2-day NDR in Malaysia, met 17 long-only investors. Generalfeedback on Shimao is positive though most investorscurrently own COLI, not Shimao. Reiterate BUY; a top sectorpick.

Good interest to learn more about Shimao given below-sectoraverage gearing, stable margins, conservative management.

No land king policy; landbanking criteria for projects isminimum 35% GPM and minimum 15% NPM.

Shimao guides stable GPMs of 35-37% for the next threeyears. Tier 2 cities make up over 60% of its landbank,alleviating some investor concerns about Tier 1 cities.

Whats New

Malaysia investors seem to be under-weight or equal-weight on theChina property sector and various investors indicated that theyown COLI. This is the first Malaysia NDR for Shimao, according tothe IR team, and investor concerns seem to surround credittightening and a potential margin squeeze for the sector. Many KLinvestors look willing to look at big- and mid-cap China propertystocks which are not highly geared nor too Tier-1 city heavy.

Whats Our View

We reaffirm our bullish view on Shimao after our 2-day NDR inMalaysia on 21 and 22 January. We believe Shimaos conservativemanagement, stable GPM guidance of 35-37% in the next threeyears and healthy gearing of 50-60% guided should attract moreinvestors. We have not made any changes to the developersearnings forecast. Shimao remains one of our top picks in thesector, along with COLI and KWG.2-day NDR with Shimao was well-received

We reaffirm our bullish view on Shimao after our 2-day NDR in Malaysia on 21 and22 January. We believe Shimaos conservative management, stable GPM guidanceof 35-37% in the next three years and healthy gearing of 50-60% guided shouldattract more investors. Shimao remains one of our top pick stocks in the sector,along with COLI and KWG.

1H sales outlook is bullish though launches only pick up around

March. Furthermore, 2Q14 sales should > 1Q14

The developer would like to achieve around 60% of its full year sales in 1H14. Thisshould further enhance its ability to achieve a high cash collection ratio. Shimaoexpressed its guidance for CNY80b of contract sales for 2014 (which would be up~20% YoY vs. 2013s CNY67.1b achieved), though internally, it has been pushingsales to meet a CNY100b internal target. In January, there should be only two newlaunches (Beijing and Hangzhou) but the developer expects its sales to pick uparound March, and 2Q14 contract sales should exceed that of 1Q14.In 2013, Shimao had CNY100b of available for sale resources and a 67% sell-throughratio. In 2014, Shimao has around CNY130b of available for sale resources; and ifmore landbank is acquired, then it could have up to CNY150-160b of saleableresources.

Still focused on genuine demand to drive sales

The developer stated that around 76% of the products from last year were smallsizedfirst home or upgrade demand products. This year, the ratio should be evenhigher.

Tier 2 city focused

Shimao indicated that Tier 2 cities account for over 60% of its landbank (now inover 40 cities), and it did quite well in the Yangtze River Delta and Fujian areaslast year and expects each of those regions to achieve over CNY25b in 2014. Someparts of the Pan-Bohai region face a difficult property market and stiffincluding Yantai and Shenyang. For the unfavourable cities, Shimao does not planto acquire any more projects after the existing ones are finished.

Favourite questions by fund managers

For how long is your landbank enough

Shimao has around 40m sq m of landbank. Last year, its completion was around 5msq m. However, some of the landbank is for investment properties andmanagement is looking to grow property sales. Shimao estimates that the landbankshould last 4-5 years. Overall land cost is not expensive at around CNY2,000/sq m(vs 2013 contract sales ASP of CNY12,802/sq m). For the land cost of newlyacquired landbank last year it was around CNY4,000/sq m, but we believe manyare well-located and Shimao targets a minimum GPM of 35% and a minimum NPM of15% for each new parcel.

Has the cash collection ratio dropped for Shimao and will it dropin 2014

No. 2013s cash collection ratio was around 85%. The company already set up anew cash collection team that is tasked with ensuring a high cash collection ratio.Internally, Shimao targets a few ppts improvement in the cash collection rate in2014 vs 2013, and to achieve that, the developer also plans to have highercontract sales in 1H than 2H.Can you talk about how the tight credit environment will affect

Shimaos cost of borrowing and trust loan exposure

Shimaos trust exposure is around CNY2b, translating to about 5% of interim 2013total borrowings. Sometimes, Shimao engaged in trust financing not because itneeds the money, but to maintain a good relationship with the commercial banksso it can ensure support in mortgages for its customers as well as constructionloans. Some investors find this point interesting vs. media reports.

For cost of borrowing, at end-2013, it was around 7.7%. Management targets to

lower it to 7.5% in 2014. Last year, around 60% of borrowings were on-shore and40% were off-shore. Net gearing as of end-2013 should be just under 60% and thecompany targets a stable net gearing level of 50-60% over the next few years.Maybank Kim Engs estimates are for 57.0% in 2013 and 51.8% in 2014.

What is Shimaos 2014 cashflow guidance

Next week, there will be a management meeting in Shanghai where details will bediscussed. There are no specific cashflow numbers yet. In 2014, we expect to usearound 35-40% of the cash collected from contract sales in land premium, another35-40% in construction costs, and the rest for other expenses such as SG&A.Management estimates at least a balanced operating cash inflow and outflow.

Any new development on the commercial side

Shimao has new efforts in mini-malls and mini-hotels. The developer is looking torent some space and spend around CNY30-40m in capex per mini-hotel asset torefurbish it into a mini-hotel catered towards business travellers. These hotels areexpected to have around 100 rooms on average and a higher room rate thanbudget hotels. For mini-malls, management would like to cater to young peopleand focus on lifestyle efforts such as food and beverages, supermarkets andplaygrounds. The first mini-mall should open in 2014.Fast property cycle and human resourcesmanagement

How do you motivate your human capital and what KPIs did you setApart from financial incentives, Shimao also provides good training and careeradvancement.

For the eight regional districts + two businesses (Taiwan straits and tourismproperty), senior management set five KPIs and the regional/business heads bonuswould depend on them:

1) Contract sales targets

2) Cash collection

3) GPM and NPM targets

4) Quality of projects

5) Customer loyalty

Fast property cycle

Shimao still targets fast asset churn. For example, the Fujian Shishi project is agood example of a short land acquisition-to-presales cycle of less than six months.The land cost was CNY6-7k/sq m but villas were sold at ~CNY40k/sq m while highriseapartments have an ASP of CNY18-20k/sq m with over CNY2b of sales on

launch day.How do you see the property market in 2014

Genuine demand is still good. For example, around 20m marriage requirements forhomes, and there is still good urbanization demand. The property market is stillvery much focused on genuine demand. The luxury market is tougher. The newadministration seems to be using no new demand-side administrative measures butis more focused on increasing supply and using economic tools as policy. Shimaofocuses on genuine demand products and has a strict land acquisition committeewith stringent requirements for landbanking.

Valuation

Shimao stock is trading at 34% discount to our NAV of HKD27.60, 6.1x 2014 PER,5.0x 2015 PER and 0.9x 2015 P/B, which looks attractive for such a high-quality,growing developer. Our TP is unchanged at HKD 22.02, pegged at 20% discount toNAV. Maintain BUY.

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