Reiterate Buy, new TP at RMB9.96; benefitting from cyclical recovery in China We reiterate our Buy rating on CSCEC with new target price of RMB9.96 pershare. CSCESC now trades at attractive valuations of 46% discount to NAV and5.7x 2016E P/E. CSCEC should benefit from the latest cyclical recovery in Chinaproperty, new constructions, and also an increase in PPP infrastructure givenits leading positions in all markets. For FY15, CSCEC’s market share in terms ofnew contract value in China was 7.8% and in terms of GFA under constructionwas 7.4%; both figures remained stable, indicating the company’s solid leadingposition within the industry. Hence, we believe that CSCEC will benefit fromrecovery in the property market in China. Benefitting from the cyclical recovery, thanks to the leading market position CSCEC should benefit from the cyclical recovery in China’s property market(via COLI) and also a strong pick up in commodity property constructions andFAI. In 3M16, sales value and volume of commodity properties in Chinaincreased by 54%/33% yoy, respectively. FAI for the same period has alsoincreased by 6.2% yoy. For 1Q16, CSCEC’s new contract value has increasedby 27% yoy to RMB348.3bn with GFA under construction up by 6% yoy (in-linewith the industry’s 5.8% yoy growth). In addition, COLI also recorded doubledigityoy growth in both sales volume and value in 3M16. As we are expectingthe property market to undergo a cyclical recovery in 2016, we believe CSCECwill continue to be a beneficiary due to its leading market positions. FY15 result in-line with estimates, demonstrating solid financials For FY15, revenue of CSCEC increased by 10% yoy to RMB881bn with netprofit up by 15.5% to RMB26.1bn. EPS was up by 10% yoy to RMB0.84/share,in-line with our estimate. The company declared DPS of RMB0.2/share,representing a stable 23% dividend payout ratio. As of end-2015, CSCEC’s netgearing was down from 61% at end-2014 to 37%, thanks to the increase incash position to RMB216bn. The company’s blended gross margin remainedstable as well as the SG&A expenses, indicating the strong execution of thecompany despite the general market turmoil in 2015. Attractive valuations at 46% NAV discount, 5.7x 2016E P/E Our new target price of RMB9.96 (lowered from RMB10.97) is based on 20%discount to our NAV of RMB12.45, down from RMB12.19, mainly as wefactored in the latest FY15 results. Key risks: unexpected policy/economicvolatility, and risks on collection of receivables.

Upgrading to Buy, still preferring its cheaper H-share counterpart; TP: Rmb6.23 We upgrade Beijing North Star A to Buy (from Hold) on valuation, following a22% sell-off YTD (versus 6% decline YTD for its H-share and 15% decline in theShanghai Composite Index). Accelerating revenue/core profit growth in FY15reaffirms our view that the aggressive operating scale expansion in the pasttwo years has started to translate into a corresponding acceleration in earningsgrowth. Looking ahead, we expect core profit growth to be at a CAGR of 20%in FY16-18, markedly higher than the industry average of 10%. Currentvaluation is attractive at a 56% discount to NAV and 12x 2016e. We see soundre-rating potential ahead on solid fundamentals. FY15 core profit +13% YoY to Rmb744m; gross margin stays at a high 39% Beijing North Star reported a 15% YoY increase in FY15 revenue toRmb7,186m, driven by a surge in GFA delivery in property sales (segmentrevenue rose by 22% YoY) and strong performance in the investment propertyportfolio (revenue was up 10% YoY pre-interest costs apportionment, 6%higher than our projection). Gross margin saw a 5.5 percentage pointcompression to 38.9% (44.4% in FY14), but was still one of the highest in theindustry. Excluding fair value gains, core profit rose by 13% YoY to Rmb744m. Meanwhile, net margin was little changed at 10.47% (10.6% in FY14). Finaldividend of Rmb6cent/share was declared for FY15 (flat YoY). Net gearing rises to 88%; but set to decline on A-share placement As of end-2015, Beijing North Star had total gross debt of Rmb21,736m (up35% from Rmb16,110m at end-2014) and a cash balance of Rmb6,575m (up53% from Rmb4,310m at end-2014). The marked increase in gross debt is notabnormal as a result of a more aggressive stance on operating scaleexpansion. Reported net gearing rose to 88% as of end-2015 from 73% at end-2014; such gearing is slightly above industry average. However, we believe netgearing is set to decline in FY16 as a result of the upcoming A-share placement(already received CSRC approval), which will likely enlarge its capital base. Target price at 35% discount to our revised NAV estimate of Rmb9.59/share Our target price is based on a 35% discount to our NAV estimate ofRmb9.59/shr, which implies a 2016/17 adjusted PER of 17x/14x. Our targetdiscount reflects its backing by the Beijing government and expectations forfaster execution ahead, which we believe is appropriate and in line withcomparable peers. Key risks: government policies/execution of new projects.

We hosted a conference call for China State Construction EngineeringCorporation (CSCEC) this morning. The following are the key takeaways: The tax reform on the construction sector has been delayed. Mr. Meng,Secretary to the Board of Directors of CSCEC commented the aim of thegovernment is to lower the tax burden of the companies. However, due to theprolonged issue on invoice collection, it is hard for the companies to deductexpenses incurred during the procurement and construction process, whichresults in higher taxable income and tax paymentMr. Meng believes that such tax reform is unlikely to happen in the shortterm as adjustments are needed before reaching a consensus between thegovernment and the companies. Tax reform adjustments on the construction designing segment are completeand the company is incorporating the new tax reporting system. But thecontribution from the business is only 1-2% by contract value, hence theimpact is insignificant. New contract value for FY15 is expected to be flat YoY. Managementacknowledged that there will be pressure for achieving high single digit to lowteen’sgrowth in 2016. The company is yet to set the target but Mr. Mengbelieves it is unlikely for CSCEC to see negative growth in new contract valuesnext year. CSCEC’s new contract from the infrastructure constructions has experienced14% YoY increase in 10M15 and the company noted the increase could help toovercome the slight decline in housing constructions for the year. Management expects a low single digit growth for new contracts from housingconstructions in 2016. New contracts from overseas have increased by 20% YoY in 10M15compared to the 1.6% YoY drop in total new contract values. Managementattributed this to the increase in contracts from the countries covered by the“One Belt One Road” (OBOR) plan. CSCEC has over 30 years of experience inthe 41 of the 65 countries under OBOR. There is yet to see significant cross-country infrastructure projects underOBOR, as such major projects would take long lead time before launching. However, CSCEC has benefited from the increase in constructions within thesecountries, including hotels, trading parks, local roads and bridges, as well asoverseas expansions from Chinese enterprises. Commenting on the outlook on the property market, MR. Meng said it isunlikely for a sharp price decline in 2016 but possible to see price increment inTier-1 and some core Tier-2 cities. However, more aggressive measures fromthe government may be needed for inventory clearance in Tier-3/4 cities.

We expect additional policy supports on property and infrastructure. At current attractive valuations, we see CSCEC as: 1) a cheaper proxy to CSCI(with its stake in CSCI and bigger non-CSCI construction businesses); and 2)more solid alternative to private developers with its more superior propertyportfolio from COLI. We also expect positive catalysts from additionalgovernment policy supports on property market and infrastructure investment. Increasingly attractive valuations vs. other construction and property names. Comparing current valuations of CSCEC with key construction companieslisted on the HK stock market, we see CSCEC generally trading at meaningfullylower PE and PB, despite its leadership position in the China constructionmarket. For example, CSCEC is trading at 2015E/16E PE of 8.8x/7.3x, wellbelow the average of 9.9x/8.5x 2015E/16E P/E for the group. Set against thebig-cap property developers, CSCEC now trades at 46% NAV discount, deeperthan the group’s average of 14%. On PE and PB, CSCEC is also meaningfullycheaper than the group’s average. Compared with other mid-cap developers(which do not have the same quality property portfolio as COLI, which isCSCEC’s subsidiary), CSCEC’s 46% NAV discount is meaningfully deeper thanCountry Garden (31%), Shimao (37%) and Evergrande (1% premium). Better-than-industry new contracts performance in 1H15. In 1H15, commodity housing new starts in the whole country declined 15.8%,while commodity residential new starts fell 17.3% YoY. However, despite thebroad market weaknesses, CSCEC has been able to achieve better-thanindustrynew contracts performance due to the rising market share in theproperty construction market. As a reference, in 1H15, CSCEC achievedcontinued solid performance for its housing construction businesses, with newcontracts awarded down only 3.7% YoY – meaningfully outperforming theoverall market. In addition, new contracts from infrastructure constructionsshowed a better-than-expected performance, with 11% growth YoY. With this,overall new contracts for CSCEC in 1H15 were down only 2.1% YoY. In ourview, this reflected the strong execution ability of CSCEC. At the end of 1H15,the total area under construction amounted to 859.46msm, up 10.3% YoY. This strong growth in the total area under construction and new starts shouldallow for continued solid growth in earnings for CSCEC over the next 2-3 years. Attractive valuations at 42% NAV discount, 8.6x 15E P/E and 7.1x 16E P/E. Our new TP of RMB10.97 (lowered from RMB12.18) is based on 10% discountto our NAV of RMB12.19, down from RMB13.53 as we factored in our new estimates for COLI and new assumptions on property constructions. Key risks:unexpected policy/economic volatility, and risks on collection of receivables.

Management expects volume recovery at a more modest pace than past cyclesWe met with management at its headquarters in Shenzhen. In summary,management expects overall ASPs to see a gradual, rather than sharp, declineas developers generally have better financial positions than in 2008/2011. Moreover, land prices have yet to see a meaningful decline, so developers havelittle justification for bigger price cuts, as land replenishment will still berelatively expensive. Meanwhile, management expects sales volume to recoverat a more modest pace, driven by pent-up demand, but a ‘V-shaped’ recovery(as in 2009/12) is unlikely, given a less favorable macro and monetaryenvironment. Buy, with upside implied by our TP. Margin compression to be modest, as ASPs still higher YoY, post price cutsManagement acknowledged that Vanke has stepped up its incentive offers innew project launches (for example, via e-coupons with E-House), rather thanthrough sharp ASP cuts. Nevertheless, effective ASPs are still above those ofthe same period a year ago, even after the latest round of price cuts. Hence,management expects an adverse impact on profit margins to be modest. Moreover, Vanke has an unbooked sales balance of Rmb200bn, which carriesa gross margin of 25%. Hence, management expects this to be a cushion tooffset the adverse impact from the recent round of price cuts. Management aims to increase foreign borrowing to lower overall funding costFollowing the H-share listing (first trading day on 25 June 2014), managementintends to increase foreign borrowing via more bond issues. Specifically, itaims to raise the proportion of foreign debt from 10% of total gross debtcurrently to about 25%. By doing so, it expects to lower the average fundingcost to 7% (from 7.5% currently). Nevertheless, Vanke would still target a netdebt-to-equity gearing ceiling of 40%. Target price at a 20% discount to our estimated NAV of Rmb16.7/share; risksOur target price is based on a 20% discount to our estimated NAV ofRmb16.7/share, which implies a 2014/15E PER of 8x/7x. Our target discount ishigher than that for the large state-owned peers like COLI but at a premium toother privately owned peers, which we believe is appropriate, given thecompany’s proven execution track record. We adopt NAV as our primaryvaluation metric, in line with peers under our coverage. Key risks: tighteningpolicies; margin compression.

Market consolidation favours Vanke; reinstating with Buy We reinstate China Vanke with a Buy rating and a target price of Rmb12.60. Inrecent years, we have seen intense market consolidation among propertydevelopers. The top developers, like Vanke, have benefited from thisconsolidation and gained market share at a faster pace than the small listeddevelopers. Vanke is currently in a development stage 2-5 years ahead of othernationwide developers. We believe this gives Vanke a significant first-moveradvantage to benefit from the consolidation and gain valuable experience incoping with a mega sales base. With this report we are also transferringprimary coverage of China Vanke from Tony Tsang to Albert Tam. Consolidation favours large developers Better funding and land acquisition capabilities widen the divergence betweenlarge developers versus small developers. The market share of the top 20developers we track doubled to 14.7% in 9M13, from 8.7% in 2008. Inparticular, the top 6 developers’ market share was 1.9x the rest of top 20developers’ share in 9M13, indicating a great leap forward for the top 6, as thetwo groups had similar market shares in 2009. Vanke’s growth has further upside potential Vanke’s growth has been attributable to both market share expansion and theproperty sector growth. Its contracted sales have continued to maintaindouble-digit growth in the past two years, achieving 33% YoY growth in 9M13. We find this remarkable given that Vanke has the largest sales base in thecountry. We do not share the view that Vanke’s growth potential is limited andconsider there is further potential upside. Moreover, we continue to see marketshare expansion in over 60% of the cities under its coverage in 9M13. Target price at a 20% discount to our estimated NAV of Rmb15.76/share; risks Our target price is based on a 20% discount to our estimated NAV ofRmb15.76/share, which implies a 2013/14E PER of 6.9x/5.6x. Currently, thecounter is trading at a 40% discount to NAV, which is very attractive in view ofVanke’s leading position and the continued growth momentum exhibited in itssales. Risks: government tightening policies; economic uncertainty.