due to the expected huge capex. Moreover, we are also concerned about the office/retail rental markets in Beijing and Shanghai as we have seen a recent slowdown in rents in both cities after significant growth in the past three years. Maintain HOLD and we raise our NAV slightly to HK$9.61/share after taking into consideration the sale of its two Shanghai projects. Applying a target discount to NAV of 34%, we arrive at a higher target price of HK$6.34. Entry price is HK$5.50. ANALYSTS David Yang ext 801 davidyang@uobkayhian.com Cynthia Chan cynthia.chan@uobkayhian.com.hk w w w. u t r a d e. c o m. h k 1

2 TRADERS COR NER China Merchants (144 ) Encountered Downtrend Line Resistance China Merchants encountered downtrend line resistance. Given the turning south of the Slow Stochastics, the stock is likely to test the previous low at HK$ If this support is breached, then increasing selling pressure will push the stock towards the deeper low at HK$25.0. Minsheng Bank (1988 ) Capped By the Downtrend Line Minsheng Bank is reversing from the downtrend line. In light of the bearish Slow Stochastics, we expect the stock to test the previous low at HK$7.16. If HK$7.16 fails to hold the stock, then deeper correction will drag the tock to the HK$ support zone. w w w. u t r a d e. c o m. h k 2

3 Li Ning (2331) Bullish Divergence Li Ning gapped up from the hammer candlestick at HK$5.37 to begin the current rally on strong volume. Given the bullish divergence of the MACD, the stock is likely to test the 0.75x retracement level at HK$6.88. Source: HKET Net ANALYST Barole Shiu, CMT w w w. u t r a d e. c o m. h k 3

4 MARKET NEWS CNOOC: Licensed to seek arctic oil China National Offshore Oil Corp, has become the first Chinese firm licensed to look for oil in the Arctic, a historic step for overseas energy exploration for China. CNOOC has partnered with Iceland s Eykon Energy to apply to explore oil and gas resources in Arctic water since last June. Iceland s national energy authority, Orkustofnun granted the new offshore license to the Company as an operator with a 60% share, 15% share to Eykon Energy and 25% share to Petoro Iceland AS. China Daily China non-manufacturing sector outperforms in February China s service sector shined in February, boosted by post-spring festival business activity, however the overall economic prospects were shadowed by a continuing slowdown in the manufacturing sector. The official services PMI rose to a three-month high of 55pts in February, up from 53.4pts in January. China Daily PBOC will begin to regulate online finance According to a member of the Chinese People s Political Consultative Conference, the Central Bank is likely to announce rules covering the fast-growing Internet finance sector by this year. Li Kemu, Vice-chairman of the China Insurance Regulatory Commission, also said that more licenses will be gradually granted to online insurance companies. China DailyCN w w w. u t r a d e. c o m. h k 4

5 Disclosures As of 05 March 2014, the analyst and his/her immediate family do not hold positions in the respective securities recommended in this report. We have based this document on information obtained from sources we believe to be reliable, but we do not make any representation or warranty nor accept any responsibility or liability as to its accuracy, completeness or correctness. Expressions of opinion contained herein are those of UOB Kay Hian (Hong Kong) Limted only and are subject to change without notice. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific addressee. This document is for the information of the addressee only and is not to be taken as substitution for the exercise of judgement by the addressee. This document is not and should not be construed as an offer or a solicitation of an offer to purchase or subscribe or sell any securities. UOB Kay Hian and its affiliates, their Directors, officers and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add to or dispose of any such securities. UOB Kay Hian and its affiliates may act as market maker or have assumed an underwriting position in the securities of companies discussed herein (or investments related thereto) and may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies. UOB Kay Hian (U.K.) Limited, a UOB Kay Hian subsidiary which distributes UOB Kay Hian research for only institutional clients, is an authorised person in the meaning of the Financial Services and Markets Act 2000 and is regulated by Financial Services Authority (FSA). In the United States of America, this research report is being distributed by UOB Kay Hian (U.S.) Inc ( UOBKHUS ) which accepts responsibility for the contents. UOBKHUS is a broker-dealer registered with the U.S. Securities and Exchange Commission and is an affiliate company of UOBKH. Any U.S. person receiving this report who wishes to effect transactions in any securities referred to herein should contact UOBKHUS, not its affiliate. The information herein has been obtained from, and any opinions herein are based upon sources believed reliable, but we do not represent that it is accurate or complete and it should not be relied upon as such. All opinions and estimates herein reflect our judgement on the date of this report and are subject to change without notice. This report is not intended to be an offer, or the solicitation of any offer, to buy or sell the securities referred to herein. From time to time, the firm preparing this report or its affiliates or the principals or employees of such firm or its affiliates may have a position in the securities referred to herein or hold options, warrants or rights with respect thereto or other securities of such issuers and may make a market or otherwise act as principal In transactions in any of these securities. Any such non-u.s. persons may have purchased securities referred to herein for their own account in advance of release of this report. Further information on the securities referred to herein may be obtained from UOBKHUS upon request. MCI (P) 122/03/2013 RCB Regn. No E w w w. u t r a d e. c o m. h k 5