Don’t catch a falling knife

􀂄 Tougher economic outlook

The economic environment within which the China property sector operates has

changed in 2008, for the worse. Softening investment and exports will likely be a

drag on income and consumption growth, slowing any recovery in the currently

consolidating property market.

􀂄 More home price falls in September/October sales season

Challenging affordability and weak sentiment, coupled with a flurry of project

launches by cash-strapped developers in the September/October sales season, could

result in further price declines. High-end housing may not be immune due to low

rental yields and a stronger US dollar.

􀂄 Sector still faces high 2009 earnings risk

We estimate that for every 5% decline in price, developer NAVs and earnings

would come down 6-7% and 6-17%, respectively. Given a likely further decline in

selling prices, we think consensus 2009 earnings estimates could face further

downgrades.

􀂄 Initiate coverage of CMP and Gemdale with Sell, and Poly with Neutral

We initiate coverage of China Merchants Properties (CMP) with a Sell rating

because we believe it missed out on the key stage of property development growth.

We initiate coverage of Gemdale with a Sell rating because of its rapid expansion

without due attention to cost control, in our view. We initiate coverage of Poly

Real Estate Group (Poly) with a Neutral rating owing to its strong fundamentals

and good execution ability but fair valuation.