SOHO China [0410.HK] June 19, 2012 BUY. Investment highlights. INITIATE COVERAGE: Buying assets in weak market boosts outlook. Real Estate Sector

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1 Jun11 Aug11 Oct11 Dec11 Feb12 Apr12 SOHO China [0410.HK] INITIATE COVERAGE: Buying assets in weak market boosts outlook Investment highlights Sustained strong office demand in first-tier cities High profit margin with ability to secure projects in good location Deep discount to RNAV not justified for commercial developer with healthy balance sheet We initiate coverage of SOHO China with a BUY recommendation at a target price (TP) of HK$7.20. SOHO China develops and invests mainly in office projects in Beijing and Shanghai, and we base our positive view on the following: Riding on strong Grade-A office demand: We are positive on the Grade-A office market in Beijing and Shanghai mainly due to strong end-user and investment demand, backing up by monetary easing and continued residential market controls. Tight supply in Beijing in the near term and the high take up rate in Shanghai will keep vacancy rates in both cities in single digit. Ability to secure projects in major and sub-cbds with a track record of achieving high profit margins: SOHO China is a pure commercial property developer in Beijing and Shanghai. Its success in building landbank in Shanghai - in major CBDs and sub- CBDs - by 0.8m m 2 in 2011 rests on its healthy balance sheet, while peers/competitors faced capital constraints. We believe SOHO China will be able to keep its track record in 2012 as acquisition opportunities are still available while market liquidity is tight. Financial: We expect SOHO China s core profit to increase by an average of 86% p.a. in E from 107% revenue growth. Contracted sales in E are expected to be around RMB19bn a year, before edging down to RMB16bn in 2014E due to reduced availability of projects to sell. Gross margin will stay high at 45-55%. Valuation: We value SOHO China at HK$7.20 based on a discount rate of 30% to our RNAV estimate, with net cash in 2012E. DPS of RMB0.25 for E is expected, yielding 5.4%. Risk Factors: Two major ones are i) major slowdown in China s foreign direct investment resulting from the European crisis; and ii) acquisition targets may be unavailable. June 19, 2012 BUY Close: HK$5.61 (June 18, 2012) Target Price: HK$7.20 (+28%) Price Performance (HK$) Market Cap US$3,732m Shares Outstanding 5,189m Auditor KPMG Free Float 35.9% 52W range Real Estate Sector Turnover (RHS) 3M average daily T/O Major Shareholder Source: Bloomberg Price (LHS) (HK$ million) HK$ US$6.0m Mr/Mrs. Pan (32.0%) 0 Figure 1: Key financials RMB m Total revenue 18,215 5,685 25,960 25,081 17,123 Core profit 3,512 1,422 4,900 5,174 3,423 Core profit margin (%) EPS (RMB) - core profit BVPS (RMB) PER (x) - core profit PBR (x) Dividend yield (%) Source: Company, CGIHK Research Janus Chan, CFA (852) januschan@chinastock.com.hk John Mulcahy (852) johnmul@chinastock.com.hk 1

2 Investment Highlights We initiate coverage of the commercial property developer with BUY recommendation at TP HK$7.20 We initiate coverage of SOHO China with a BUY recommendation and a RNAV-based TP at HK$7.20/share. SOHO China is the only HK-listed China commercial property developer not affected by the current housing policy. The company will benefit from the development of Beijing and Shanghai into the national financial centre and international business hubs of China, respectively, raising office demand from domestic and international users. Its strategy to hold for yield only those properties located in prime locations and sell the rest reduces operational risk that could arise from the unstable office market. It also enables SOHO China to accumulate cash for further development. Riding on Grade-A office sector growth A number of factors favour the outlook for the Grade-A office sector in Beijing and Shanghai, including growing end-user demand, sustainable investment demand in the face of a strict housing policy against investment and speculation, and a potential further cut in reserve ratio requirement (RRR) and interest rate. Strong end-user demand keeps vacancy rate low Strong end-user demand for Grade-A office space: We have seen strong Grade-A office demand based on the number of transactions, including sales and leasing for self-use and investment in Beijing and Shanghai. Net absorption of Grade-A office properties in Beijing outpaced new supply by 510,000m 2 in 2011 and a further c.12,800m 2 in 1Q12. In 2011, total GFA of 331,028m 2 was changed from en-bloc sale to self-use. Vacancy rate for Grade-A office in Beijing has gone down from 3.8% in 4Q11 to 3.6% in 1Q12. A similar situation occurred in Shanghai in 2011 with net absorption being about 81,400m 2 more than new supply, despite a relatively slower net absorption in 1Q12 due to new Grade-A office building located in Putuo. Vacancy rate for Grade-A office in Shanghai is still low at 5.9% in 1Q12. Figure 2: Grade-A office supply and net absorption 900,000 m 2 800, , , , , , , , Q Q12 Beijing Shanghai New supply Net absorption Source: DTZ Figure 3: Key office transaction in Beijing and Shanghai during 1Q12 Project GFA (m 2 ) Purchaser Beijing: Unit price (RMB/m 2 ) Metropolis Tower 24,800 New Oriental Gp 42,400 New Times Square 82,000 Sinotrans 50,000 Boshi Xiangyuan #7 16,700 Delta Electronics 25,150 Shanghai: Oriental Financial Plaza 9,900 (2,000 retail) First Sino Bank (Taiwan based) 56,000 Int l Port Group Tower 35,300 SOE 66,000 Source: Savills The strong demand comes from a well-diversified broad base of users. For example, State Owned Enterprises (SOEs), domestic private companies, domestic and foreign financial institutions and multinational companies (MNCs), etc. While financial institutions and information technology (IT) companies have dominated foreign demand, there is increasing demand from health-care companies. Novartis recently relocated its regional headquarters to Shanghai, following competitor Roche. We expect demand for office space from domestic and foreign companies in China, especially Beijing and Shanghai, to remain strong as China remains the world s growth driver. As Beijing and Shanghai will be developed into the national 2

3 financial centre and international business hub, respectively, by 2020, most companies will choose these two cities to establish their foothold, one with close proximity to the central authority and the other is the international finance and business center of the nation. Investment demand to remain strong: We believe there are three major factors to support investment demand: Commercial property a good option to offset restrictive housing policy Further monetary easing to increase liquidity and lower net interest cost 1) Commercial property will continue to be a more secure option than residential: We believe the restrictive housing policy limiting investment and speculation, in place since 2010, will continue in the near future, but support to first-time home buyers will continue. As mortgage finance is generally not available to investors in residential properties, potential capital returns will be suppressed. On the other hand, we believe property investors, including individuals and institutions, will continue investing in commercial properties which are not subject to political risk while their outlook, especially in the first tier cities, remains healthy. 2) Potential reserve ratio requirement (RRR) and interest rate cut: Sluggish global demand and the lukewarm economic growth in China has prompted a series of RRR cuts since late 2011 and the first interest rate cut (25bp) since More economic stimuli are expected this year after Premier Wen said the key is to stabilize China s economic growth. According to a Bloomberg survey 20 economists out of 20 expect further RRR cuts of bp this year; and five of 19 economists expect an interest rate cut of 25-50bp this year. The impacts are: a) More liquidity available to commercial property investors: Banks are more willing to lend to commercial property buyers than residential property buyers as the former provides a higher interest rate margin of 170bp than the latter for the first-time home buyers if we assume mortgage rate is set at 0.85x the PBoC reference rate; and b) Lowering net interest cost: Mortgage rates for commercial properties will fall from 7.8% (1.1x of PBoC reference rate) to about 7.2% if a total interest-rate cut of 50bp is applied this year, reducing net interest cost. This compares with rental yield for Grade-A office in first tier cities of about 5-6%. On the other hand, investors expect good capital gains. Ability to secure land bank in major CBDs Originating in Beijing, SOHO China has secured good locations in Shanghai Location, location, location! The cliché for property investment is especially true for office property, as the location of business clusters typically has significant impact on demand for office space in a particular building. SOHO China has been able to secure landbank in major CBDs of first-tier cities within a short period of time. Founded in Beijing, SOHO China has projects in major CBDs such as Wangjing, Sanlitun, Zhongguanchun and Chaoyangmen, etc. Last year, the Company successfully acquired raw land and projects in Shanghai, adding seven projects in total. SOHO China now has 11 projects in Shanghai (including the recent acquisition of the Tianshan Road project in April), topping up the gross floor area (GFA) of its Shanghai projects from 0.4m m 2 in 2010 to about 1.6m m 2 as at the end of April SOHO China now has a presence in six out of eight major CBDs in Shanghai, including Huangpu, Jing an, Pudong, Hongqiao, Hongkou and Xuhui. While this is partly due to the lower competition amid the sluggish property sector and tight liquidity among developers, the strong cash flow of SOHO China has 3 allowed it to become more competitive during this period of tight liquidity.

4 Strong profitability while business risk is low Gross profit margin similar to residential despite higher land cost Reduced cyclical risk through sales of most projects SOHO China has maintained its gross profit margin (GPM) above 40%. This is comparable to residential developers which have much lower land and construction costs. We believe this is attributable to the Company s ability to acquire land or projects at competitive prices and its strong cash position. For example, SOHO China made a GPM of 71% from Zhongshan SOHO which was acquired at an average cost of about RMB28,400/m 2 based on sellable GFA but was resold two months later for RMB48,400/m 2. This is important to SOHO China as land cost accounts for 60-70% of total development as most of its sites are in the CBD area. The Company acquired seven projects in Shanghai last year when other developers were tight on liquidity and sold projects at distressed prices. On average, SO- HO China s required GPM for greenfield and brownfield projects are about 50% and 40%, respectively. SOHO China reduces cyclical risk through property sales. We favour SOHO China s strategy of selling most of its developments but retaining projects located in prime locations. Unlike residential property, demand for office space is more sensitive to the economic cycle. In other words, demand can increase quickly during boom times and fall sharply during economic downturns. This is particularly obvious for office property located in sub-cbds as their capital value and rentals are more volatile than those in CBDs and prime locations. On the other hand, due to the centralization of various related businesses in the vicinity of well-developed infrastructure in CBDs, as well as rare supply, office property in CBDs and prime locations can generally demand relatively higher prices and rentals than secondary locations. For this reason, we prefer SOHO China s strategy to sell rather than hold projects located in sub-cbds, such as Wangjing, which is between the 4 th and 5 th Ring Road in Beijing; and Hongqiao which despite its name is not convenient to the Hongqiao Transportation Hub, in Shanghai. Ready for more acquisitions with healthy balance sheet Net cash position provides strong buying power SOHO China s strong cash position of RMB11.9bn at the end of 2011 is likely to be maintained as management expects to achieve total contract sales of RMB23bn (we forecast RMB20bn) this year but major cash outflows, including unpaid land premium, construction cost and short-term debt are only about RMB12bn (including Taishan Road project acquired in April 2012). Overall, we expect SOHO China will be in a net cash position in coming years with cash balances at RMB18bn, RMB25bn and RMB32bn in E, respectively. The Company expects to spend RMB10bn on acquisitions this year. For the first five months, it has spent RMB2bn in acquiring the Taishan Road project in Shanghai. With a healthy balance sheet, SOHO China can gear up its balance sheet when more opportunities arise, giving it strong buying power. The timing for such investment capacity is excellent, as we expect there will be more acquisition opportunities emerging this year while other developers are struggling for capital as a result of tight monetary policy in the property sector. 4

5 Risks Major risks to SOHO China are decrease in China FDI and lack of acquisition targets We believe there are two major risks to SOHO China, being 1) the further impact on the global economy from the European debt crisis, which could reduce foreign direct investment (FDI) in China and thus demand for office in the near term; and 2) lack of acquisition targets for SOHO China. SOHO China could face the risk of significant profit declines after 2015 as its existing land bank will only be sufficient for development in the next 3-4 years based on our estimation. However, we see the risk for the latter is low due to potentially more asset disposal from other developers amid the tight liquidity in current market. Valuation We estimate SOHO China s RNAV at RMB per share We recommend investors BUY SOHO China and set our target price (TP) at HK$7.20, representing potential upside of 28%. Our TP is set at a 30% discount to the mid-point of our RNAV estimate based on replacement costs and discounted cash flow of expected market value. We believe SOHO China should trade at a premium to other property developers (market average is about 50% of RNAV) as most are residential developers. This is due to the visibility of sales and the likelihood that the current landbank will be developed and sold within 3-4 years. Our replacement cost-rnav estimate is based on the current price of land and construction costs spent. DCF-RNAV estimate is based on the current market price and an expected growth of 6% p.a. on average for completed and underdeveloped properties for sale, income capitalization methodology with a cap rate on net property income of 3.0% for completed investment properties, and we factor in properties for investment properties under development, at current market realizable value. All projects are then valued based on DCF analysis with a WACC of 8.4% based on Bloomberg s estimation for discounting future cash flow. Figure 4: Summary of RNAV estimate for SOHO China (RMB m) Unit value range (RMB) Capital value (replacement cost) Capital value (DCF) Properties for sale 22,697-24,320 20,490 24,049 Investment properties 34,664-34,886 18,629 18,749 Total market value 39,120 42,798 Cash 21,141 21,141 Total debt 17,631 17,631 Net cash (debt) 3,511 3,511 RNAV 42,631 46,308 RNAV per share (RMB) Source: CGIHK Research 5

6 More projects available for sales boosting contracted sales in E Earnings Outlook and Balance Sheet SOHO China s revenue comes mainly from sales of commercial properties, which account for more than 95% of total revenue. It is a function of average selling price (ASP), land bank and the pace of construction starts, i.e. GFA available for sales. Contract sales are expected to increase at an average of 19.4% per annum for E driven mainly by the increase of GFA available for sales. We expect selling prices to rise by 6% per annum on average over the same period. However, we expect overall ASP of SOHO China in 2013 to fall by about 6% due mainly to the lower contribution from retail space (14% of contract sales in 2013 compared with 30% in 2012); and partly due to the higher proportion of SKY SOHO office sales (22% in 2013E vs. 18% in 2012E), whose ASP we expect to be 20% lower than other centrally located projects. On the other hand, more projects, located between the Middle- and Inner-Ring Road in Shanghai, with higher selling prices should be launched in We expect ASP to rise by 15% YoY in Core profit to rise by an average 86% in E driven by margin expansion Net profit growth: Both revenue and core profit of SOHO China are quite volatile due to the timing of sales recognition which also depends on project completion. This is common to all developers. We estimate SOHO China s core profit to rise by an average of 86% p.a. in E due to: Revenue growth of 107% on average in 2012E-14E with major sales recognition in 2012E and 2013E; Gross margin to rise from 45% in 2011 to 49% in 2012E and 54% in 2013 on the back of more greenfield projects, which have a 10 percentage point higher gross margin than brownfield projects, to be recognized. Revenue from greenfield projects is expected to account for 73%, 94.5% and 100% of revenue in 2012E, 2013E and 2014E, respectively, versus 30% in Gross margin will stay high at 50% in 2014E; SOHO China s tax expenses comprise mainly China s corporate tax (25%) and land appreciation tax (LAT). Given uncertainty in deductible items, we estimate LAT expense based on the relatively stable ratio between LAT expenses to profit from property sales at an average of 30%; Financing cost will remain stable at an average of 5.8% in E. SOHO China may further gear up its balance if more acquisitions arise, but net gearing will be below 20% in 2012E. We assume dividend to stay at RMB0.25 per share, yielding 5.4% Dividend grows gradually. Despite the volatility of net profit to shareholders, SOHO China s policy is to maintain stable dividend distribution, depending on contract sales rather than profit. We have assumed a stable DPS for the next three years at RMB0.25. At the current stock price of HK$5.61, this implies a dividend yield of about 5.4%. Figure 5: Statistics on booked revenue and contracted sales (RMB m) Booked revenue 18,105 5,594 25,819 24,810 16,343 Contracted sales 23,810 10,913 19,561 19,071 15,552 Source: Company, CGIHK Research 6

7 Healthy balance sheet SOHO China is able to gear up its balance sheet for more acquisitions We expect SOHO China to revert back to a net cash position in 2012E after 7.4% gearing (net debt to total equity, which excludes bank deposit for loan guarantees) in The short-term cash flow disturbance is mainly due to its large acquisitions in The expected strong contract sales in 2012 (management expects RMB23 bn vs. CGHKI estimate of RMB20 bn) together with the cash balance of RMB11.9 bn at the end of 2011 will more than offset the unpaid land premium, construction cost, short-term debt and potential acquisitions. However, SOHO China expects level of debt may increase in 2012 if more acquisition opportunities arise, but will keep net gearing at less than 20%. Land bank is sufficient for about 3-4 years SOHO China s land bank of 2.4m m 2 is sufficient for 3-4 years sales Figure 6: SOHO China s land bank in Beijing SOHO China has aggressively ramped up its land bank by acquiring eight new plots and projects (including Tianshan Road project as announced in April 2012) in Shanghai since 2011 with a total consideration of RMB17.1 bn. SOHO China currently has a total land bank of 2.4m m 2, split almost equally between Beijing and Shanghai. SOHO China will hold five projects as investment properties, which have a total GFA of about 1m m 2. In other words, GFA for property development is about 1.4m m 2. Based on pre-sales expectations, construction and completion schedule, current land bank is only sufficient for SOHO China's development for the next 3-4 years. Average accommodation value (AV) of SOHO China's land bank is about RMB19,000 per m 2, a weighted average based on saleable GFA. As SOHO China focuses primarily on commercial properties, its land bank is located in central business districts (CBD) or sub-cbds. The AV of most of its projects ranges between RMB15,000-30,000 per m 2 and is relatively high when compared to residential developers whose average AV can be as low as few hundred yuan. Source: Company 7

8 Figure 7: SOHO China s land bank in Shanghai Source: Company Commercial Grade-A office market Demand for Grade-A office in Beijing and Shanghai has remained resilient since 2011, driving higher capital values and rentals Prices and rentals of Grade-A office in Beijing and Shanghai have run up strongly yearto-date as new supply has been limited while demand remains strong. Vacancy rates of Grade-A office in Beijing and Shanghai remained at low single digit of 3.8% and 4.9%, respectively, at the end of In Beijing, capital value and average rental rate (ARR) rose 38% YoY and 31% YoY to RMB50,984 per m 2 and RMB246 per m 2 per month while prices in Shanghai rose about 20% YoY and rent rose 19.2% YoY to RMB60,000 per m 2 and RMB8.5 per m 2 per day, respectively. The strong growth in Grade-A office sector has extended into 1Q12 with ARR rising by 12.6% in Beijing and 2.2% in Shanghai. Meanwhile, vacancy rates also stayed low at 3.6% and 5.9%, respectively. Looking forward, we are positive on Grade-A office in Beijing and Shanghai with limited supply in Beijing while demand for Shanghai s Grade-A office should remain strong, reflecting the city s development as an international business hub. Company overview SOHO China was listed on 8th October The Company develops and sells mainly offices, with some retail space. The Company started its business in Beijing and now has landbank in both Beijing and Shanghai of 2.4m m 2. SOHO China does both greenfield and brownfield projects, but it prefers the former as it allows the Company to add more value to the projects and to achieve a better profit margin of 10 percentage points. Nevertheless it takes longer (3-4 years) to develop a greenfield project from acquisition to completion. Sales will normally start 6-12 months after a project commences construction. SOHO China acquired most of its land through the secondary market as most CBD and sub-cbd plots in tier-1 cities are in private-sector hands. Land size in Beijing is larger, while those in Shanghai are generally smaller. As SOHO China is in a strong cash position, it has an advantage in acquiring land aggressively when liquidity in the market is tight. 8

9 Key Company Metrics Figure 8: Revenue, volume and ASP Figure 9: Revenue by products 80,000 70,000 60, % 80% 50,000 40,000 60% 30,000 40% 20,000 10,000 20% 0 Revenue (RMB'm) Volume (m 2 ) x10 ASP (RMB/sq. m) 0% Office Retail Others Figure 10: Contracted sales, GFA sold and ASP Figure 11: Completion of development for sale 70, ,000 60,000 50, ,000 40, ,000 30,000 20,000 10, , ,000 0 Contracted sales GFA sold (m 2 ) x 10 ASP (RMB/sq. m) (RMB'm) 0 GFA completed Figure 12: Cost structure 100% 80% 60% 40% 20% Figure 13: Gross Margin & Profit Margin 60 % % Cost of properties Other direct costs Selling expenses Administration expenses Finance expenses Other operating costs Income tax expense Gross margin Core profit margin Source: Company, CGIHK Research 9

10 Key Financials Income Statement (RMB) Development revenue m 18,105 5,594 25,819 24,810 16,343 Investment revenue m Other revenue m Total revenue m 18,215 5,685 25,960 25,081 17,123 Cost of Land m -6,056-1,982-8,113-4,451-4,557 Other cost of sales m -2, ,077-7,035-4,094 Total cost of sales m -8,958-2,954-13,190-11,486-8,650 Gross profit m 9,257 2,731 12,770 13,595 8,473 Operating cost m EBITDA m 8,692 2,779 11,795 12,653 7,897 Dep. & amort. m EBIT m 8,674 2,760 11,774 12,630 7,872 Net interest inc. (exp) m Chg. in fair value of IP m 165 4,027 1,897 10,588 13,455 Others m - -2,375-6,652-9,411-7,439 Profit before tax m 8,700 4,486 7,068 13,903 14,035 Corporate income tax m -1,903-1,553-2,863-5,414-5,131 LAT (Land Apprec. Tax) m -3, ,789-3,997-2,308 Minorities m ,835-1,853 Net profit m 3,637 3,892 6,135 12,067 12,182 Core profit m 3,512 1,422 4,900 5,174 3,423 Revenue growth % Gross profit growth % EBIT growth % Core profit growth % Gross profit margin % EBIT margin % Core profit margin % Payout ratio (core profit) % Cash flow (RMB) Pre-tax profit m 8,700 6,862 13,719 23,313 21,474 Chg. In working capital m 6,477-6,155 1,215 2,848 5,028 Other m -4,594-4,693-5,977-14,934-15,082 Operating cash flow m 10,583-3,986 8,958 11,227 11,420 Capex m -1,522-2,050-5,621-2,802-2,802 Net acq/disposals m Other m -2,380 3, Investing cash flow m -3,960 1,356-5,158-2,293-2,241 Net change in debt m 1,804 1,355 3, Dividends paid m -1,660-1,452-1,193-1,300-1,300 Others m Financing cash flow m ,394-1,719-1,719 Effect of FX m Net cash flow m 6,912-2,832 6,128 7,149 7,394 Free cash flow m 9,061-6,036 3,336 8,425 8,617 Balance Sheet (RMB) Cash m 17,725 11,906 18,035 25,184 32,578 Restricted cash m 3,841 3,805 3,107 3,023 2,447 Prop s held for sale m 3,881 5, Prop s under dev. for sale m 14,816 18,084 19,104 12,947 7,421 Accounts receivables m ,154 1,021 Other current assets m 1,006 5,066 2,127 2,127 2,127 Current assets m 42,060 44,755 43,920 44,965 45,703 Investment properties m 3,085 13,335 23,792 37,182 53,439 Net fixed assets m Other non-current assets m 2, ,397 1,734 1,922 Non-current assets m 5,870 14,925 25,926 39,701 56,191 Total assets m 47,930 59,680 69,845 84, ,894 Accounts payables m Deposit rec. on prop. sale m 6,720 13,199 10,070 7,200 6,805 Short term debt m 2,581 2,215 3,657 3,129 3,129 Long term debt m 8,037 11,410 13,974 14,502 14,502 Other liabilities m 9,807 8,864 12,261 17,602 22,728 Total liabilities m 27,951 36,462 40,753 42,971 47,465 Shareholders capital m 11,532 11,532 11,532 11,532 11,532 Reserves m 7,711 10,191 15,133 25,900 36,782 Minority Interests m 737 1,495 2,428 4,263 6,116 Total equity m 19,979 23,218 29,092 41,695 54,430 Total liabilities & equity m 47,930 59,680 69,845 84, ,894 ROE % ROA % Net debt (cash)/equity % Interest cover x Total asset turnover % EPS (core profit) BVPS PER (core profit) X PBR X Dividend yield % Key Assumptions WACC % Cap rate % ASP chg. % n.a. n.a ARR chg % n.a. n.a Construction cost chg % n.a. n.a GFA sold m 2 394, , , , ,917 GFA booked m 2 409, , , , ,590 Leasable area m 2 22,763 22,763 54,691 54, ,633 Source: Company, CGIHK Research 10

11 Analyst Certification The research analyst who is primarily responsible for the content of this research report, in whole or in part, certifies that with respect to the securities or issuer covered in this report: (1) all of the views expressed accurately reflect his or her personal views about the subject, securities or issuer; and (2) no part of his or her compensation was, is, or will be, directly or indirectly, related to the specific views expressed by the analyst in this report. Besides, the analyst confirms that neither the analyst nor his/her associates (as defined in the code of conduct issued by The Hong Kong Securities and Futures Commission) (1) have dealt in or traded in the stock(s) covered in this research report within 30 calendar days prior to the date of issue of this report; (2) will deal in or trade in the stock(s) covered in this research report three business days after the date of issue of this report; (3) serve as an officer of any of the Hong Kong listed companies covered in this report; and (4) have any financial interests in the Hong Kong listed companies covered in this report. Explanation on Equity Ratings BUY: We expect the total return on the stock to exceed 20% over a 12 to 18 month horizon. HOLD: We expect the total return on the stock will be between 0% to 20% over a 12 to 18 month horizon. SELL: We expect the total return on the stock will be less than 0% over a 12 to 18 month horizon. DISCLAIMER For private perusal only. This report (including any information attached) is issued by China Galaxy International 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 estimates contained herein reflects the personal views and opinions of the analyst 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 inaccuracy, 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 , 35/F, Cosco Tower, Grand Millennium Plaza, 183 Queen s Road Central, Sheung Wan, Hong Kong. General line: