Credit Suisse 20100614 china property policy outlook 1

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14 June 2010Asia Pacific/ChinaEquity Research

Real Estate

China Property Policy Outlook: 1THEME

Property tax: would it crash the market? Figure 1: China’s proposed solutions to its housing issue

Middle class

Low-income population

Investors/speculators

Property tax (near-term)

Double wages (five-year plan)

Public housing (long term but start now?)

Source:Credit Suisse research

China has decided to extend the holding tax for commercial properties to investment-purpose residential ones. Many industry experts and popular media believe that the property tax could cause China’s residential property prices to drop 40% or more.

■ The implementation may signal a bottoming; a crash is unlikely. We believe the potentially upcoming implementation of property tax may signal a bottoming for China property stocks’ prices, and it is unlikely to crash the physical property markets. The property tax is just one component of China’s property policies, and it should mainly affect near-term sentiments. China’s housing solutions are likely to combine property tax with the wage increase measures to increase housing affordability and the large-scale construction of public housing for lower income population.

■ Other countries’ experience also shows a property tax usually does not crash property markets. We draw this conclusion after studying the implementation of property tax in recent decades in many countries, especially South Korea and Mexico.

■ China’s planned property tax seems to have limited monetary impact in its current form. Our scenario analysis of Shanghai’s proposal shows that it should only be 5-6% of average mortgage payments – an impact even smaller that that caused by a major interest rate increases.

This report is the first of our China Property Policy Outlook series.

Research Analysts Jinsong Du

852 2101 6589 [email protected]

Raymond Cheng, CFA 852 2101 6945

[email protected]

Ronney Cheung 852 2101 7472

[email protected]

Asia Property Research Analysts Ernest Fong

(Head of Asia Property Research)

Anand Agarwal (India)

Raymond Cheng (China)

Jinson Du (China)

Cusson Leung (Hong Kong)

Teddy Oetomo (Indonesia)

Tricia Song (Singapore)

Chai Techakumpuch (Thailand)

Tan Ting Min (Malaysia)

Sidney Yeh (Taiwan)

Research Assistants Ronney Cheung

(China)

Joyce Kwock (Hong Kong)

14 June 2010

China Property Policy Outlook: 1 2

Focus charts Figure 2: Relative performance (%) of Credit Suisse China Property indice performance vs MSCI China (1 March to current) – property tax has been the key factor

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CS China P roperty Share Price Index (rebased)

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8th Apr il : Rumour that property tax will be firs tly implemented in the 4 f irst tier cities 17th Apri l : State Council iss ued 10 tightening

measures but no ment ioning of the property tax was in p lac e.

12th May : Media reported that Shanghai government is in the progress of drafting the property tax proposal - details include the possib ility of property tax to be levied at 0.8% p.a

17th May: An assistant manager of NDRC cited that property tax will not be implemented at least in 3 yr's time24th May : NDRC refuted the c omment above

(%)

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CS China P roperty Share Price Index (rebased)

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8th Apr il : Rumour that property tax will be firs tly implemented in the 4 f irst tier cities 17th Apri l : State Council iss ued 10 tightening

measures but no ment ioning of the property tax was in p lac e.

12th May : Media reported that Shanghai government is in the progress of drafting the property tax proposal - details include the possib ility of property tax to be levied at 0.8% p.a

17th May: An assistant manager of NDRC cited that property tax will not be implemented at least in 3 yr's time24th May : NDRC refuted the c omment above

(%)

Source: Datastream; Credit Suisse research

Figure 3: South Korea – price index before and after implementation of property tax

Figure 4: Mexico – property price index before and after implementation of property tax

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2,000

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Source: Government websites Source: Government websites

Figure 5: Valuation summary – China developers Share Target +/- Mkt Current (Disc)/ +12M (Disc)/ Yield P/B Net Price Price Cap NAV Prem NAV Prem Core PE (x) (%) (x) Gearing

Company RIC Rating (HK$) (HK$) (%) (US$b) (HK$/sh) (%) (HK$/sh) (%) FY09 FY10 FY11 FY09 FY10 FY10 (%)

China developers

China Overseas Land 0688.HK O 14.60 17.70 21 15.3 16.88 (14) 19.68 (26) 15.9 15.4 13.4 1.4 2.5 59.5

China Resources Land 1109.HK O 14.50 17.00 17 9.4 21.66 (33) 24.29 (40) 22.5 15.2 12.2 1.6 1.9 44.5

China Vanke - A (Rmb) 000002.SZ O 7.15 9.50 33 10.1 8.50 (16) 10.50 (32) 14.8 11.0 10.7 1.0 2.2 34.6

China Vanke - B 200002.SZ O 7.53 7.90 5 1.3 9.66 (22) 11.93 (37) 13.7 10.1 9.9 0.9 2.0 34.6

Evergrande 3333.HK N 2.39 2.40 0 4.6 5.97 (60) 6.09 (61) 137.1 4.4 4.1 0.1 0.6 20.4

Greentown 3900.HK U 8.35 8.30 (1) 1.6 15.95 (48) 16.62 (50) 15.6 9.1 6.9 3.6 1.2 169.1

Guangzhou R&F 2777.HK N 9.88 9.80 (1) 4.1 15.80 (37) 17.80 (44) 11.1 7.7 6.8 4.1 1.4 109.7

Hopson 0754.HK N 8.93 9.90 11 1.7 22.00 (59) 24.80 (64) 5.3 4.7 3.6 2.8 0.5 42.0

Kaisa 1638.HK O 1.59 2.10 32 1.0 4.90 (68) 5.30 (70) 16.8 5.0 8.3 n.a 1.1 58.9

KWG 1813.HK O 4.43 5.90 33 1.6 10.10 (56) 10.70 (59) 14.6 8.6 7.4 1.1 1.0 70.2

Poly (A) 600048.SS O 11.05 17.30 57 6.5 16.70 (34) 19.20 (42) 10.4 10.6 8.0 1.4 1.4 66.5

Poly (Hong Kong) 0119.HK O 7.27 9.90 36 3.0 12.20 (40) 14.10 (48) 25.2 19.6 13.5 0.6 1.2 52.9

Shimao Property 0813.HK O 11.80 14.10 19 5.4 17.66 (33) 20.20 (42) 13.4 9.5 8.5 2.5 1.5 78.5

Sino Ocean 3377.HK O 5.67 8.00 41 4.1 9.60 (41) 11.44 (50) 21.4 12.1 10.6 1.4 1.1 45.1

Source: Prices are as of 10th Jun, Bloomberg;Company data, Credit Suisse estimates

14 June 2010


Property tax: would it crash the market? China has decided to extend the holding tax for commercial properties to investment-purpose residential ones, to avoid legislation issues for implementing a new property tax. Several industry experts, including those that we brought to meet investors recently, believe that the property tax could cause China’s residential property prices to drop 40% or more. In our opinion, however, property tax is just one component of China’s property policies – it should not crash the property market and its upcoming implementation could actually signal a bottoming in China’s property sector.

Property tax – only part of the housing solution We expect it to cool the sentiment in the near term for investment and speculation in the property market, but property tax by itself cannot solve the housing issue.

The Ministry of Human Resources and Social Security’s proposal to double average wages in China within five years, if approved and implemented, should improve the affordability ratio significantly. The Ministry of Housing and Urban-Rural Development also announced plans of large scale Public Housing construction. If this plan is implemented strictly, we should see a surge in public housing supply in the next few years, although the total amount may stay small in the forseeable future – as of 2009, public housing stock accounted for less than 5% of total housing stock in China.

Other countries’ experience – it’s unlikely to crash the market We draw this conclusion after studying the property tax situation in many countries. Specifically, we studied countries that started to implement property tax only in recent decades, such as South Korea and Mexico – both started to implement property tax in a hope to reverse the surge of property prices – just like China. Neither of the two countries’ implementaton of property tax caused a crash in the property market.

China’s current plan – limited monetary impact Based on the current plan’s tax rate, scope and difficulties on implementation, we expect the impact on the property market to be less than what the current stock market assumes. Our detailed scenario analysis also shows that, even if the full amount of property tax can be successfully collected, the monetary impact on home-buyers should be manageable.

In fact, scenario analysis on Shanghai’s proposal shows that the new property tax’ net impact on monthly payments shoud be only 5% to 6% – an impact even smaller that that caused by a major interest rate increases.

A gradual reform – no near-term replacement for land sales One of the key targets for property tax is to reduce the local government’s reliance on land sales as the main financing resource. However, this goal cannot be realised in the foreseeable future, in our view.

Land sales has been an important source of revenue for local governments and property tax has been below 4% of local government revenue. Therefore, as discussed earlier in this report, local governments may be willing to implement property tax for additional revenue, but will have to continue to rely heavily on land sales for years to come, in our view.

China has decided to extend the holding tax for commercial properties to investment-purpose residential ones

We expect it to cool the sentiment in the near term for investment/speculation in the property market

South Korea and Mexico’s implementaton of property tax did not crash the market

Scenario analysis on Shanghai’s proposal shows that the new property tax’s net impact to monthly payment shoud be around 5% to 6% only

Local governments may be willing to implement property tax for additional revenue, but will have to continue to heavily rely on land sales for years to come, in our view

14 June 2010


Property tax – only part of the housing solution We expect the property tax to cool near-term sentiment for investment/speculation in the property market. This is likely to be in combination with the wage rise measures to increase housing affordability and the large-scale construction of public housing for lower income population.

Property tax has undoubtedly been the key factor for the China property sector’s recent performance Ever since Chongqing’s Mayor disclosed on 24 March that the city has submitted a proposal for property tax implementation to the state council, every new information on property tax has resulted in turbulence in China’s property stocks.

Figure 6: Relative performance (%) of Credit Suisse China Property index performance vs MSCI China (1 March to current) – property tax has been the key factor

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CS China Property Share Price Index (rebased)

24th Mar : Chongqing government announced its has subitted its proposal of the implementation of property tax

8th April : Rumour that property tax will be firs tly implemented in the 4 f irst tier cities 17th April : State Council issued 10 tightening

measures but no mentioning of the property tax was in place.

12th May : Media reported that Shanghai government is in the progress of drafting the property tax proposal - details include the possibility of property tax to be levied at 0.8% p.a

17th May: An assistant manager of NDRC cited that property tax will not be implemented at least in 3 yr's time24th May : NDRC refuted the comment above

(%)

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CS China Property Share Price Index (rebased)

24th Mar : Chongqing government announced its has subitted its proposal of the implementation of property tax

8th April : Rumour that property tax will be firs tly implemented in the 4 f irst tier cities 17th April : State Council issued 10 tightening

measures but no mentioning of the property tax was in place.

12th May : Media reported that Shanghai government is in the progress of drafting the property tax proposal - details include the possibility of property tax to be levied at 0.8% p.a

17th May: An assistant manager of NDRC cited that property tax will not be implemented at least in 3 yr's time24th May : NDRC refuted the comment above

(%)

Source: Datastream; Credit Suisse research

Why have local governments become much more interested? This version of property tax is different

The public debate on implementing property tax has been ongoing since 2004 and local governments have shown no interest in it. Why have local governments become much more interested in implementing it this time? After Chongqing, many other cities such as Shanghai, Wuhan and Jinan have also reportedly submitted similar proposals. The key reason, in our view, is the central government’s decision to extend the holding tax for commercial properties to investment-purpose residential ones, in order to avoid legislation issues for implementing a new property tax.

A new property tax needs the People’s Congress’ approval as a formal law, which cannot avoid the debate on whether to remove land premium charges during local government’s land sales. This is because the land premium payment is widely considered a one-off payment of property use rights/taxes and many believe the formal property tax should

We expect the property tax to cool near-term sentiment for investment/speculation

Recently, every new piece of information on the property tax has caused China property stock turbulence

Local governments were previously worried that the implementation of property tax may take away land premium payments

14 June 2010


replace land premium – the key financing sources for local governments. Therefore, local governments have been against this new, formal property tax.

On the other land, by extending the holding tax for commercial properties (according to a tax law established as early as 1986) to residential properties, local governments can continue to charge a land premium while gaining an additional type of tax revenue. It is not surprising that the local governments nowadays are much more interested in implementing this version of a property tax.

Figure 7: The key messages from the property tax as implemented in 1986 Early establishment of the property tax law and its main points September 1986 Property tax shall be (A) 1.2% if calculated on the basis of the residual value of a building; or (B) 12% if it is calculated on the basis of rental For (A) – the taxable value of the building is subject to a reduction of 10-30% from its original value, the % of reduction

depending on each local government's ruling The following are exempt from property tax: 1) properties owned and used by government agencies, military units and social organisations 2) State-allocated housing (e.g. those SOE units that were allocated to staff) 3) buildings used for parks, scenic spots and historical sites 4) properties not for operating / investment uses ( i.e. tax is levied on those that are for commercial use only) 5) Others as approved by the relevant or locat authority

Source: State Administration of Taxation

Property tax is likely to become transaction-based rather than a holding tax Due to the difficulties in tax administration and collection at the local level, residential property-related taxes – from land sales markets to secondary housing markets – are all collected after transactions are through. According to industry experts, although property tax is designed to be a holding tax, it may become feasible to collect upon changes of ownership. In this case, the property tax may actually propel property price appreciation in the long term, although the negative market sentiment in its implementation causes could reduce property prices in the near term.

In fact, all residential related taxes currently are transaction-based. The following table summarises the various taxes for residential properties.

Figure 8: When the land was purchased … Type Taxpayers Taxation base Tax rate (%)Deed tax Developers with land use right certificates Cost of obtaining the land use rights 3Stamp duty (on contract) Developers with land use right certificates Contractual price of the property 0.05Stamp duty (on land use rights) Developers with land use right certificates Per document Rmb5 per documentFarmland use tax Occupants of the land Usable area of the farmland Rmb5-50 per sq m


Figure 9: When the property was purchased from developers … Type Taxpayers Taxation base Tax rate (%)Deed tax Developers with land use right certificates Cost of obtaining the land use rights 3Stamp duty (on contract) Developers with land use right certificates Contractual price of the property 0.05Stamp duty (on land use rights) Developers with land use right certificates Per document Rmb5 per documentFarmland use tax Occupants of the land Usable area of farmland Rmb5-50 per sq m


The current version of the property tax allows local governments to continue to charge land premiums while gaining an additional type of tax revenue

Although property tax is designed to be a holding tax, it may only become feasible to collect upon changes of ownership

14 June 2010


Figure 10: When the home ownership changes hands … Type Taxpayers Taxation base Tax rateBusiness tax Seller a. General commodity housing: 5.50 If holding period < 5 yrs, then it's 5.5% on the capital gain If holding period > 5 yrs, then it's exempt from business tax b. Non-general commodity housing If holding period < 5 yrs, then it's 5.5% on the sales amount If holding period > 5 yrs, then it's 5.5% on the capital gain Personal income tax Seller Capital gain (with document of proof in relation to cost of the property) 20 Sales amount (without document of proof in relation to cost of the property) 1LAT Seller Sales amount Ordinary housing: exempt; Non-ordinary housing: if holding period > 5 yrs: exempt; 3-5 yrs: 50% of tax; <3 yrs: standard cal.Stamp duty (on contract) Sellers and home buyer Sales amount 0.30Stamp duty (on land use rights) Home buyer Per document Rmb5 per documentDeed tax Home buyer Contractual price of the property General residential: 1.5


Limitations determine that property tax itself cannot be the solution to China’s housing problem Given the limitations discussed above, we believe the implementation of property tax itself cannot solve China’s housing problems. More sustainable measures include the wage increase to raise housing affordability and the large-scale construction of public housing for the lower income population.

Recently, the Ministry of Human Resources and Social Security submitted its proposal to double average wages in China within five years. If this proposal is approved and implemented, the affordability ratio in China should improve significantly. Earlier this year, the Ministry of Housing and Urban-Rural Development also announced plans of large scale Public Housing construction, and signed agreements with local goverments to start the construction with scale within 2010. If this plan is implemented strictly, we should see a surge in public housing supply in the next few years, although the total amount may stay small in the forseeable future – as of 2009, public housing stock took up less than 5% of total housing stock in China.

Figure 11: China’s proposed solutions to its housing issue

Middle class

Low-income population

Investors/speculators

Property tax (near-term)

Double wages (five-year plan)

Public housing (long term but start now?)

Source: Credit Suisse research

We believe the implementation of property tax itself cannot solve China’s housing problem

14 June 2010

China Property Policy O

utlook: 1 7

Figure 12: A brief history of China’s property-related policies vs property prices and volume changes

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Stimulate demand (98-99)1998: Housing reform: Abolished the state-allocated housing policy & introduced the transfer of state-owned land use rights1999: Maximum mortgage term extended to 30 yrs and max. mortgage financing increased from 70% to 80%

Stablise supply (02-042002: Rules regarding grant of Land Use Rights by way of 1. Tender, 2. Auction or 3. Lis ting for sale were issued. )

Suppress demand (05-07)2005-07: The 70/90 rule was introduced. Required down payment ratio raised from 20% to 30% for 1st home buyers. Benchmark lending rate raised by 27bpts to 7.47% - a totalof six t imes in 07

Stimulate demand (08)2008: Reduced the discount to frm 15% to 30% for 1st home buyers. Reduced down payment ratio from 30% to 20% for 1st home buyer. Reduced of deed taxfrom 1.5% to 1%. Business tax for individual pptytransactions is exempt if holding period > 2 years.

Suppress demand End 2009-10:

Min down payment is at 50% of the total land

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Source: CEIC, Credit Suisse research

14 June 2010


Other countries’ experience – it’s unlikely to crash the market We studied property tax policies in other countries and conclude that property tax should be a common practice and not a main factor for property price changes.

Figure 13: Property-related tax policies in other countries Country Type Tax payers Taxable items Taxation base Tax rate (%)US Property tax Property owners Property Current market value of the property 0.12-3.05 Land Current market value of the land 1France Land tax Owner of land Land and property Est. rental income 3-10 Residency tax Owners or tenants Property Est. rental income 5-13England City tax Owners or tenants Residential Current market value of property 0.67-2 Commercial property

tax Owners or tenants (non-residential)

Non-residential Est. rental income ~40

Chille Fixed assets tax Owners of all fixed assets

All types of buildings (including property)

Cost of the building 2

Japan Fixed assets tax Owners All types of fixed assets

Market value (revalued once every three years)

1.4%;capped at 2.1

Singapore Property tax Owners/Government assigned land lords

Private and public housing

Rental income Self-use: progressive: first S$6,000 taxed at

0%; Next S$50,000 at 4%; >S$65,000 at 6%

Other purpose: 10%

Hong Kong Rates Owners Property Est. rental income 5 Goverent rent Owners Property Est. rental income 3 Property tax Owners Property Rental income 15Taiwan Land tax Land owners Land Government appraisal value 0.2-5.5 Property tax Property owners Property Government appraisal value Residential: 1.2 Non-residential: 1.5-5Source: Relevant Tax Authorities

Specifically, we studied countries that only started to implement property tax in recent decades, such as South Korea and Mexico – both started to implement property tax in a hope to reverse the surge of property prices – just like China. Neither of the two countries’ implementaton of property tax caused a crash in the property market.

The property tax in both South Korea and Mexico is based on the value of property and collected at a progressive rate, e.g. the higher the value, the higher the rate.

For Mexico, the rate is 0.275-1.35% and was implemented in 1999. From the price chart below, it had some impact on price, as reflected by a 4% YoY decline in prices for 2000. But the impact seems to have been short-lived, as prices resumed their upward trend later.

For Seoul, it was first implemented in 1988 and revised in 2006. The rate is from 1-3%. From the chart below, we can see that the implementation of property tax seems to have not had much impact on property prices, which continued to rise after its implementation/ revision.

Neither South Korea nor Mexico’s implementation of property tax caused a crash in the property market

Both South Korea and Mexico started to implement property tax to try to reverse the surge in property prices

14 June 2010


Figure 14: South Korea – price index before and after implementation of property tax

Figure 15: Mexico – property price index before and after implementation of property tax

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99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Dec 08 = 100



0

2 0

4 0

6 0

8 0

10 0

12 0

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan

-96

Jan

-97

Jan

-98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Dec 08 = 100



0

2 0

4 0

6 0

8 0

10 0

12 0

Jan-

86

Jan-

87

Jan-

88

Jan-

89

Jan-

90

Jan-

91

Jan-

92

Jan-

93

Jan-

94

Jan-

95

Jan

-96

Jan

-97

Jan

-98

Jan-

99

Jan-

00

Jan-

01

Jan-

02

Jan-

03

Jan-

04

Jan-

05

Jan-

06

Jan-

07

Jan-

08

Jan-

09

Jan-

10

Dec 08 = 100



2,000

3,0004,000

5,000

6,000

7,0008,000

9,000

10,000

11,00012,000

1994 1996 1998 2000 2002 2004 2006 2008

(Peso/sqm)


2,000

3,0004,000

5,000

6,000

7,0008,000

9,000

10,000

11,00012,000

1994 1996 1998 2000 2002 2004 2006 2008

(Peso/sqm)


Source: Government websites Source: Government websites

14 June 2010


China’s current plan – limited monetary impact Based on the current plan’s tax rate, scope and difficulties on implementation, we expect the impact on the property market to be less than what the current stock market assumes. Our detailed scenario analysis also shows that, even if the full amount of property tax can be successfully collected, the monetary impact to home buyers should be manageable.

Shanghai’s proposal targets only large-size property with only 0.8% tax rate The recent public attention on property tax has focused on Shanghai. Shanghai is said to have submitted proposals to implement property tax. The recently discussed tax rate is about 0.6-0.8% – at the low end of the international range. The scope of property tax is also limited to families with more than one property and the taxable property size more than 70 sq m per person.

Figure 16:The two version of Shanghai’s proposal for property tax – their conditions: Proposal A – “the milder” plan Proposal B – the “stricter” plan Implementation date The property would be subject to a property tax if the

property is bought after the date of implementation (i.e. property purchased before that would not be subject to property tax) AND

A property tax would be levied on all properties bought irrespective of the date of implementation AND

Unit size The purchase is a 2nd purchase with an average unit size > 70 sq m per capita or 3rd or more purchase of any unit size (i.e. first purchase would not be subject to property tax)'

The purchase is a 2nd purchase with an avg. unit size > 70 sq m per capita or 3rd or more purchase of any unit size (i.e. first purchase would not be subject to property tax)'

Source: Company data, Credit Suisse estimates

More importantly, since the current version of the residential property tax is an extension of the 1986 tax law currently used only for commercial properties, the residential property tax would very likely follow the following principles:

1) The tax is based on the purchase value of the property, rather than current market value;

2) The taxable amount is 70-90% of the purchase value.

Property tax’s impact would be similar to interest rate increase for those who buy and hold For home buyers that have no plans to sell their property in the foreseeable future, the property tax can be viewed as a payment similar to mortgage payments.

Using Shanghai as an example, the proposed policy implies a taxable unit should be at least 140 sq m for a couple with no children. Therefore, the minimal value of an housing unit in Shanghai city area should be around Rmb3 mn in order to be affected by the new property tax policy. The tables below shows that the new property tax should only be 5% to 6% of average mortgage payments – even smaller impact than what a major interest rate increase can cause.

Shanghai is said to have submitted proposals to implement property tax

Scenario analysis shows that the new property tax’ net impact to monthly payment shoud be around 5% to 6% only – even smaller impact than what a major interest rate increase can cause

14 June 2010


Figure 17: Additional mortgage payment incurred based on Proposal A & B of the above Ppty tax rate 0.60% 0.80% 1.00% A. Sales amount = Rmb 3mn Yearly mortgage payment: without property tax - Rmb 134,330 134,330 134,330 Yearly total payment: with property tax - Rmb 140,711 142,870 145,045 Additional payment per year - Rmb 6,381 8,540 10,715 Additional payment per year - % 5% 6% 8% B. Sales amount = Rmb 6mn Yearly mortgage payment: without property tax - Rmb 223,883 223,883 223,883 Yearly total payment: with property tax - Rmb 234,518 238,116 241,742 Additional payment per year - Rmb 10,634 14,233 17,859 Additional payment per year - % 5% 6% 8% C. Sales amount = Rmb 10mn Yearly mortgage payment: without property tax - Rmb 447,767 447,767 447,767 Yearly total payment: with property tax - Rmb 469,035 476,233 483,484 Additional payment per year - Rmb 21,268 28,466 35,718 Additional payment per year - % 5% 6% 8%

Source: Credit Suisse estimates

Detailed calculation of Scenario A - C above

Figure 18: Property tax impact on mortgage rate for 2nd home buyers – if sales value = Rmb3 mn Case 1 Case 2 Case 3 Property holding tax (%) 0.60% 0.80% 1% Property purchase value (Rmb 3,000,000 3,000,000 3,000,000 Before property tax Mortgage payment per year (for a 25-year mortgage with interest rates = average of 2007-curent)

134,330 134,330 134,330

After property tax Property tax needs to be paid ^ 7,200 9,600 12,000 Mortgage payment per year 140,711 142,870 145,045 Increase in total payment per year (Rmb) 6,381 8,540 10,715 Increase in total payment per year (%) 5% 6% 8%

Source: Credit Suisse estimates: ^ assuming there will be a 20% reduction of the original property value

Figure 19: Impact of property tax on mortgage rate for 2nd home buyers – if sales value = Rmb6 mn Case 1 Case 2 Case 3 Property holding tax (%) 0.60% 0.80% 1% Property purchase value (Rmb 5,000,000 5,000,000 5,000,000 Before property tax Mortgage payment per year (for a 25-year mortgage with interest rates = average of 2007-curent)

223,883 223,883 223,883

After property tax Property tax needs to be paid ^ 12,000 16,000 20,000 Mortgage payment per year 234,518 238,116 241,742 Increase in total payment per year (Rmb) 10,634 14,233 17,859 Increase in total payment per year (%) 5% 6% 8%

Source: Credit Suisse estimates;^ assuming there will be a 20% reduction of the original property value

14 June 2010


Figure 20: Impact of property tax on mortgage rate for 2nd home buyers –if sales value = Rmb10mn Case 1 Case 2 Case 3 Property holding tax (%) 0.60% 0.80% 1% Property purchase value (Rmb 10,000,000 10,000,000 10,000,000 Before property tax Mortgage payment per year (for a 25-year mortgage with interest rates = average of 2007-curent) 447,767 447,767 447,767

After property tax Property tax needs to be paid ^ 24,000 32,000 40,000 Mortgage payment per year 469,035 476,233 483,484 Increase in total payment per year (Rmb) 21,268 28,466 35,718 Increase in total payment per year (%) 5% 6% 8% Source: Credit Suisse estimates;^ assuming there will be a 20% reduction of the original property value

For the sell-at-higher-price type, property tax is likely to be treated as a transaction cost For home buyers that plan to sell their property in the foreseeable future, the property tax can be viewed as part of the transaction costs.

As discussed earlier in this report, the table below shows that currently total taxes for secondary housing transactions should be around 10% of the transaction value or higher (depending on the capital gains tax). If the home buyer sells the property five years after the purchase, the cumulative property tax should be 2.4-3.2% of the purchase value (with a property tax rate of 0.6-0.8%). Therefore, property tax as part of the transaction costs should be manageable as well – especially if the costs are borne jointly by both the seller and the buyer.

Figure 21: When the home ownership changes hands … Type Taxpayers Taxation base Tax rate (%)Business tax Seller a. General commodity housing: 5.50 If holding period < 5 yrs, then it’s 5.5% on the capital gain If holding period > 5 yrs, then it's exempt from business tax b. Non-general commodity housing If holding period < 5 yrs, then it's 5.5% on the sales amount If holding period > 5 yrs, then it's 5.5% on the capital gain Personal income tax Seller Capital gain (with document of proof in relation to cost of the property) 20 Sales amount (without document of proof in relation to cost of the property) 1LAT Seller Sales amount Ordinary housing: exempt; Non-ordinary housing: if holding period > 5 yrs: exempt; betw 3-5 yrs: 50% of tax; <3yrs: standard cal.Stamp duty (on contract) Sellers and home buyer Sales amount 0.30Stamp duty (on land use rights) Home buyer Per document Rmb5 per documentDeed tax Home buyer Contractual price of the property General residential: 1.5


Property tax as part of the transaction costs should be manageable as well – especially if the costs are borne jointly by both the seller and the buyer

14 June 2010


A gradual reform – no near-term replacement for land sales One of the key targets for property tax is to reduce the local government’s reliance on land sales as the main financing resource. However, this goal cannot be realised in the foreseeable future, in our view.

As shown in the two tables below, land sales has been an important source of revenue for local governments, and property tax has been below 4% of local government revenue. Therefore, as discussed earlier in this report, local governments may be willing to implement property tax for additional revenue, but will have to continue to heavily rely on land sales for years to come, in our view.

Figure 22: Top 10 cities’ land sales vs local government revenue (2009) Land Land sales revenue to the local Local government Land sales revenue / local sales government (assuming 70% revenue government revenueCity (Rmb bn) allocation) (Rmb bn)* (excluding land sales) (excluding land sales) (%)Hangzhou 112 79 52 151Shanghai 103 72 254 28Beijing 93 65 203 32Tianjin 74 52 82 63Guangzhou 48 34 70 48Chongqing 45 31 68 46Ningbo 42 29 43 68Wuhan 36 25 32 80Chengdu 36 25 39 64Foshan 34 24 25 94

Source: Company data, Credit Suisse estimates; *assume 70% being allocated to local government

Figure 23: Government’s tax revenue breakdown Local govt’s (Property + Urban Land tax) /Year Total tax Local govt’s revenue Property Urban Local govt’s revenue(Rmb bn) revenue tax revenue (ex. land sales) tax land tax (ex. land sales) (%)1998 909 295 498 16 5 4.21999 1,032 331 560 18 6 4.32000 1,267 373 641 21 7 4.42001 1,517 472 480 23 7 6.32002 1,700 531 852 28 8 4.22003 2,047 630 985 32 9 4.22004 2,572 786 1,189 37 11 4.02005 3,087 953 1,510 44 14 3.82006 3,764 1,145 1,830 52 18 3.82007 4,945 1,503 2,357 58 39 4.1Up to 3Q08 4,606 1,426 2,865 49 61 3.8Source: State Administration of Taxation

14 June 2010


Appendix I – Affordability index Figure 24: Affordability index – 1st time buyers - national Figure 25: Affordability index – 1st time buyers - Beijing

National Housing affordability

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug-

07Se

p-07

Oct

-07

Nov-

0720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug-

08Se

p-08

Oct

-08

Nov-

0820

08M

ar-0

9A

pr-0

9M

ay 0

9Ju

n 09

July

09

Aug

09S

ept 0

9O

ct 0

9No

v 09

Dec

09

Jan

10Fe

b 10

Mar

10

Apr

il 10

4

5

6

7

8

9

10

Price to Income multiple (RHS)Affordability index (LHS)

Getting more expensive

Getting less expensive

National Housing affordability

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07Fe

b-07

Mar

-07

Apr

-07

May

-07

Jun-

07Ju

l-07

Aug-

07Se

p-07

Oct

-07

Nov-

0720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug-

08Se

p-08

Oct

-08

Nov-

0820

08M

ar-0

9A

pr-0

9M

ay 0

9Ju

n 09

July

09

Aug

09S

ept 0

9O

ct 0

9No

v 09

Dec

09

Jan

10Fe

b 10

Mar

10

Apr

il 10

4

5

6

7

8

9

10




Bejing Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun

08Ju

ly 08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr

-09

May

09

Jun

09Ju

ly 0

9A

ug 0

9S

ept 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pril

10

24681012141618202224

Price to Income multiple (RHS) Affordability index (LHS)



Bejing Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

160%

180%

200%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun

08Ju

ly 08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr

-09

May

09

Jun

09Ju

ly 0

9A

ug 0

9S

ept 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pril

10

24681012141618202224

Price to Income multiple (RHS) Affordability index (LHS)



Source: CEIC; Soufun, Credit Suisse estimates Source: CEIC; Soufun, Credit Suisse estimates

Figure 26: Affordability index – 1st time buyers - Shanghai Figure 27: Affordability index – 1st time buyers - ShenzhenSha nghai Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

1995

1996

1997

1998

199

920

0020

0120

0220

032

004

2005

2006

Jan-

07Fe

b-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Ma

r-09

Apr

-09

May

09

Jun

09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 1

0M

ar 1

0A

pril

10

0

2

4

6

8

10

12

14

16

Price to Income m ultiple (RHS)Af forda bility ind ex (LH S)

Gett ing more ex pensive

Getting le ss expens ive

Sha nghai Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

1995

1996

1997

1998

199

920

0020

0120

0220

032

004

2005

2006

Jan-

07Fe

b-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Ma

r-09

Apr

-09

May

09

Jun

09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 1

0M

ar 1

0A

pril

10

0

2

4

6

8

10

12

14

16





0%

20%

40%

60%

80%

100%

120%

140%

1995

1996

1997

1998

199

920

0020

0120

0220

032

004

2005

2006

Jan-

07Fe

b-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Ma

r-09

Apr

-09

May

09

Jun

09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 1

0M

ar 1

0A

pril

10

0

2

4

6

8

10

12

14

16





0%

20%

40%

60%

80%

100%

120%

140%

1995

1996

1997

1998

199

920

0020

0120

0220

032

004

2005

2006

Jan-

07Fe

b-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Ma

r-09

Apr

-09

May

09

Jun

09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 1

0M

ar 1

0A

pril

10

0

2

4

6

8

10

12

14

16




Shenzhen Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

160%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr

-09

May

09

Jun

09Ju

ly 0

9A

ug 0

9S

ept 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pril

10

0

5

10

15

20

25

Price to Income multiple (RHS)

Affordability index (LHS)



Shenzhen Housing affordability

0%

20%

40%

60%

80%

100%

120%

140%

160%

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr

-09

May

09

Jun

09Ju

ly 0

9A

ug 0

9S

ept 0

9O

ct 0

9N

ov 0

9D

ec 0

9Ja

n 10

Feb

10M

ar 1

0A

pril

10

0

5

10

15

20

25






Figure 28: Affordability index – 1st time buyers - Guangzhou

Figure 29: Affordability index – 1st time buyers - Chengdu

Guangzhou Housing affordability

20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%

100%

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov-

0820

08M

ar-0

9A

pr-0

9M

ay 0

9Ju

n 09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09Ja

n 10

Feb

10

Mar

10

Apr

il 10

4

5

6

7

8

9

10

11

12

13

14





Guangzhou Housing affordability

20%25%30%35%40%45%50%55%60%65%70%75%80%85%90%95%

100%

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07F

eb-0

7M

ar-0

7A

pr-0

7M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7S

ep-0

7O

ct-0

7N

ov-0

720

07Ja

n-08

Feb-

08M

ar-0

8A

pr-0

8M

ay-0

8Ju

n 08

July

08

Aug

-08

Sep

-08

Oct

-08

Nov-

0820

08M

ar-0

9A

pr-0

9M

ay 0

9Ju

n 09

July

09

Aug

09

Sep

t 09

Oct

09

Nov

09

Dec

09Ja

n 10

Feb

10

Mar

10

Apr

il 10

4

5

6

7

8

9

10

11

12

13

14





Chengdu Housing affordability

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07Fe

b-07

Mar

-07

Apr-

07M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7Se

p-07

Oct

-07

Nov-

0720

07Ja

n-08

Feb-

08M

ar-0

8Ap

r-08

May

-08

Jun

08Ju

ly 08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr-0

9M

ay 0

9Ju

n 09

July

09Au

g 09

Sept

09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 10

Mar

10

April

10

4

5

6

7

8

9

10




Chengdu Housing affordability

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1999

2000

2001

2002

2003

2004

2005

2006

Jan-

07Fe

b-07

Mar

-07

Apr-

07M

ay-0

7Ju

n-07

Jul-0

7A

ug-0

7Se

p-07

Oct

-07

Nov-

0720

07Ja

n-08

Feb-

08M

ar-0

8Ap

r-08

May

-08

Jun

08Ju

ly 08

Aug

-08

Sep

-08

Oct

-08

Nov

-08

2008

Mar

-09

Apr-0

9M

ay 0

9Ju

n 09

July

09Au

g 09

Sept

09

Oct

09

Nov

09

Dec

09

Jan

10Fe

b 10

Mar

10

April

10

4

5

6

7

8

9

10





14 June 2010


Appendix II – Price to 12M NAV discount Figure 30: China Vanke A – 12 mth NAV discount Figure 31: COLI – 12 mth NAV discount

-50

-40

-30

-20-10

0

10

20

30

40

Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10

Avg. premium of 9%

(%)

-50

-40

-30

-20-10

0

10

20

30

40

Jun 08 Sep 08 Dec 08 Mar 09 Jun 09 Sep 09 Dec 09 Mar 10 Jun 10

Avg. premium of 9%

(%)

-50-40-30-20-10

0102030405060

Oct 06 Apr 07 Oct 07 Apr 08 Oct 08 Apr 09 Oct 09 Apr 10

Avg. Disc. = 3%

(%)

-50-40-30-20-10

0102030405060


Avg. Disc. = 3%

(%)

Source: Company data, Credit Suisse estimates Source: Company data, Credit Suisse estimates

Figure 32: CR Land – 12 mth NAV discount Figure 33: Evergrande – 12 mth NAV discount

-70

-60

-50

-40

-30

-20

-10

0

10

Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10

Average discount at 34%

(%)

-70

-60

-50

-40

-30

-20

-10

0

10

Mar 07 Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10

Average discount at 34%

(%)

-70%

-65%

-60%

-55%

-50%

-45%

-40%

-35%

-30%

Jan-

10

Feb-1

0

Mar

-10

Apr-1

0

May

-10

Avg. discount of 53%

-70%

-65%

-60%

-55%

-50%

-45%

-40%

-35%

-30%

Jan-

10

Feb-1

0

Mar

-10

Apr-1

0

May

-10


-70%

-65%

-60%

-55%

-50%

-45%

-40%

-35%

-30%

Jan-

10

Feb-1

0

Mar

-10

Apr-1

0

May

-10



Figure 34: Greentown – 12 mth NAV discount Figure 35: GZ R&F – 12 mth NAV discount

-100

-80

-60

-40

-20

0

Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10

Average Discount 56%

(%)

-100

-80

-60

-40

-20

0

Sep 07 Mar 08 Sep 08 Mar 09 Sep 09 Mar 10

Average Discount 56%

(%)

-100

-80

-60

-40

-20

0

20

40

60

Jul 06 Jul 07 Jul 08 Jul 09

Average Discount at 27%

(%)

-100

-80

-60

-40

-20

0

20

40

60

Jul 06 Jul 07 Jul 08 Jul 09

Average Discount at 27%

(%)


14 June 2010


Figure 36: Hopson – 12 mth NAV discount Figure 37: Kaisa – 12 mth NAV discount

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0


Historical avg. disc at 56%

(%)

-100

-90

-80

-70

-60

-50

-40

-30

-20

-10

0


Historical avg. disc at 56%

(%)

-80%

-75%

-70%

-65%

-60%

-55%

Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10

Avg, dicsount = 60%


Figure 38: KWG – 12 mth NAV discount Figure 39: Poly (A) – 12 mth NAV discount

-100

-80

-60

-40

-20

0

20

Jan 08 May 08 Sep 08 Jan 09 May 09 Sep 09 Jan 10 May 10


(%)

-100

-80

-60

-40

-20

0

20



(%)

-60

-40

-20

0

20

40

60

80

100

120

Aug 06 Feb 07 Aug 07 Feb 08 Aug 08 Feb 09 Aug 09 Feb 10

Avg. discount of 3%

(%)

-60

-40

-20

0

20

40

60

80

100

120


Avg. discount of 3%

(%)


14 June 2010


Figure 40: Poly (HK) – 12 mth NAV discount Figure 41: Shimao – 12 mth NAV discount

-100

-50

0

50

100

150

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10


(%)

-100

-50

0

50

100

150

Jan 06 Jan 07 Jan 08 Jan 09 Jan 10


(%)

-80

-70

-60

-50

-40

-30

-20

-10

0



(%)

-80

-70

-60

-50

-40

-30

-20

-10

0



(%)


Figure 42: Sino Ocean – 12 mth NAV discount

-90

-80

-70

-60

-50

-40

-30

-20

-10

0


Avg. discount = 37%

(%)

-90

-80

-70

-60

-50

-40

-30

-20

-10

0


Avg. discount = 37%

(%)

Source: Company data, Credit Suisse estimates

14 June 2010


Companies Mentioned (Price as of 10 Jun 10) China Overseas Land & Investment (0688.HK, HK$14.60, OUTPERFORM [V], TP HK$17.70) China Resources Land Ltd (1109.HK, HK$14.50, OUTPERFORM [V], TP HK$17.00) China Vanke Co Ltd-A (000002.SZ, Rmb7.15, OUTPERFORM [V], TP Rmb9.50) China Vanke Co Ltd-B (200002.SZ, HK$7.53, OUTPERFORM [V], TP HK$7.90) Evergrande Real Estate Group Ltd (3333.HK, Rmb2.09, NEUTRAL [V], TP Rmb2.40) Greentown China Holdings Ltd (3900.HK, HK$8.35, UNDERPERFORM [V], TP HK$8.30) Guangzhou R&F Properties Co Ltd (2777.HK, HK$9.88, NEUTRAL [V], TP HK$9.80) Hopson Development Holdings (0754.HK, HK$8.93, NEUTRAL [V], TP HK$9.90) Kaisa Group Holdings (1638.HK, HK$1.59, OUTPERFORM [V], TP HK$2.10) KWG Property Holding Limited (1813.HK, HK$4.43, OUTPERFORM [V], TP HK$5.90) Poly (Hong Kong) Investments Ltd (0119.HK, HK$7.27, OUTPERFORM [V], TP HK$9.90) Poly Real Estate Group (600048.SS, Rmb11.05, OUTPERFORM [V], TP Rmb17.30) Shimao Property Holdings Ltd (0813.HK, HK$11.80, OUTPERFORM [V], TP HK$14.10) Sino-Ocean Land Holdings Ltd (3377.HK, HK$5.67, OUTPERFORM [V], TP HK$8.00)

Disclosure Appendix Important Global Disclosures Jinsong Du, Raymond Cheng, CFA & Ronney Cheung each certify, with respect to the companies or securities that he or she analyzes, that (1) the views expressed in this report accurately reflect his or her personal views about all of the subject companies and securities and (2) no part of his or her compensation was, is or will be directly or indirectly related to the specific recommendations or views expressed in this report. The analyst(s) responsible for preparing this research report received compensation that is based upon various factors including Credit Suisse's total revenues, a portion of which are generated by Credit Suisse's investment banking activities. Analysts’ stock ratings are defined as follows: Outperform (O): The stock’s total return is expected to outperform the relevant benchmark* by at least 10-15% (or more, depending on perceived risk) over the next 12 months. Neutral (N): The stock’s total return is expected to be in line with the relevant benchmark* (range of ±10-15%) over the next 12 months. Underperform (U): The stock’s total return is expected to underperform the relevant benchmark* by 10-15% or more over the next 12 months. *Relevant benchmark by region: As of 29th May 2009, Australia, New Zealand, U.S. and Canadian ratings are based on (1) a stock’s absolute total return potential to its current share price and (2) the relative attractiveness of a stock’s total return potential within an analyst’s coverage universe**, with Outperforms representing the most attractive, Neutrals the less attractive, and Underperforms the least attractive investment opportunities. Some U.S. and Canadian ratings may fall outside the absolute total return ranges defined above, depending on market conditions and industry factors. For Latin American, Japanese, and non-Japan Asia stocks, ratings are based on a stock’s total return relative to the average total return of the relevant country or regional benchmark; for European stocks, ratings are based on a stock’s total return relative to the analyst's coverage universe**. For Australian and New Zealand stocks a 22% and a 12% threshold replace the 10-15% level in the Outperform and Underperform stock rating definitions, respectively, subject to analysts’ perceived risk. The 22% and 12% thresholds replace the +10-15% and -10-15% levels in the Neutral stock rating definition, respectively, subject to analysts’ perceived risk. **An analyst's coverage universe consists of all companies covered by the analyst within the relevant sector. Restricted (R): In certain circumstances, Credit Suisse policy and/or applicable law and regulations preclude certain types of communications, including an investment recommendation, during the course of Credit Suisse's engagement in an investment banking transaction and in certain other circumstances. Volatility Indicator [V]: A stock is defined as volatile if the stock price has moved up or down by 20% or more in a month in at least 8 of the past 24 months or the analyst expects significant volatility going forward.

Analysts’ coverage universe weightings are distinct from analysts’ stock ratings and are based on the expected performance of an analyst’s coverage universe* versus the relevant broad market benchmark**: Overweight: Industry expected to outperform the relevant broad market benchmark over the next 12 months. Market Weight: Industry expected to perform in-line with the relevant broad market benchmark over the next 12 months. Underweight: Industry expected to underperform the relevant broad market benchmark over the next 12 months. *An analyst’s coverage universe consists of all companies covered by the analyst within the relevant sector. **The broad market benchmark is based on the expected return of the local market index (e.g., the S&P 500 in the U.S.) over the next 12 months. Credit Suisse’s distribution of stock ratings (and banking clients) is:

Global Ratings Distribution Outperform/Buy* 45% (63% banking clients) Neutral/Hold* 41% (60% banking clients) Underperform/Sell* 13% (55% banking clients) Restricted 2%

*For purposes of the NYSE and NASD ratings distribution disclosure requirements, our stock ratings of Outperform, Neutral, and Underperform most closely correspond to Buy, Hold, and Sell, respectively; however, the meanings are not the same, as our stock ratings are determined on a relative basis. (Please refer to definitions above.) An investor's decision to buy or sell a security should be based on investment objectives, current holdings, and other individual factors.

14 June 2010


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14 June 2010Asia Pacific/ChinaEquity Research

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