Upgrade China property to NEUTRAL
Taking rating one notch higher
After being consistently bearish on the Chinese property market for the
past 10 months, we now upgrade our rating on Chinese property to
NEUTRAL from UNDERWEIGHT for the following reasons:
1) Affordability ratio stands to improve markedly
We estimate that developers need to cut prices by at least 20% from
current level, couple with another big rate cut, to bring affordability to a
healthy level. The longer developers delay price cuts, the longer the
sector will remain in the doldrums.
2) Bearish assumptions already priced in
We have already factored in a 20% price cut scenario in our model but
even if prices are cut by more (eg, 30%) current valuations appear to
have largely factored this in. Mistrust of NAV numbers in the market will
lessen once the market has identified the level of price cut needed to get
sales volumes moving again.
3) China property deserves a premium over Asian peers
Aggressive stimulus measures and strong balance sheet for Chinese
household and government.
4) Financing environment is becoming more
accommodating
The PBOC indicated they are no longer imposing strict limits on bank
lending. Coupled with the sharp decline in lending rates and,
subsequently, mortgage rates, we expect the financing environment will
improve rather than worsen from this point on.
Our top BUY pick: Shimao Property; Upgrade Guangdong
plays too
Except for the contribution from Shanghai, no city is contributing more
than 10% of Shimao’s GAV and again diversified play deserves to trade
at premium given their lower operational risks and flexibility to adjust
prices selectively. Shimao is our top pick. We also lift our rating for three
Guangdong plays with their undemanding valuation.

Contents
We have seen enough................................................................................................... 3
Chinese property rating moves one notch higher 3
1) China property play deserves to trade at premium to regional peers 3
2) Affordability ratio stands to improve markedly 5
3) Fairly bearish assumption on price cut factored in 9
Stimulus measures come to the rescue 11
The worst is over for the financing situation 15
Sensitivity analysis ...................................................................................................... 19
Company updates ....................................................................................................... 21
Shimao Property 22
C C Land 25
Guangzhou R&F Properties 27
Country Garden 30
Agile Property 33
China Overseas Land 36
Sino-Ocean Land 39

Chinese property rating moves one notch higher
After being bearish on the Chinese property market for the past 10 months, we now
upgrade our view on Chinese property to NEUTRAL from UNDERWEIGHT for the
following reasons:
1) Chinese property plays deserves to trade at a premium over regional peers for its
aggressive stimulus measures and strong balance sheet (for Chinese household
and government);
2) We expect a sharp improvement in affordability;
3) We’ve priced a pessimistic assumption into our model, but valuation still look
reasonable; and
4) The financing situation and macro policies can only improve from now on.
We still assume property prices will go down and we estimate earnings will decline in
2009, but the heavy underperformance of China property counters had priced in many
negative outlooks. The table below shows that China property counters
underperformed their Asian peers, except for India, for the past 3- to 12 months

1) China property play deserves to trade at premium to
regional peers
We believe property China property plays deserve to trade at a decent premium to its
regional peers because:
1) The whopping RMB17t savings deposit should mean liquidity itself is not a big
concern;
2) Aggressive stimulus measures are flexing the financial muscles of the Chinese
government and demonstrating that the government can enjoy the flexibility of
adjusting its macroeconomic policies in the wake of the current crisis.

3) The subsiding inflationary pressure (4% y-y as of end-October) means the
government can roll out a more-aggressive fiscal plan to stimulate economic
growth and demand for property.
4) Our economist now forecasts GDP growth for China in 2009 and 2010 to be 8.4%
and 8.8%, respectively, which is still much higher than the estimated growth for
most Asian countries.
As shown in the chart below, Chinese property developers under our coverage (except
for COLI) are plotted below the regression line, indicating that they are cheaper than
the Asian average. The market has yet to appreciate the premium that Chinese
developers deserve to enjoy.

2) Affordability ratio stands to improve markedly
We estimate that developers need to cut prices by at least 20% from current level,
couple with another big rate cut, to bring affordability to a healthy level. The longer
developers delay price cuts, the longer the sector will remain in the doldrums.
Our economist is now expecting aggressive rate cuts of 108bp and 162bp in the next
few months (before the rate cut announced on 26 November). Coupled with our
assumed ASP cut of 20% (on average), we expect affordability for China as a whole to
improve markedly.
Again the affordability ratio is defined as average monthly mortgage payment, divided
by average monthly disposable income for a household. The higher the ratio, the less
affordable will be for home buying.
Assumptions:
1) Size of flat = 100 sqm
2) Tenure of mortgage = 30 years
Under these assumptions, the current average monthly mortgage payment (using the
current average selling price of RMB3,715/sqm and mortgage rate of 4.28%) for China
is approximately RMB1,284, representing about 34% of the average monthly
disposable income.
2.1) How does affordability change when prices change?
We have done some sensitivity analyses and found that every 5% change in average
price of a property will change our affordability ratio by 1.0ppt to 4.0ppt, depending on
how high the affordability ratio of the city is. Cities with higher affordability ratios will
have their ratios to move more in percentage points when the average price changes.
Every 5% change in the housing price moves our monthly mortgage payment by
approximately 5% as well.
If we assume that there is no change in interest rates but prices drop by 20%
from current levels (which are priced in our model for some companies), the
national affordability ratio will come down markedly from 34% to 27%, which is
deemed to be a healthy level. Price cuts are effective in improving affordability.