INI1IA1ION RLPOR1

lease see Lhe second Lo lasL page and lasL page of Lhls docu
k|nyuan kea| Lstate Co., Ltd.
SepLember 19, 2008

nao nong, CIA, 212-702-6621


Industry neadw|nds ressure Manu
Coverage w|th no|d kat|ng

Investment Summary
We are lnlLlaLlng coverage of xlnyuan 8eal LsLaLe
manufacLurlng model of real esLaLe developmen
acuLely exposed lL Lo Lhe real esLaLe down cycle.
whlch xlnyuan has expanded have been apprecla
houslng sLock ln Lhese clLles could furLher slow p
Lerm, and Lhus could pressure xlnyuan's margln
quarLers. We belleve lnvesLors should walL for Lh
Lo buy Lhls sLock.
D|scuss|on
A sca|ab|e manufactur|ng mode|. xlnyuan p
of a land banklng model, for real esLaLe dev
componenL Lo bulldlngs. 1hls model ls scala
expanslon lnLo varlous new clLles. 1he comp
road," mlddle-slzed aparLmenLs for mlddle
Acute|y exposed to rea| estate cyc|es. 1he m
real esLaLe up cycle, buL also acuLely exposes
Industry headw|nds pressure manufactur|n
Suzhou, Chengdu and kunshan, were acqulr
Lo have hlgher cosLs. And land prlces have b
prlces ln Lhese clLles ln Lhe lasL few years. l
clLles foreshadow furLher deceleraLlon ln pr
decllne. ConsequenLly, we belleve xlnyuan'
comlng quarLers. Slowlng real esLaLe sales s
asseL Lurnover - a key elemenL of Lhe reLurn
Suff|c|ent ||qu|d|ty for 2008. We esLlmaLe, w
xlnyuan should have sufflclenL llquldlLy for
land reserves, and ls nlmble enough Lo susp
Lo dlfflculL markeL condlLlons. As such, Lhe c
Lo carry ouL lLs developmenL unfeLLered.
NAV ~56.30. xlnyuan's nAv, derlved from lL
Lwo years, ls ~$6.30, 30 hlgher Lhan lLs rec
company's fuLure growLh poLenLlal. lLs /8
bodes lll for cycllcal sLocks, buL we noLe Lha
because of Lhe dlfflculLles ln esLlmaLlng ear

Va|uat|on
We esLlmaLe xlnyuan's nAv Lo be ~$6.30 from lL
conservaLlve assumpLlons, and wlLhouL conslder
poLenLlal. ApproxlmaLely Lwo-Lhlrds of lLs nAv ls
and one-Lhlrd from lLs unsold pro[ecLs.

k|sks
(1) SlgnlflcanL lndusLry headwlnds, especlally ln L
clLles where xlnyuan has operaLlons. (2) roperL
xlnyuan's marglns furLher. (3) 8uyers wlLhdraw f
source of llquldlLy. ConsequenLly, xlnyuan could

umenL for lmporLanL dlsclosures.
(xln/n?SL)
ufactur|ng Mode|, In|t|at|ng
e wlLh a Pold raLlng. 1he company's
nL has made xlnyuan nlmble, buL has also
Land prlces ln many of Lhe clLles lnLo
aLlng fasLer Lhan properLy prlces. Large
properLy prlce appreclaLlon ln Lhe near
and asseL Lurnover ln Lhe comlng
he nexL Lurn ln Chlna's real esLaLe cycle
pursues a manufacLurlng model, lnsLead
velopmenL. Land ls [usL anoLher
able, and xlnyuan has been nlmble ln lLs
pany's sLraLegy focuses on mlddle of Lhe
lncome ln 1ler-2 clLles.
manufacLurlng model Lends Lo do well ln a
s xlnyuan Lo Lhe swlngs ln properLy prlces.
ng mode|. Land ln Lhe new clLles, such as
red Lhrough open aucLlons and Lhus Lend
been appreclaLlng fasLer Lhan properLy
urLher, Lhe lnvenLory poslLlons ln Lhese
roperLy prlce appreclaLlon, or even
s marglns could be under pressure ln Lhe
should also deceleraLe Lhe company's
n ln Lhe manufacLurlng model.
wlLh conservaLlve assumpLlons, LhaL
2008. lL has around 12-18 monLhs of
pend lLs expanslon plan Lemporarlly due
company should have enough resources
Ls currenL pro[ecLs for Lhe nexL one Lo
cenL prlce, wlLhouL conslderlng Lhe
ls also ln llne wlLh lLs peers. A low /L
aL lL ls noL a rellable valuaLlon measure
nlngs.
Ls currenL and unsold pro[ecLs, wlLh
rlng Lhe company's fuLure growLh
s from Lhe company's currenL pro[ecL,
Lhe 1ler-1 clLles, could permeaLe Lhe
y prlces decllne subsLanLlally, pressurlng
from presale conLracLs, an lmporLanL
be sLrapped for cash.
In
rlce
32-Week Plgh/Low
Shares CuLsLandln
MarkeL Cap. (mm)
Average ually volu


LS I0
Mar
!un
Sep
uec
I 5(2.

Consensus -

/L
l? 8ev.
(mm) $309


1
hao.hong[bmur.com
n|t|at|ng Coverage at no|d
1arget r|ce: nA
$4.27
w $18.00 - 3.06
ng (mm) 74.20
) $316.83
ume (mm) 0.22

07A I08L I09L




.47) 50.64 50.93

- $0.74 $0.89

3.8 x 4.8 x
9.73 $477.42 $812.72



8rean Murray, CarreL & Co. LqulLy 8esearch 2
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)

Summary and Investment Conc|us|on
xlnyuan resembles more of a manufacLurer Lhan a bullder. lL ls a resldenLlal developer LhaL relles on
mlnlmum land reserves buL fasL asseL Lurnover Lo reap reLurns. lndeed, Lhe company belleves LhaL land
ls [usL anoLher lnpuL componenL of bulldlngs. 1hls manufacLurlng model ls scalable and enables xlnyuan
Lo be nlmble when lL expands, buL also acuLely exposes Lhe company Lo Lhe cycles wlLhln Lhe real esLaLe
lndusLry.
Land prlces ln many of Lhe clLles where xlnyuan has expanded have been appreclaLlng fasLer Lhan
properLy prlces, and properLy sales and prlce appreclaLlon ln Lhese clLles are llkely Lo conLlnue Lo
deceleraLe, as lnvenLory sLays hlgh. 1hese new expanslons, unforLunaLely, represenL close Lo 80 of
xlnyuan's undeveloped land reserves. ConsequenLly, xlnyuan's proflL marglns and asseL Lurnover could
be under pressure for Lhe comlng quarLers.
Cycllcal sLocks Lend Lo underperform when Lhelr /L ls low. 8uL we belleve /L currenLly ls an unrellable
measure of valuaLlon. And we noLe LhaL xlnyuan's /8, a more Langlble valuaLlon measure, ls ln llne wlLh
lLs peers. lurLher, we esLlmaLe Lhe company's nAv Lo be ~$6.30 per share, 30 hlgher Lhan lLs recenL
prlce, wlLhouL even conslderlng Lhe company's fuLure growLh poLenLlal. ln shorL, Lhe company's
valuaLlon ls noL demandlng. We Lherefore recommend lnvesLors Lo sLay on Lhe sldellnes for now, and
walL for Lhe nexL Lurn ln Chlna's real esLaLe cycle.
Investment os|t|ves
A sca|ab|e manufactur|ng mode|. 1here are Lwo buslness models for resldenLlal real esLaLe developmenL
ln Chlna. xlnyuan follows Lhe manufacLurlng model. Companles LhaL follow Lhls model, lncludlng Chlna's
real esLaLe lndusLry bellweLher, vanke, Lend Lo have smaller land banks on Lhelr balance sheeLs. 1hese
companles rely on open markeL aucLlons and pay Lhe prevalenL markeL prlce Lo acqulre Lhelr land
reserves.
As such, Lhe asseL bases and proflL marglns of Lhese companles are llkely Lo be lower. lnsLead, Lhey rely
on fasL Lurnover of Lhelr asseLs Lo maxlmlze reLurns. 1hls model Lends Lo do well when Lhe properLy
markeL ls rlslng, as lL was ln Lhe pasL few years, and ls scalable and conduclve Lo rapld expanslon. 1he
downslde, of course, ls LhaL Lhe model's dependence on open markeL land acqulslLlon makes lL acuLely
suscepLlble Lo a decllne ln properLy prlce.
1he oLher model ls Lhe land banklng model. Companles LhaL follow Lhls model, lncludlng CC1, CClCC
roperLy and llnanclal SLreeL, Lend Lo have larger land banks on Lhelr balance sheeLs. 1hese companles
sLrlve Lo acqulre Lhelr land reserves aL very low cosL Lhrough varlous channels. lor lnsLance, CC1 pursues
a comblnaLlon of Lourlsm and real esLaLe developmenL Lo lower lLs land cosLs.
1he asseL bases and proflL marglns of Lhese companles Lend Lo be hlgher. 8uL asseL Lurnover ls slow. 1hls
model Lends Lo be more reslllenL durlng a markeL downLurn. As Lhe cosL of land reserves, one of Lhe
largesL componenLs of bulldlng cosLs, are low, Lhese companles are noL under pressure Lo cuL prlces, and
could afford Lo offer sLeep dlscounL Lo move lnvenLory lf Lhey wlsh.
"M|dd|e of the road" focus. xlnyuan focuses on Lhe fasL-growlng 1ler-2 clLles, whlle avoldlng many of
Lhe overheaLlng 1ler-1 clLles and Lhe less developed 1ler-3 clLles. ln Lhe clLles lnLo whlch xlnyuan
expands, lL bullds mldslzed resldenLlal unlLs for mlddle lncome consumers.
Suff|c|ent ||qu|d|ty for 2008. Many real esLaLe developers ln Chlna have overexLended Lhemselves Lo
bulld up land reserves ln Lhe pasL few years. 8y SepLember and CcLober Lhls year, many of Lhem wlll be
requlred Lo pay for Lhe land Lhey bld for successfully" from Lhe aucLlons lasL year. re-sales, one of Lhe
mosL lmporLanL sources of developers' cash flow, have slowed dramaLlcally. ConsequenLly, many
developers are llkely Lo face furLher cash consLralnLs ln Lhe comlng monLhs. 1he recenL drasLlc reducLlon
ln sales prlces ln Lhe lndusLry has lnsLllled a sense of desperaLlon, lnsLead of generaLlng subsLanLlal
lnLeresL, and Lhe pace of sales conLlnues Lo deceleraLe.
We have esLlmaLed xlnyuan's cash flow poslLlon ln 2008 wlLh a few reasonable and conservaLlve
assumpLlons on lLs cash flow requlremenLs and sources of cash flow. lor example, we have assumed
LhaL all currenL debL would be repald by flnanclal year-end, all Laxes seLLled ln cash and all consLrucLlon
and land cosLs pald ln cash as well. We have also assumed xlnyuan wlll suspend all land purchase
program due Lo dlfflculL markeL condlLlons, accordlng Lo guldance.


8rean Murray, CarreL & Co. LqulLy 8esearch 3
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)
ln reallLy, Lhe shorL-Lerm debL ls llkely Lo be rolled over, noL all Laxes are cash, and land and consLrucLlon
cosLs may noL need Lo be pald lmmedlaLely. We may also have well underesLlmaLed Lhe cash proceeds
from bulldlng sales. We have assumed ~30 of bulldlng sales from 2P08 wlll be collecLed ln cash. And
even lf xlnyuan resumes lLs land purchase program, lL does noL have Lo pay ln cash ln 2008, as Lhe
lndusLry pracLlce of land paymenL Lends Lo spllL Lhe paymenL 63/33 over Lwo years.
WlLh Lhese conservaLlve assumpLlons, we belleve xlnyuan should have a cash surplus of ~$27 mllllon by
flnanclal year-end 2008, and as such should have enough resources Lo execuLe lLs developmenL plans ln
2008.
Lxh|b|t 1: Suff|c|ent L|qu|d|ty for 2008

5ootce. compooy Joto, 8teoo Mottoy, cottet & co.
Assomptloos. lot cosb flow tepoltemeots 1) Moooqemeot loJlcoteJ tbot coosttoctloo costs wete toooloq ot kM8
120m to kM8 150m pet mootb, 2) looJ poymeot ls fot tbe looJ ocpolteJ lo cbeoqJo lo Motcb 2008. 1bls looJ sboolJ
bove beeo pottlolly polJ, ot poymeot moy oot eveo Joe ootll floooclol yeot 2009 ooJ coolJ be polJ by lostollmeot. we
bove ossomeJ kloyooo woolJ poy lo foll lo tbe oext few mootbs to be coosetvotlve. Moooqemeot loJlcoteJ tbot tbe
compooy bos polJ fot tbe two potcels of looJ ocpolteJ lo 5eptembet 2007 ooJ Iooooty 2008 sepototely lo 2beoqzboo,
J) All cotteot Jebts wlll be tepolJ, 4) All toxes Joe polJ lo cosb. lot cosb flow sootces 1) J0X soles lo 2n08 wlll be
collecteJ lo cosb, 2) Assomloq oo ploo fot looJ te-sole lotet tbls yeot, J) Moooqemeot loJlcoteJ tbot lt ls lo tbe ptocess
of ottooqloq kM8 600m of book cteJlt lloe.

NAV ~56.30 per share. We esLlmaLe xlnyuan's nAv Lo be ~$6.30 per share, ~30 hlgher Lhan lLs recenL
share prlce. lurLher, Lhls esLlmaLe only lncludes xlnyuan's currenL pro[ecLs ln Lhe nexL 12-18 monLhs,
wlLhouL conslderlng Lhe growLh poLenLlal of Lhe company. 1haL sald, all Chlnese developers are selllng aL
a slgnlflcanL dlscounL Lo Lhelr nAv. We also noLe Lhe xlnyuan /8 raLlo, a raLlo LhaL Lhe markeL appears
Lo be uslng Lo evaluaLe developers, ls Lradlng ln Landem wlLh Lhe oLher smaller developers. /L ls also ln
llne, buL low earnlng vlslblllLy undermlnes Lhe rellablllLy of Lhls valuaLlon meLhodology.

Investment Negat|ves
Industry headw|nds pressure manufactur|ng mode|. xlnyuan follows Lhe manufacLurlng model of real
esLaLe developmenL. As dlscussed earller, Lhls model ls acuLely suscepLlble when properLy prlces decllne
amld a markeL downLurn, as lL ls now (LxhlblL 2). 8ecause of hlgher cosL of land acqulred Lhrough publlc
aucLlons, xlnyuan has less leeway Lo cuL prlces Lo sLlmulaLe sales Lhan Lhose who follow Lhe land banklng
model. lurLher, many parcels of Lhe company's land were acqulred ln 2007 and early 2008, when land
prlce was hlgh. 1he margln pressure on lLs Suzhou lnLernaLlonal ClLy Carden pro[ecL has evldenced Lhls.
And we esLlmaLe LhaL Lhls pro[ecL wlll evenLually represenL a loss Lo Lhe company's nAv, because of lLs
hlgh land cosL (LxhlblL 8).

Cashf|ow kequ|rements Cashf|ow Sources
ConsLrucLlon 138,462 Cash on 8alance SheeL 120,126
Land aymenL - 8ulldlng re Sales 78,630
8epaymenL of 8ank Loans 77,233 Land Sales -
Cash 1axes 24,306 8ank Loans 92,308
1ota| 240,203 1ota| 291,084
Cash Surp|us](Def|c|t) S0,881


8rean Murray, CarreL & Co. LqulLy 8esearch 4
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)
Lxh|b|t 2: Cperat|ng Marg|n Sens|t|ve to Dec||ne |n roperty r|ce

5ootce. compooy Joto, N85, clc, 8teoo Mottoy, cottet & co.

Land pr|ces r|s|ng faster than property pr|ces |n many of the new|y-entered c|t|es. xlnyuan has
expanded well beyond lLs home base of Zhengzhou, ln Lhe lasL few years, lnLo new clLles such as
Chengdu, kunshan, Suzhou, !lnan and Pefel. AL presenL, kunshan, LogeLher wlLh Suzhou and Chengdu,
consLlLuLe close Lo 80 of Lhe company's undeveloped land bank (LxhlblL 4). Powever, land prlces ln
Lhese clLles are rlslng fasLer Lhan properLy prlces. lurLher, we belleve LhaL properLy prlces ln Chlna are
llkely Lo decllne furLher (please refer Lo our lndusLry noLe, A 1ale of 1wo MarkeLs", publlshed LogeLher
wlLh Lhls reporL). 1hese developmenLs are llkely Lo puL more pressure on xlnyuan's proflL margln.

Lxh|b|t 3: Land r|ces |n Many of k|nyuan's key C|t|es k|s|ng Iaster than roperty r|ces

5ootce. compooy Joto, N85, clc, 8teoo Mottoy, cottet & co.
Note. koosboo ls lo tbe ptoxlmlty of 5booqbol, ooJ we bove oseJ tbe ptlces of ptopetty ooJ looJ lo 5booqbol to opptoxlmote tbe cooJltloos of tbe teol estote
motket lo koosboo. we bove olso sobstltoteJ nooqzboos ptlces fot 5ozboo boseJ oo tbe some ossomptloo of qeoqtopblcol ptoxlmlty.


-2.0
-1.3
-1.0
-0.3
0.0
0.3
1.0
1.3
2.0
2.3
0
3
10
13
20
23
30
33
40
43
4C03 2C06 4C06 2C07 4C07 2C08
L8l1 Margln (LS)
naLlonal roperLy rlce AppreclaLlon
(C/C)
60
80
100
120
140
160
180
200
60
80
100
120
140
160
180
200
3]00 3]01 3]02 3]03 3]04 3]0S 3]06 3]07 3]08
Shanghal
Pangzhou
Zhengzhou
Chengdu
Pefel


8rean Murray, CarreL & Co. LqulLy 8esearch 5
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)
Lxh|b|t 4: 90 of GIA |n C|t|es Iac|ng k|s|ng Inventory (kunshan, Suzhou, Chengdu and 2hengzhou), 2]3 of NAV from Current ro[ects

5ootce. compooy Joto, 8teoo Mottoy, cottet & co.
Va|uat|on
Larger deve|opers suffer sma||er d|scount to NAV. 1he markeL appears Lo conLlnue Lo assume larger
developers should have Lhe necessary resources Lo develop Lhelr underlylng asseLs. As such, we observe
a sLrong correlaLlon beLween Lhe markeL caplLallzaLlon of varlous developers and Lhe dlscounL of Lhelr
share prlces Lo Lhelr nAv. 1haL sald, all developers are selllng aL a sLeep dlscounL Lo Lhelr nAv, wlLh
Chlna Cverseas, Lhe largesL developer by markeL caplLallzaLlon, selllng aL ~20 dlscounL, and smaller
developers, such as Popson, selllng aL ~70 dlscounL.
Lxh|b|t S: 1ang|b|e Va|uat|on: Larger Names Suffer Sma||er D|scount to NAV and nave n|gher ]8

5ootce. compooy Joto, 8teoo Mottoy, cottet & co.
Note. Nombet lo btockets Jeootes tbe tookloq of motket cop

Larger deve|opers trad|ng on h|gher ]8. 1he markeL also appears Lo be rellanL upon Langlble asseLs for
guldance on valuaLlon. As such, we observe a sLrong correlaLlon beLween Lhe markeL caplLallzaLlon of
varlous developers and Lhelr /8 raLlos. lurLher, Lhe larger developers are Lradlng aL a /8 of ~1.6 Llmes,
around Lhree Llmes hlgher Lhan Lhe smaller developers (LxhlblL 6).

Pefel
0.11
!lnan
8.31
Zhengzhou
13.94
Chengdu
18.08
kunshan
39.92
Suzhou
19.43
CurrenL
ro[ecLs
67
unsold
unlLs
33
xln (13)
vAnkL (2)
CCun18? CA8uLn (3)
AClLL (7)
CPlnA CvL8SLAS (1)
SPul Cn (6)
CPlnA 8LS (3)
CZ 8&l (4)
PkC (10)
PCSCn (9)
nLW WC8Lu (11)
SP lC81L (12)
SC (14)
8! CAl1AL (13)
CPLn (16)
SlnC CCLAn (8)
-0.3
0.0
0.3
1.0
1.3
2.0
2.3
3.0
-100 -90 -80 -70 -60 -30 -40 -30
D|scount to NAV
]8


8rean Murray, CarreL & Co. LqulLy 8esearch 6
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)
]L no |onger a re||ab|e va|uat|on measured for Ch|nese deve|opers. Larller Lhls year, a sLrong
correlaLlon exlsLed beLween Lhe markeL caplLallzaLlon of Lhe developers and Lhelr /L raLlos. 8uL noL
anymore. We could noL flnd meanlngful correlaLlon beLween Lhe Lwo measures. 1he uncerLaln ouLlook
ln Lhe lndusLry, Lhe rapldly deLerloraLlng sales and deceleraLlng properLy prlce appreclaLlon have all
made esLlmaLlng earnlngs a challenge. We also belleve Lhls ls one of Lhe reasons why /8 has a much
beLLer correlaLlon wlLh markeL caplLallzaLlon, as book value ls one of Lhe more Langlble accounLlng
measures, and hence ls percelved as more rellable for valuaLlon purpose (LxhlblL 7).

Lxh|b|t 6: 1ang|b|e Va|uat|on: Larger-Cap Names 1rad|ng on n|gher ]8

5ootce. compooy Joto, 8loombetq, 8teoo Mottoy, cottet & co.
Note. Nombet lo btockets Jeootes tbe tookloq of motket cop

Lxh|b|t 7: ]L Va|uat|on No Longer ke||ab|e, as "L" |s D|ff|cu|t to Iorecast

5ootce. compooy Joto, 8loombetq, 8teoo Mottoy, cottet & co.
Note. Nombet lo btockets Jeootes tbe tookloq of motket cop
k|nyuan's NAV |s ~56.30. We esLlmaLe xlnyuan's nAv Lo be ~$6.30 per share, ~30 hlgher Lhan lLs
recenL share prlce. AbouL Lwo-Lhlrds of xlnyuan's nAv ls from lLs currenL pro[ecL, whlle one Lhlrd ls from
Lhe unsold unlLs from some prevlous pro[ecLs (LxhlblL 4). We belleve LhaL Lhe Suzhou lnLernaLlonal
Carden ro[ecL wlll generaLe a loss, mosLly because of lLs hlgh land cosL (LxhlblL 8).
ManagemenL has lndlcaLed LhaL lL has suspended lLs land acqulslLlon sLraLegy because of markeL
uncerLalnLles. 1herefore, Lhls esLlmaLe only lncludes xlnyuan's currenL pro[ecLs ln Lhe nexL Lwelve Lo
elghLeen monLhs, wlLhouL conslderlng Lhe growLh poLenLlal of Lhe company. 1haL sald, we noLe Lhe
xlnyuan /8 raLlo, a raLlo LhaL Lhe markeL appears Lo be uslng Lo evaluaLe developers, ls Lradlng ln
Landem wlLh Lhe oLher smaller developers. /L ls also ln llne, buL low earnlng vlslblllLy undermlnes Lhe
rellablllLy of Lhls valuaLlon meLhodology.

0.33
1.03
1op na|f Avg ]8, 1.63
8ottom na|f Avg ]8, 0.S0
0.0
0.3
1.0
1.3
2.0
2.3
Chlna
Cverseas
(1)
vanke (2) CounLry
Carden
(3)
CPlnA
8LS (3)
Cz 8&l
(4)
Shul Cn
(6)
Aglle (7) Slno
Ccean
(8)
Pkc (10) nLW
WC8Lu
(11)
Popson
(9)
SP
lC81L
(12)
SC (14) 8!
CAl1AL
(13)
xln (13) CPLn
(16)
-43
-69
-1.0
-0.8
-0.6
-0.4
-0.2
0.0
0.2
Chlna
Cverseas
(1)
vanke (2) CounLry
Carden
(3)
CPlnA
8LS (3)
Cz 8&l
(4)
Shul Cn
(6)
Aglle (7) Slno
Ccean
(8)
Pkc (10) nLW
WC8Lu
(11)
Popson
(9)
SP
lC81L
(12)
SC (14) 8!
CAl1AL
(13)
xln (13) CPLn
(16)


8rean Murray, CarreL & Co. LqulLy 8esearch
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)
Lxh|b|t 8: Negat|ve NAV Contr|but|on from Suzhou

5ootce. compooy Joto, 8teoo Mottoy, cottet & co.
Company Descr|pt|on
xlnyuan 8eal LsLaLe Co., LLd., ls a resldenLlal real esLaLe developer focuslng on Lhe fasL-growlng 1ler-2
clLles ln Chlna. 1he company pursues a manufacLurlng model of real esLaLe developmenL - mlnlmum
land bank and fasL asseL Lurnover. xlnyuan has developmenL pro[ecLs ln slx clLles wlLh LoLal ClA close Lo
2 mllllon sqm as of 1P08.

1,303
334,183
102,360
82,843
86,367
80,708 (246,338)
107,626
34,169 161,793
-
30,000
100,000
130,000
200,000
230,000
300,000
330,000
400,000
Pefel !lnan Zhengzhou Chengdu kunshan Lx Suzhou Suzhou 1oLal nAv
(ex. unsold)
unsold 1oLal ro[ecL
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8rean Murray, CarreL & Co. LqulLy 8esearch 10
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)

5ootce. 8loombetq, 8teoo Mottoy, cottet & co.

Xin Yuan
Consolidated Income Statements Actual Actual Estimate Estimate Estimate
(USD '000) Year End 31-Dec 2006 2007 200S 2009 2010
Sales Revenue
Total Revenue 1+2,367 309,726 +77,+16 812,719 1,08+,905
change NfA 117.6 5+.1 70.2 33.5
Net Revenues 142,367 309,726 477,416 S12,719 1,0S4,905
change on pcp NfA 117.6 5+.1 70.2 33.5
COGS (ex Depreciation) (108,196) (208,135) (352,+17) (610,5+1) (821,191)
Gross Nargin 2+.0 32.8 26.2 2+.9 2+.3
Total SG8A (6,622) (27,+83) (55,062) (100,130) (133,9+0)
EBITDA 27,549 74,10S 69,93S 102,047 129,775
-change on pcp NfA 169.0 -5.6 +5.9 27.2
- of Sales 19.+ 23.9 1+.6 12.6 12.0
- Depreciation 0 0 0 0 0
- Amortisation (G'will and brands) - - - - -
EBIT 27,549 74,10S 69,93S 102,047 129,775
EB!T Nargin 19.+ 23.9 1+.6 12.6 12.0
!nterest !ncome +61 1,+17 3,+08 1,392 5,275
!nterest Expense (727) (3,20+) 7 13 17
- Net Interest Expense {266) {1,7S7) 3,415 1,406 5,293
Other non-operating !ncomefloss (++6) 397 7,301 0 0
Pretax Profit 26,S3S 72,71S S0,653 103,453 135,067
- Tax Expense (10,717) (30,180) (2+,506) (25,863) (33,767)
Effective Tax Rate 39.9 +1.5 30.+ 25.0 25.0
Net Profit 16,120 42,53S 56,147 77,590 101,301
-change on pcp NfA 163.9 32.0 38.2 30.6
- of revenues 11.32 13.73 11.76 9.55 9.3+
EPS {rep) - Basic 0.42 2.47 - 1.00 1.05 1.37
EPS {rep) - Diluted 0.42 2.47 - 0.92 0.96 1.26
change on pcp -691.2 -137.1 +.9 30.6
EPS {adj) - Basic 0.42 2.47 - 0.76 1.05 1.37
EPS {adj) - Diluted 0.42 2.47 - 0.70 0.96 1.26
change on pcp -691.2 -128.2 38.2 30.6
DPS {Ordinary Shares) - - - - -
change on pcp NfA NfA NfA NfA NfA
PJE Ratio 10.5x -1.Sx 4.Sx 4.6x 3.5x
PJE Ratio {adj.) 10.5x -1.Sx 6.3x 4.6x 3.5x
Xin Yuan
Valuation Summary
(USD '000) Year End 31-Dec 2006 2007 200S 2009 2010
Adj. EPS growth () -7+.8 -691.2 -128.2 38.2 30.6
PfE ratio (x) 10.5x -1.8x +.8x +.6x 3.5x
EvfEB!TDA (x) 17.+x 6.1x 11.1x 8.0x 5.7x
EvfEB!TA (x) 17.+x 6.1x 11.1x 8.0x 5.7x
EvfEB!T (x) 17.+x 6.1x 11.1x 8.0x 5.7x
Bk valuefShr 0.+3 2.+3 3.07 3.55 +.18
PfB 5.1x 0.9x 0.7x 0.6x 0.5x
FCF yield () -8.7 -50.2 -9+.2 -12.1 21.1
EB!TDA !nterest cover (x) 103.7x +1.5x NfN NfN NfN


8rean Murray, CarreL & Co. LqulLy 8esearch 11
INI1IA1ION RLPOR1 k|nyuan kea| Lstate Co., Ltd. (kIN]NSL)

5ootce. 8loombetq, 8teoo Mottoy, cottet & co.

Xin Yuan
Consolidated balance sheet summary
(USD '000) Year End 31-Dec 2006 2007 200S 2009 2010
Cash 8 Deposits 3+,91+ 309,315 27,220 8+,+66 159,059
Other Current Assets 139,511 +61,031 927,253 1,111,020 1,207,195
Current Assets 17+,+26 770,3+7 95+,+73 1,195,+86 1,366,25+
Fixed Assets 28,19+ 21,197 20,157 2+,957 29,757
Goodwill 8 !ntangibles 2,016 0 0 0 0
Other Non-Current Assets 320 15,651 38,668 78,637 120,979
Total assets 204,956 S07,195 1,013,29S 1,299,0S0 1,516,990
Current Debt 22,667 +9,28+ 77,235 77,235 77,235
Current Liabilities 96,173 105,090 170,006 26+,82+ 366,7+5
Non-current Debt 12,806 229,629 2+7,867 3+7,867 3+7,867
Other non-current Liabilities +,+18 33,293 25,010 38,979 5+,260
Total liabilities 136,064 417,296 520,11S 72S,904 S46,107
Shareholders Equity 6S,S92 3S9,S99 493,1S0 570,176 670,SS3
Total L+E 204,956 S07,195 1,013,29S 1,299,0S0 1,516,990
Net Debt 559 (30,+02) 297,882 3+0,636 266,0+3
Capital employed 69,451 359,497 791,062 910,S12 936,926
Net DebtfEv 0.1 -6.8 38.3 +1.5 35.7
Net DebtfEquity 0.8 -7.8 60.+ 59.7 39.7
NTAfShr 0.+2 2.+3 3.07 3.55 +.18
PricefNTA 10.6 1.8 1.+ 1.2 1.1
Xin Yuan
Summary Cash Flow Statement
(USD '000) Year End 31-Dec 2006 2007 200S 2009 2010
Pre-Tax Profit 26,S3S 72,71S S0,653 103,453 135,067
+ Depreciation 8 Amortisation - - - - -
- Cash Tax Paid (2,791) (2+,569) (15,015) (2+,809) (32,689)
- !nc in Working Capital (50,+83) (280,995) (+15,889) (116,598) (22,986)
+ Other OCF (1,2+3) 58,171 15,369 - -
Operating Cashflow {27,679) {174,675) {334,SS1) {37,954) 79,393
- Capital Expenditure (3,022) (2,623) 2,299 (+,800) (+,800)
FCF {30,701) {177,29S) {332,5S2) {42,754) 74,593
- Ordinary Dividends Paid (1,+76) - - - -
Net CF {32,17S) {177,29S) {332,5S2) {42,754) 74,593
Xin Yuan
Other value drivers
(USD '000) Year End 31-Dec 2006 2007 200S 2009 2010
ROE () 23.+ 10.9 11.+ 13.6 15.1
ROCE () 39.7 20.6 8.8 11.2 13.9
Net debtfequity () 0.8 -7.8 60.+ 59.7 39.7
EB!T !nterest Cover (x) -103.7x -+1.5x NfN NfN NfN
Net debt to EB!TDA (yrs) 0.0 NfN +.3 3.3 2.1
Asset turn (x) 0.7x 0.+x 0.5x 0.6x 0.7x
Working capitalfsales () 55.0 21+.8 16+.3 11+.5 92.1
Cap. exp.fdeprec. (x) NfN NfN NfN NfN NfN
Evfsales (x) 3.+x 1.5x 1.6x 1.0x 0.7x
Days inventory (x) 236.70x +52.60x 622.3+x +17.26x 321.+6x
Capital expendituref Sales (Net ) NfN 0.8 -0.5 0.6 0.+

lease see Lhe second Lo lasL page and lasL page of Lhls
INDUS1RY RLPOR1
Ch|na kesearch
SepLember 19, 2008

nao nong, CIA, 212-702-6621

Ch|na kea| Lstate: A 1a|e of 1wo Ma

Investment Summary
Chlna's physlcal real esLaLe markeL has been falll
selllng. 1he physlcal real esLaLe markeL faces som
reached a nadlr LhaL Lends Lo porLend a boLLom,
Men don'L change. 1he only new Lhlng ln Lhe w
Lerm lnvesLors Lo wade back lnLo Lhe secLor.

Ch|na's f|nanc|a| rea| estate market shou|d be a
flnanclal markeLs. ln Lhe pasL, bubbles have Lend
ma[orlLy of markeLs have Lended Lo rlse from Lhe
70 slnce laLe 2007. 1hls ls comparable Lo Lhe ~7
Chlnese developers have accompllshed" ln a ye
flnanclal real esLaLe markeL should be approachl

8ut the phys|ca| rea| estate market |s st||| fac|ng
developmenL. lloor space due for compleLlon ls
paradoxlcally porLends less pressure on Lhe flnan
deceleraLe furLher from here.

No nat|ona| bubb|e, |ong-term demand for res|d
we noLe LhaL demand for resldenLlal properLy ha
sllghLly behlnd supply growLh slnce 2004. A bala
bubble on a naLlonal scale. Longer Lerm, demand
lmprovemenL ln llvlng quallLy, a much less Lalked

Se|ect|ve po||cy eas|ng poss|b|e, even |f too ear|
currenL accounL ls an lmporLanL source of llquldl
lnflaLlon. 1he u.S. currenL accounL has been lmp
more leeway Lo selecLlvely ease Lhe sLranglehold
easlng may appear hasLy. A sofLenlng sLance ln m
real esLaLe markeLs.

Cpportun|t|es shou|d ar|se |n the next three to
llnger. 8uL Lhe flnanclal real esLaLe markeL shoul
oversupply was menaclng Lhe lndusLry ln Lhe mld
monLhs. CpporLunlLles should arlse ln Lhe comln

8uy CnLN, no|d LI and kIN. We recommend buy
scenarlo, ln our vlew. We would hold L! and walL
esLaLe markeL llfLs lLs margln and acceleraLes lLs
Company 1|cke
Chlna Pouslng & Land uevelopmenL,
lnc. CPLn
L-Pouse (Chlna) Poldlngs LlmlLed L!
xlnyuan 8eal LsLaLe Co., LLd. xln
5ootce. 1bomsoo, 8teoo Mottoy, cottet & co.
s documenL for lmporLanL dlsclosures.
arkets
lng, buL Lhe flnanclal real esLaLe markeL has fallen slgnlflcanLly,
me slgnlflcanL headwlnds. 8uL Lhe Lumble ln Lhe flnanclal real es
lf Lhe 21 bubbles ln Lhe 130 years of global flnanclal markeL are
orld ls Lhe hlsLory you don'L know." CpporLunlLles should arlse
approach|ng a bottom. We have lnvesLlgaLed 21 bubbles ln Lhe
ded Lo boLLom afLer a ~40-30 correcLlon ln Lhe ensulng Lhree
e ashes agaln afLer Lumbllng ~70. Chlna's flnanclal real esLaLe
70 correcLlon ln u.S. homebullder shares ln Lhe currenL u.S. h
ear whaL Lhelr u.S. colleagues have achleved" over Lhe course o
ng a boLLom.
g s|gn|f|cant headw|nds |n the near term. uevelopers have acce
seL Lo rlse, and lnvenLory level ln many 1ler-1 clLles looks preca
nclal real esLaLe markeL, buL noL so for Lhe physlcal one. roper
dent|a| property robust. 8enLal yleld has collapsed, especlally l
as been growlng ln Landem wlLh supply over Lhe pasL decade, a
nce ln supply and demand ln Lhe physlcal real esLaLe markeL Le
d for resldenLlal properLy wlll conLlnue Lo sLem from urbanlzaLlo
d abouL buL an lmporLanL drlver of demand for properLy.
|y for a genera| eas|ng. 1he u.S. dollar ls our currency, buL you
Ly ln Chlna, a worsenlng u.S. currenL accounL deflclL Lends Lo co
rovlng slnce 2007, augurlng well for Chlna's lnflaLlon ouLlook. 1
d on Lhose secLors severely affecLed durlng lLs moneLary LlghLen
moneLary pollcy, selecLlve or general, should render supporL Lo
s|x months for |ong-term |nvestors. 1he paln ln Lhe physlcal re
d be nearlng lLs nadlr. Many bubbles sLarL recuperaLlng afLer a
d 90's, vanke, Lhe bellweLher of Chlna's real esLaLe markeL, boL
ng monLhs for long-Lerm lnvesLors wadlng back lnLo Lhe markeL.
ylng CPLn, as lLs currenL share prlce lmplles land prlce would co
L for more earnlngs clarlLy, and would also hold xln unLll Lhe pr
asseL Lurnover. .
er kat|ng r|ce 1arget 08 LS ]
n 8uy $2.09 $7.00 $0.37
Pold $8.37 nA $0.39 (
Pold $4.27 nA $0.64
1
hao.hong[bmur.com
wlLhouL Lhe force of shorL
sLaLe markeL should have
e a gulde. As Parry 1ruman sald,
ln Lhe comlng monLhs for long-
130 years of hlsLory ln global
e years afLer Lhelr peaks. A
markeL has plummeLed over
houslng debacle, excepL LhaL Lhe
of Lhree years. As such, Chlna's
eleraLed Lhelr pace of land
arlous. lasLer land developmenL
rLy prlce appreclaLlon ls llkely Lo
n many of Lhe 1ler-1 clLles. 8uL
lbelL lL appears Lo have lagged
nds Lo lndlcaLe Lhe absence of a
on, as well as slgnlflcanL
ur problem." lndeed, Lhe u.S.
orrelaLe wlLh a rlse ln Chlnese
1hus, Lhe 8CC may soon flnd
nlng campalgn, even lf a general
boLh Lhe flnanclal and physlcal
al esLaLe markeL ls llkely Lo
~70 correcLlon. When houslng
LLomed afLer falllng 70 ln 18
.
orrecL 60 - an unllkely
ro[ecLed up cycle ln Chlna's real
] (]L) 09 LS ] (]L)
7 (3.7x) $0.97 (2.2x)
(14.2x) $0.83 (9.8x)
4 (6.7x) $0.93 (4.6x)


8rean Murray, CarreL & Co. LqulLy 8esearch 2
INDUS1RY RLPOR1 Ch|na kesearch

Cverv|ew
1he physlcal real esLaLe markeL ln Chlna has been falllng, buL Lhe flnanclal real esLaLe markeL has fallen,
slgnlflcanLly, wlLhouL Lhe force of shorL selllng. lndeed, Lhe plummeL has been so preclplLous LhaL Lhe
Chlnese developers' share prlce as a group ls now ~30 of whaL lL was aL lLs peak ln laLe 2007. 8y
comparlson, Lhe aggregaLe share prlce of u.S. bullders has also Lumbled ~70, buL ln Lhe Lhree years
afLer lLs peak ln laLe 2003. And many have dubbed Lhe currenL u.S. houslng debacle as Lhe worsL of Lhe
cenLury". Chlna developers' share prlce has achleved" ln Lwelve monLhs whaL Lhelr u.S. colleagues have
been endeavorlng" ln Lhree years.
lor guldance on Lhe prospecL for a posL bubble recovery ln Chlna, we have lnvesLlgaLed 21 bubbles ln
global flnanclal markeLs ln Lhe pasL 130 years. We found LhaL bubbles Lend Lo sLop falllng afLer an
approxlmaLe 40- 30 correcLlon on average, wlLh a ma[orlLy of Lhem flndlng a boLLom afLer falllng
approxlmaLely 70 ln Lhree years. 1he moLher of all bubbles", Lhe nASuAC mlllennlum bubble,
plummeLed a llLLle furLher, Lo 80 from lLs peak before flndlng some fooLlng. As such, Chlna's flnanclal
real esLaLe markeL should be approachlng lLs boLLom, lf hlsLory ls a gulde.
1haL sald, Lhe physlcal real esLaLe markeL ls sLlll faclng slgnlflcanL headwlnds ln Lhe near Lerm. 8esldenLlal
floor space due for compleLlon ls seL Lo rlse furLher, as developers speed up Lhelr land developmenL
process and sLall Lhelr land acqulslLlon. ln Lurn, Lhls ls llkely Lo puL more resldenLlal lnvenLory lnLo Lhe
markeL and deceleraLe properLy prlce appreclaLlon furLher. 1hls ls especlally Lrue for many of Lhe 1ler-1
clLles such as 8el[lng, for whlch Lhe lnvenLory level has rlsen omlnously.
lurLher, Lhe valuaLlon of many 1ler-1 clLles, measured by renLal yleld, appears expenslve when
compared Lo oLher ma[or lnLernaLlonal clLles. Lxpenslve valuaLlon porLends furLher pressure on Lhe
physlcal properLy markeL. 1haL sald, our research shows LhaL Lhe flnanclal real esLaLe markeL Lends Lo
lead Lhe physlcal markeL by abouL slx Lo nlne monLhs. 1hus, we belleve LhaL Lhe downLurn ln Lhe physlcal
markeL should have been prlced ln Lhe flnanclal real esLaLe markeL, aL leasL Lo a cerLaln exLenL.
uemand for resldenLlal properLy ln Chlna sLems ln parL from lLs urbanlzaLlon process. 8uL many have
lgnored Lhe subsLanLlal lmprovemenL ln llvlng quallLy, a phenomenon LhaL has generaLed [usL as much
growLh ln properLy demand as urbanlzaLlon. ConsequenLly, properLy demand has been growlng largely
ln Landem wlLh Lhe growLh ln houslng sLock supply ln Lhe pasL decade. We Lhus belleve Lhere has been
no naLlonal bubble, and belleve LhaL urbanlzaLlon and llvlng quallLy lmprovemenL are llkely Lo conLlnue
Lo propel demand for properLy for Lhe nexL Lwo decades.
Men don'L change. 1he only new Lhlng ln Lhe world ls Lhe hlsLory you don'L know." Chlna's flnanclal real
esLaLe markeL has fallen Lo a level LhaL Lends Lo augur for a boLLom, lf hlsLory ls a gulde. CpporLunlLles
should arlse for long-Lerm lnvesLors Lo wade back lnLo Lhe secLor selecLlvely ln Lhe comlng monLhs. 8uL
proceed wlLh cauLlon and paLlence - lL Lakes on average Lwo Lo Lhree years for a Lyplcal bubble Lo rlse
agaln from ashes. 1he recovery process could Lake some Llme, even Lhough Chlna's flnanclal real esLaLe
bubble has unraveled aL an acceleraLed pace.
1he I|nanc|a| kea| Lstate Market: Approach|ng the L|us|ve 8ottom
1he f|nanc|a| rea| estate market |s forward-|ook|ng. Perd-llke behavlor ln Chlnese funds Lends Lo puL
Lhe efflclency of Chlna's sLock markeL ln quesLlon. lndeed, many Chlnese funds boughL ln aL Lhe Lop of
Lhe markeL when Lhe Chlnese sLock lndex was hoverlng aL 6,000, buL llquldaLed Lhelr holdlngs on Lhe
way down. !usL before Lhe Clymplcs, Lhe Chlnese governmenL dlscouraged fund managers from
voclferaLlng Lhelr excesslve pesslmlsm regardlng Lhe sLock markeL publlcly. 1hese observaLlons do noL
lnsLlll a loL of confldence.
ls Lhe Chlnese sLock markeL, ln Lhls case Lhe share prlces of Chlnese developers, forward looklng? We
belleve lL ls. We measure Lhe sLaLe of Lhe Chlnese physlcal properLy markeL wlLh a dlffuslon lndex of
properLy prlce ln 33 ma[or clLles. 1hls dlffuslon lndex has plummeLed slnce March of Lhls year.
aradoxlcal ln Lhe eye of Lhe lnfldels of markeL efflclency, Chlnese developers' share prlces have been
Lumbllng slnce laLe 2007, long before Lhe currenL slowdown ln Lhe counLry's physlcal real esLaLe markeL.
lL appears LhaL developers' sLock prlces have correcLly anLlclpaLed Lhe currenL downLurn ln Chlna's real
esLaLe markeL long before lL began.



8rean Murray, CarreL & Co. LqulLy 8esearch 3
INDUS1RY RLPOR1 Ch|na kesearch
We noLe LhaL Lhls relaLlonshlp has perslsLed ln Lhe pasL decade, wlLh Lhe flnanclal real esLaLe markeL
performance, measured by Lhe sLock prlce reLurn of Chlnese developers, leadlng Lhe physlcal properLy
markeL performance by approxlmaLely slx Lo nlne monLhs on average. As such, we belleve Lhe share
prlces of developers have prlced ln Lhe currenL downLurn ln Lhe physlcal real esLaLe markeL, aL leasL Lo a
cerLaln exLenL.
Lxh|b|t 1: Deve|opers' Stock r|ce |s Iorward Look|ng - It 1ends to Lead roperty r|ce by S|x to N|ne
Months

5ootce. 8loombetq, N85, clc, 8teoo Mottoy, cottet & co.
1he f|nanc|a| rea| estate market shou|d be near|ng a bottom. AfLer esLabllshlng LhaL Lhe flnanclal real
esLaLe markeL ls forward looklng, Lhe nexL loglcal hypoLhesls Lo examlne ls wheLher Lhe flnanclal real
esLaLe markeL has largely reached lLs boLLom, or sLlll has furLher Lo fall. AfLer all, developers' share prlces
could conLlnue Lo fall, porLendlng furLher subsLanLlal deLerloraLlon ln Lhe physlcal real esLaLe markeL.
1o answer Lhls quesLlon, we have examlned ln a hlsLorlcal conLexL, Lhe posL recovery perlods of varlous
bubbles. 1he lmmedlaLe example ls Lhe currenL u.S. houslng debacle, whlch many belleve ls sLlll
unfoldlng.
ln Lhe currenL cycle, Lhe u.S 8ullders lndex peaked ln !uly 2003. AfLer reachlng a LenLaLlve sLop ln mld-
2006, lL had a rally of 30. 8uL Lhen Lhe u.S. 8ullder lndex Look anoLher dramaLlc dlve. now Lhese sLocks
as a group sLand aL a mere 30 of Lhelr value aL Lhe 2003 peak, and lL has been almosL Lhree years slnce
Lhe !uly 2003 peak (LxhlblL 2).
ln comparlson, Lhe currenL correcLlon ln Lhe Chlnese developers' share prlce has been of a slmllar
magnlLude Lo LhaL of Lhe u.S. bullders, or ~70, excepL LhaL Lhe Chlnese correcLlon has achleved" ln
abouL Lwelve monLhs whaL lLs u.S. colleagues have done ln abouL Lhree years (LxhlblL 2).
Lxh|b|t 2: Cver the ast 9 Months, the Ch|nese Deve|opers nave Suffered a Correct|on S|m||ar to What
the U.S. 8u||ders nave 8een Lndur|ng |n the 1hree ears S|nce the eak of the U.S. nous|ng 8ubb|e

5ootce. 8loombetq, locol 5tock xcbooqes, 8teoo Mottoy, cottet & co.
Note. ltlce setles loJexeJ ot tbelt tespectlve peoks ot 100. notlzootol oxls sbows tbe oombet of mootbs owoy ftom tbe peok, wltb tbe
peok epools 0. 1be nk cbloo uevelopets loJex ls oo epool-welqbteJ loJex of tbe followloq cbloo-boseJ ot cbloo-focoseJ Jevelopets.
2007 nk, JJ8J nk, 688 nk, 1109 nk, 2777 nk, JJ77 nk, 754 nk, 917 nk, 272 nk, 588 nk, 81J nk, J900 nk, 2JJ7 nk. 1be u.5. 8ollJet
loJex ls oo epool-welqbteJ loJex of tbe followloq u.5. Jevelopets. lnM, unl, Nvk, Muc, kl, k8n, lN, 1Ol, c1k, Mnk. cbloo leok.
5eptembet 2007, u.5. leok. Ioly 2005, NA5uAO leok. Motcb 2000, nk leok. Novembet 2007.
-30
-20
-10
0
10
20
30
-80
-60
-40
-20
0
20
40
60
80
100
6/98 1/00 7/01 1/03 7/04 1/06 7/07 1/09
roperLy rlce ulffuslon lndex (33 ClLles)
ueveloper rlce erf. (Lead 9 monLhs, 8S)
0
20
40
60
80
100
120
0
20
40
60
80
100
120
-37 M -31 M -23 M -19 M -13 M -7 M -1 M 3 M 11 M 17 M 23 M
Chlna 8eal LsLaLe lndex 09/'07
u.S. 8ullder lndex 07/'03
nASuAC Mlllenlum 8ubble 03/'00
Pk Chlna uevelopers 11/'07
eak


8rean Murray, CarreL & Co. LqulLy 8esearch 4
INDUS1RY RLPOR1 Ch|na kesearch
8uL Lhe currenL correcLlon of Lhe u.S. 8ullder lndex could be aLyplcal, some may argue. lndeed, lL ls
someLhlng exLraordlnary - lL ls Lhe one of Lhe mosL exLreme bubbles wlLhln Lhe uS bullders ln Lhe lasL
Lhree decades. Cf Lhe slx bubble eplsodes of Lhls lndex LhaL we have examlned, four of Lhem rebounded
before falllng 30. Cnly Lwo of Lhem, Lhe 1987 eplsode and Lhe currenL eplsode have fallen much
furLher Lhan 30, wlLh Lhe 1987 eplsode noL reachlng lLs nadlr unLll an 80 correcLlon (LxhlblL 3).
8eyond Lhe u.S. houslng bubbles, we have also examlned whaL we vlew as Lhe moLher of all bubbles, Lhe
nASuAC mlllennlum bubble. lL also Look around Lhree years Lo boLLom, afLer an 80 correcLlon (LxhlblL
2).
Lxh|b|t 3: Current Correct|on |n U.S. Deve|opers |s one of the Worst |n 1hree Decades

5ootce. 8loombetq, 8teoo Mottoy, cottet & co.
Note. ltlce setles loJexeJ ot tbelt tespectlve peoks ot 100. notlzootol oxls sbows tbe oombet of mootbs owoy ftom tbe
peok, wltb tbe peok epools 0. 1be u.5. 8ollJet loJex ls oo epool-welqbteJ loJex of tbe followloq u.5. Jevelopets. lnM,
unl, Nvk, Muc, kl, k8n, lN, 1Ol, c1k, Mnk. 1be composlte loJex ls tbe ovetoqe of oll tbe bobble eplsoJes. 1be
tespectlve peok of eocb eplsoJe ls sbowo lo tbe cbott.
A 70 correct|on post bubb|e has tended to suggest a market bottom. 1o gauge Lhe appllcablllLy of Lhe
lessons gleaned from Lhe u.S. 8ullder lndex, we have broadened Lhe scope of our lnvesLlgaLlon, by
examlnlng Lhe hlsLory of 21 sLock markeL bubbles around Lhe world ln Lhe pasL 130 years.
We flnd LhaL bubbles Lend Lo sLop falllng afLer an approxlmaLe 40 correcLlon on average, wlLh an
average recovery perlod of around Lhree years. lurLher, Lwo Lhlrds of Lhe bubbles examlned (plus and
mlnus one sLandard devlaLlon) sLop falllng afLer an approxlmaLe 70 correcLlon (LxhlblL 4). 1haL ls, Lhe
markeL Lends Lo flnd a boLLom afLer a 70 correcLlon LhaL occurred over Lhree years. Clven LhaL Lhe
aggregaLe share prlce of Chlnese developers has fallen by abouL 70 and aL an acceleraLed pace, lL
should be aL lLs boLLom, or aL leasL noL far from lL.

3/31/1981
3/31/1987
1/31/1994
6/30/1998
7/31/2003
6/30/2002
0
30
100
130
200
230
300
0
30
100
130
200
230
300
-36M -30M -24M -18M -12M -6M 0M 6M 12M 18M 24M 30M 36M 42M 48M 34M 60M
3/31/1981 3/31/1987
1/31/1994 6/30/1998
7/31/2003 6/30/2002
ComposlLe lndex*
eak


8rean Murray, CarreL & Co. LqulLy 8esearch 5
INDUS1RY RLPOR1 Ch|na kesearch
Lxh|b|t 4: 1S0 ears of G|oba| Stock Markets n|story, 21 8ubb|es: Most Stock Market 8ubb|es
8ottomed after ~70 Correct|on that Cccurred |n the 1hree ears Io||ow|ng the eak

5ootce. 8loombetq, Clobol lloooclol uoto, uoto5tteom, 8teoo Mottoy, cottet & co.
Note. ltlce setles loJexeJ ot tbelt tespectlve peoks ot 100. notlzootol oxls sbows tbe oombet of mootbs owoy ftom tbe
peok, wltb tbe peok epools 0. 1be composlte 5tock 8obble loJex ls oo epool-welqbteJ loJex of tbe followloq eplsoJes
of stock motket bobbles. u5 4/1864, u5 8/1929, u5 7/19J7, u5 8/1987, u5 J/2000, Iopoo 1/1920, Iopoo 5/1949,
Iopoo 9/195J, Iopoo 12/1989, uk 6/1720, uk 2/1825, uk 4/1972, uk 9/1987, Cetmooy 2/1925, Cetmooy 4/1927,
Cetmooy 4/1986, Cetmooy 4/2000, ltooce 5/1920, ltooce 2/1929, ltooce 1/194J, ltooce 7/1989.
A change |n monetary po||cy stance cou|d he|p stab|||ze the phys|ca| rea| estate market. Soarlng
lnflaLlon has bound Lhe Chlnese cenLral bank's moneLary hands ln Lhe pasL year. 8uL Chlnese headllne
Cl has already been on a decllne slnce lL reached lLs eleven-year hlgh ln lebruary. 8ecenL rapld 8M8
appreclaLlon may have leL Lhe cenLral bank regaln some conLrol over lLs moneLary pollcy. lnflaLlon ls
always and everywhere a moneLary phenomenon," as MllLon lrledman sald.
As Chlna's M2 growLh conLlnues Lo abaLe from Lhe hlsLorlcal hlgh level seen ln 2003/04, Lhe bank reserve
raLlo remalns aL lLs hlsLorlcal hlgh, Lhe u.S. currenL accounL conLlnues Lo lmprove, and as llquldlLy ln Lhe
counLry's flnanclal sysLem dralns, Lhe ouLlook for lnflaLlon should allevlaLe (LxhlblL 3).
Lxh|b|t S: "Inf|at|on |s a|ways and everywhere a monetary phenomenon"

5ootce. Mlltoo ltleJmoo, l8c, N85, 8loombetq, 8teoo Mottoy, cottet & co.
"1he U.S. do||ar |s our currency, but your prob|em." AnoLher less Lalked abouL source of llquldlLy ls Lhe
u.S. currenL accounL deflclL. 8efore 2007, Lhe u.S. currenL accounL deflclL has been a ma[or source of
llquldlLy worldwlde. LxLra llquldlLy from Lhe u.S. currenL accounL has been puLLlng upward pressure on
asseL prlces and lnflaLlon around Lhe globe. As one former u.S. 1reasury SecreLary famously declared,
1he u.S. dollar ls our currency, buL your problem."
8uL noL anymore. Slnce 2007, Lhe u.S. currenL accounL deflclL has lmproved subsLanLlally. Cur research
shows a good correlaLlon beLween Lhe sLaLe of Lhe u.S. currenL accounL deflclL and Chlnese lnflaLlon
(LxhlblL 6). 1hls makes lnLulLlve sense, glven Lhe close relaLlonshlp of Lhe moneLary pollcles beLween Lhe
u.S. and Chlna, one LhaL arlses from Chlna's forelgn currency reglme. 1he lmprovemenL ln Lhe u.S.
currenL accounL deflclL should help reduce Lhe excess llquldlLy ln Chlna's moneLary sysLem, and ln Lurn
lmprove Lhe ouLlook for Chlnese lnflaLlon.
10
20
30
40
30
60
70
80
90
100
110
-60M -48M -36M -24M -12M 0M 12M 24M 36M
avg-1sd
+1 S.u.
-1 S.u.
eak
10
12
14
16
18
20
22
24
26
28
30
10/98 4/00 10/01 4/03 10/04 4/06 10/07
Cl (re-scaled)
M2 y/y


8rean Murray, CarreL & Co. LqulLy 8esearch 6
INDUS1RY RLPOR1 Ch|na kesearch
Lxh|b|t 6: "1he US do||ar |s our currency, but your prob|em"

5ootce. lotmet u.5. 5ectetoty of tbe 1teosoty, 8A, N85, 8teoo Mottoy, cottet & co.
1he lmproved lnflaLlon ouLlook from subsldlng llquldlLy ln Lhe moneLary sysLem should Lhen enable Lhe
governmenL Lo sofLen lLs LlghLenlng blas, and Lo LargeL lLs pollcy rellef Lo Lhose lndusLrles LhaL have been
hlL parLlcularly hard durlng Lhe moneLary LlghLenlng campalgn.
1he hys|ca| kea| Lstate Market: S|gn|f|cant Near-1erm neadw|nds
roperty deve|opment p|pe||ne |s set to r|se, and ||ke|y to exert pressure on property pr|ce. As of !une,
resldenLlal floor space under consLrucLlon was sLlll growlng aL ~30 ?o?, buL floor space compleLed
seems Lo have slowed down dramaLlcally. PlsLorlcally, Lhese Lwo measures Lend Lo be hlghly correlaLed
(LxhlblL 7, upper panel). As such, we belleve Lhe decllne ln floor space compleLed ls a Lemporary bllp.
So far, properLy prlce appreclaLlon has deceleraLed across many ma[or clLles ln Chlna, wlLh a few clLles ln
Lhe souLh, such as Shenzhen, reglsLerlng Lhe sLeepesL decllnes. 8uL few clLles have lndeed seen a fall ln
properLy prlces on a year-over-year basls. 1haL sald, a rlse ln floor space compleLed means an lncrease ln
houslng lnvenLory for sale on Lhe markeL, especlally when compleLlon ls rlslng fasLer Lhan sales. Pence,
we expecL Lhe decllne ln properLy prlce appreclaLlon Lo conLlnue lLs course, lf hlsLory ls a gulde (LxhlblL 7,
lower panel).
Lxh|b|t 7: I|oor Space Comp|eted Is L|ke|y to k|se, utt|ng ressure on roperty r|ce

5ootce. N85, Nukc, locol 8oteoo of 5totlstlcs, clc, 8teoo Mottoy, cottet & co.

-13
-10
-3
0
3
10
13
-60
-40
-20
0
20
40
60
80
100
120
1994-l 1996-ll 1998-lll 2000-lv 2003-l 2003-ll 2007-lll
uS CurrenL AccounL ?/?
Chlna Cl ?/? (8S)
uS CurrenL AccounL ueLerloraLes
uS CurrenL AccounL lmproves
-40
-20
0
20
40
60
80
100
-20
-10
0
10
20
30
40
30
60
6/00 1/01 8/01 3/02 10/02 3/03 12/03 7/04 2/03 9/03 4/06 11/06 6/07 1/08
lloor Space under ConsLrucLlon ?/? (LS, 3mavg)
lloor Space CompleLed ?/? (3mavg)
-3
-2
-1
0
1
2
3
-30
-40
-30
-20
-10
0
10
20
30
40
6/00 1/01 8/01 3/02 10/02 3/03 12/03 7/04 2/03 9/03 4/06 11/06 6/07 1/08
lloor Space under ConsLrucLlon/Sold ?/? (LS, 6mavg)
MonLhly Chg ln roperLy rlce ?/? (6mavg)


8rean Murray, CarreL & Co. LqulLy 8esearch
INDUS1RY RLPOR1 Ch|na kesearch
Inventory has r|sen s|gn|f|cant|y, part|cu|ar|y |n the eastern prov|nces. Cfflclal sLaLlsLlcs conLlnue Lo
show a drasLlc reducLlon ln LransacLlon volume across Lhe counLry. 1o examlne Lhe severlLy of Lhls lssue,
we approxlmaLe lnvenLory ouLsLandlng uslng floor space under consLrucLlon and unsold floor space. We
Lhen compare Lhls measure wlLh LransacLlon volume ln respecLlve provlnces Lo derlve an lnvenLory-Lo-
sales raLlo.
We noLe LhaL Lhe lnvenLory-Lo-sales raLlo ln many easLern provlnces has rlsen omlnously. lor lnsLance,
Lhe raLlo ln 8el[lng has soared well over Lhree Llmes ln Lhe flrsL half. arL of Lhe reason, we belleve, ls Lhe
8el[lng Clymplcs. Powever, Lhe Clymplc facLor alone may noL have accounLed for Lhe enLlre sLory of a
subsLanLlal slowdown ln properLy sales, Lhough lL does help Lo explaln why Lhe lnvenLory lssue ln 8el[lng
appears Lo be Lhe mosL severe ln Lhe counLry. lnvenLory ln oLher provlnces and munlclpallLles, such as
1lan[ln, !langsu, lu[lan and Cuangdong where many 1ler-1 clLles are locaLed, ls also bulldlng up, albelL Lo
a lesser exLenL (LxhlblL 8, upper panel).

Lxh|b|t 8: Inventory-to-Sa|es kat|o nas k|sen |n Many Lastern rov|nces, but Looks Large|y Conta|ned |n Centra| and Western rov|nces

5ootce. N85, Nukc, locol 8oteoo of 5totlstlcs, clc, 8teoo Mottoy, cottet & co.
Note. ltovloces wltb loveototy-to-soles totlo tlsloq mote tboo 20X ote cltcleJ lo teJ.
Shangha| appears expens|ve re|at|ve to other ma[or |nternat|ona| c|t|es |n terms of rea| renta| y|e|d.
undlLs have argued LhaL Chlnese properLy ls very expenslve by lnLernaLlonal sLandards, observlng LhaL
Lhe properLy prlce Lo personal lncome raLlo ln Chlna ls perhaps over 20 Llmes, versus Lhe World 8ank's
affordablllLy benchmark of around flve Lo slx Llmes.
We belleve LhaL lL ls dlfflculL Lo value Chlnese properLy accuraLely on an lncome basls. Such dlfflculLy
arlses from Lhe compllcaLlons ln measurlng Chlnese lncome. Chlna's lncome Lax sysLem ls sLlll callow,
and hence much of Chlnese lncome has been under-reporLed. ConsequenLly, Lhe properLy prlce Lo
personal lncome raLlo could be lnadverLenLly lnflaLed.
0
2
4
6
8
10
12
14
16
Lastern Area 8e|[|ng 1|an[|an nebe| L|aon|ng Shangha| I|angsu 2he[|ang Iu[|an Shangdong Guangdong Guangx| na|nan
2004
2006
2008
(I|oor Space Under Construct|on + Unso|d)]So|d
0
2
4
6
8
10
12
14
16
Centra| Area Shanx| Inner Mongo||a I|||n ne||ong[|ang Anhu| I|angx| nenan nube| nunan
2004
2006
2008
0
3
10
13
20
23
30
Western Area Chongq|ng S|chuan Gu|zhou unnan 1|bet Shaanx| Gansu |ngha| N|ngx|a k|n[|ang
2004
2006
2008


8rean Murray, CarreL & Co. LqulLy 8esearch 8
INDUS1RY RLPOR1 Ch|na kesearch
8esearch conducLed by CASS ln 2003 lndlcaLed LhaL unreporLed lncome, or grey" lncome, could be over
40 of Chlnese Laxable lncome. 1hls could be one of Lhe reasons why Chlna's properLy prlce Lo personal
lncome raLlo ls so hlgh compared Lo Lhe lnLernaLlonal average. lL also helps Lo explaln Lhe phenomenon
LhaL 40-30 of Lhe fundlng for properLy purchase ln Chlna ls from buyers' own savlngs, lnsLead of bank
loans.
1o have an ob[ecLlve evaluaLlon, we opL for Lhe classlc renLal yleld measure, wlLh a small modlflcaLlon.
We subLracL lnLeresL raLes, a flnanclng cosL, from renLal yleld, and Lhen compare Lhe ad[usLed renLal
yleld ln Shanghal wlLh oLher ma[or lnLernaLlonally clLles globally.
noL surprlslngly, Shanghal ls ranked hlgh ln Lhe league Lable aL number flve, ouL of Lhe 33 lnLernaLlonal
clLles LhaL we examlned. 1he clLy ls more expenslve Lhan new ?ork, London, arls, 8ome, Sydney and
Pong kong, wlLh a real yleld of less Lhan mlnus 3. 8uL lL ls more affordable Lhan Moscow, Mumbal and
Po Chl Mlnh ClLy, lf Lhls ls any consolaLlon (LxhlblL 9).
1he caveaL, of course, ls LhaL Lhe Chlnese do noL generally have a renLal culLure. lnsLead, Chlnese culLure
has a sLronger propenslLy Lo own Lhan Lo renL. roperLy prlces ln many 1ler-1 clLles may be ouL of reach
for Lhe worklng youLh. Many hence choose Lo llve wlLh Lhelr parenLs, whlle savlng up for Lhelr own
aparLmenLs. 1here ls no sLlgma aLLached. arenLs may even dole ouL Lhelr own savlngs for Lhe down
paymenL when Lhe klds are ready Lo move ouL.

Lxh|b|t 9: Ma[or Internat|ona| C|t|es kanked by kea| kenta| |e|d: Shangha| Appears Lxpens|ve G|oba||y
|n 1erms of kea| |e|d

5ootce. N85, 8loombetq, Clobol ltopetty ColJe, kespectlve coootty ceottol 8ooks, 8teoo Mottoy, cottet & co.

kank Country]C|ty USD]SM r|ce]kent USD kent]Mth Gross |e|d Interest kate kea| |e|d
1 1urkey,lsLanbul 1,838 13x 1,202 6.47 16.73 -10.28
2 8ussla,Moscow 20,721 22x 9,334 4.61 11.00 -6.39
3 lndla,Mumbal 11,413 23x 4,392 4.02 9.00 -4.98
4 vleLnam/PCMC 2,070 11x 2,764 9.43 14.00 -4.37
3 Chlna,Shanghal 2,697 23x 1,176 4.36 7.47 -3.11
6 newZealand,Auckland 4,438 18x 2,479 3.39 8.00 -2.41
7 Pungary,8udapesL 3,411 13x 2,334 6.84 8.30 -1.66
8 Creece,CreLe 9,347 37x 2,331 2.71 4.23 -1.34
9 MalLa,valleLa 4,349 33x 1,241 2.83 4.23 -1.40
10 AusLralla,Sydney 7,083 17x 4,143 3.83 7.23 -1.40
11 1alwan,1alpel 4,424 42x 1,031 2.38 3.63 -1.23
12 uk,London 29,308 24x 12,130 4.12 3.00 -0.88
13 lLaly,8ome 10,901 28x 3,944 3.62 4.23 -0.63
14 Spaln,Madrld 6,746 27x 2,479 3.67 4.23 -0.38
13 lrance,arls 14,417 23x 6,141 4.26 4.23 0.01
16 uenmark,Copenhagen 7,140 22x 3,292 4.61 4.60 0.01
17 Luxembourg 7,333 23x 3,140 4.28 4.23 0.03
18 Cyprus,Llmassol 3,349 23x 1,468 4.38 4.23 0.13
19 AusLrla,vlenna 4,636 23x 2,040 4.40 4.23 0.13
20 oland,Warsaw 3,087 17x 3,026 3.93 3.73 0.20
21 Pongkong,Pongkonglsland 16,032 27x 3,982 3.73 3.30 0.23
22 Cermany,8erlln 3,604 21x 1,728 4.80 4.23 0.33
23 8elglum,8russels 3,883 20x 1,902 4.90 4.23 0.63
24 llnland,Pelslnkl 3,131 20x 2,373 3.00 4.23 0.73
23 LgypL,Calro 406 9x 376 11.33 10.30 0.83
26 Slovenla,L[ubl[ana 4,322 18x 2,173 3.49 4.23 1.24
27 Czech8epubllc,rague 6,012 20x 3,013 3.02 3.30 1.32
28 SwlLzerland,Ceneva 8,332 21x 4,103 4.80 2.73 2.03
29 uS,new?ork 14,898 23x 6,316 4.37 2.00 2.37
30 neLherlands,AmsLerdam 3,331 13x 3,666 6.63 4.23 2.38
31 lndonesla,!akarLa 1,334 9x 1,326 11.27 8.30 2.77
32 Canada,1oronLo 4,737 13x 3,192 6.74 3.00 3.74
33 !apan,1okyo 13,831 21x 7,711 4.86 0.30 4.36
34 1halland,8angkok 2,492 13x 1,986 7.97 3.30 4.47
33 hlllpplnes,MeLroManlla 1,969 9x 2,210 11.23 3.23 3.98


8rean Murray, CarreL & Co. LqulLy 8esearch 9
INDUS1RY RLPOR1 Ch|na kesearch
Many 1|er-1 c|t|es and some 1|er-2]3 c|t|es are becom|ng expens|ve, from a y|e|d perspect|ve. noL only
does Shanghal appear expenslve when compared wlLh oLher ma[or lnLernaLlonal clLles, lL has become
more expenslve over Lhe pasL few years, wlLh Lhe renLal yleld ln Lhe clLy decllnlng sLeadlly. 1haL sald, Lhls
decllne ln renLal yleld ln Shanghal acLually appears less perLurblng when compared wlLh oLher clLles ln
Chlna. Whlle Shanghal's renLal yleld has fallen by more Lhan 10, oLher 1ler-1 clLles, such as 8el[lng,
1lan[ln and Shenzhen, have seen Lhelr renLal yleld decllnlng by 20 or much more slnce 2004 (LxhlblL
10).
A number of Lhe fasL-developlng 1ler-2/3 clLles, such as uallan and Chengdu, have also had slmllar
experlences (LxhlblL 10). Cn Lhe naLlonal level, renLal yleld has also fallen more Lhan 20, lmplylng a
slgnlflcanL lncrease ln properLy valuaLlon across Lhe counLry over Lhe pasL few years. lL ls noL a
parLlcularly accommodaLlng envlronmenL for renLal properLy lnvesLors.

Lxh|b|t 10: kenta| |e|ds |n Many 1|er 1 C|t|es nave 8een Depressed, after the 1orr|d k|se |n roperty r|ce |n 1hese C|t|es, a Iew 1|er 2]3
C|t|es A|so Look recar|ous

5ootce. N85, locol 8oteoo of 5totlstlcs, locol teotol websltes, clc, 8teoo Mottoy, cottet & co.
Note. cltles wltb teotol ylelJ Jeclloloq by mote tboo 20X ote cltcleJ lo teJ.

Acce|erat|on |n |and deve|opment a|so warns of further pressure on property pr|ce. We have
approxlmaLed Lhe pace of land developmenL by comparlng Lhe ?o? change ln land purchased wlLh Lhe
?o? change ln land developmenL. We noLlce LhaL Lhe developmenL pace has acceleraLed, as land
acqulslLlon slows down from lLs Lorrld speed ln laLe 2007.
Cur research has found a poslLlve correlaLlon beLween Lhe pace of land developmenL and properLy prlce
appreclaLlon (LxhlblL 11, upper panel). 1haL ls, more land developmenL Lends Lo foreshadow a perlod of
30
60
70
80
90
100
110
120
130
Avg 8e|[|ng 1|an[|n Shangha| Nan[|ng nangzhou N|ngbo k|amen I|nan |ngdao Guangzhou Shenzhen
2004
2006
2008
1|er-1 C|t|es kenta| |e|d
30
60
70
80
90
100
110
120
130
140
Avg Sh|[|azhuang 1a|yuan Shenyang Da||an Iuzhou na|kou Changsha Changchun narb|n nefe| nohhot
2004
2006
2008
1|er-2 C|t|es kenta| |e|d
30
60
70
80
90
100
110
120
130
140
Avg Nanchang 2hengzhou Wuhan Nann|ng Chongq|ng Chengdu k|n|ng kunm|ng k|an Lanzhou |nchuan Gu|yang Urumq|
2004
2006
2008
1|er-3 C|t|es kenta| |e|d


8rean Murray, CarreL & Co. LqulLy 8esearch 10
INDUS1RY RLPOR1 Ch|na kesearch
slowdown ln properLy prlce appreclaLlon. 1hls flndlng makes lnLulLlve sense, as supply rlses wlLh more
land Lurnlng lnLo resldenLlal properLles. lL ls also conslsLenL wlLh our earller observaLlon of Lhe
relaLlonshlp beLween floor space compleLlon and resldenLlal properLy prlce (LxhlblL 7).
8ut a s|owdown |n |and acqu|s|t|on shou|d |essen the pressure on deve|opers' pr|ce performance.
uurlng Lhe course of 2007, Chlnese developers have been engaged ln flerce baLLles for land banks, parLly
ouL of fear of Lhe governmenL curLalllng land supply, and parLly due Lo Lhe deslre Lo boosL sLock
valuaLlon. Many of Lhe rlchesL men ln Chlna have made Lhelr forLunes ln real esLaLe.
1he posLer chlld of Lhls frenzy was a parcel of land ln Shanghal, whlch was sold for a record 8M8 67,000
per square meLer, and was dubbed Lhe land klng." 1hls prlce was abouL 30 hlgher Lhan Lhe prevlous
comparable markeL prlce for resldenLlal properLles ln Lhe nelghborhood, leavlng many markeL waLchers
gasplng ln awe. 8ecenLly, Lhe acqulrer reallzed lL overpald for Lhe land, and has declded Lo forfelL. 1he
land klng" ls now an empLy parklng loL, and lLs demlse serves as Lhe eplLome of Lhe land grab frenzy ln
2007.
ConLrary Lo common bellef LhaL land acqulslLlon ls beneflLs Lhe valuaLlon of developer share prlces, our
research flnds an lnverse correlaLlon beLween developers' sLock performance and Lhe pace of land
acqulslLlon. We flnd LhaL Lhe fasLer a developer acqulres land, Lhe worse lLs sLock performance Lends Lo
be (LxhlblL 11, lower panel). WlLh Lhe slowdown ln developer land acqulslLlon, Lhe pressure on Lhelr
sLock prlce should allevlaLe, lf hlsLory ls a gulde.
Lxh|b|t 11: Acce|erat|on |n Land Deve|opment |s 8enef|c|a| to Deve|opers' Stock r|ce, but Detr|menta|
to roperty r|ce Apprec|at|on

5ootce. N85, Nukc, locol 8oteoo of 5totlstlcs, Mlolstty of looJ ooJ kesootces, clc, 8teoo Mottoy, cottet & co.
No nat|ona| bubb|e - property supp|y and demand |arge|y |n ba|ance. Whlle chaLLer of a properLy
bubble ls rlfe, we belleve supply and demand for properLy durlng Lhe pasL decade have largely been ln
balance on Lhe naLlonal level.
Chlnese demand for properLy ln parL sLems from urbanlzaLlon. Cver Lhe pasL decade, we esLlmaLe LhaL
urbanlzaLlon generaLed demand for resldenLlal properLy of approxlmaLely 3 per annum. Chlna's
urbanlzaLlon process has been very dramaLlc , ln 1949 when Chlna was flrsL founded as a republlc,
roughly 11 of lLs populaLlon llved ln Lhe clLles buL by 2007, Lhls raLlo had rlsen Lo 43.
8esldes urbanlzaLlon, lmprovemenL ln llvlng quallLy has also played a slgnlflcanL role ln Lhe formaLlon of
demand for resldenLlal properLy, lL ls much less Lalked abouL. Llvlng area per caplLa ln 1949 was less Lhan
-3
-2
-1
0
1
2
3
-30
-40
-30
-20
-10
0
10
20
30
40
6/00 1/01 8/01 3/02 10/02 3/03 12/03 7/04 2/03 9/03 4/06 11/06 6/07 1/08
Land urchased/ueveloped ?/?(LS)
MonLhly Chg ln roperLy rlce ?/? (Lead 6 mLhs, smooLh)
Land AcqulslLlon AcceleraLes
Land uevelopmenL AcceleraLes
-30
-40
-30
-20
-10
0
10
20
30
40
-30
-20
-10
0
10
20
30
6/00 12/00 6/01 12/01 6/02 12/02 6/03 12/03 6/04 12/04 6/03 12/03 6/06 12/06 6/07 12/07 6/08
Chlna ueveloper MonLhly 8Ln
Land urchased/ueveloped ?/? (LS)
Land uevelopmenL AcceleraLes
Land AcqulslLlon AcceleraLes
'07 Land Crab
'03/06 Cov Land 8elease 8esLrlcLlons


8rean Murray, CarreL & Co. LqulLy 8esearch 11
INDUS1RY RLPOR1 Ch|na kesearch
seven square meLers. Many famllles were squashed ln one-room governmenL houslng, wlLh shared
baLhroom faclllLles. 8y 2007, Lhls measure has grown Lo well over 28 square meLers per caplLa, or over
four Llmes as large as slxLy years ago. We esLlmaLe LhaL Lhls lmprovemenL ln llvlng quallLy has LranslaLed
lnLo roughly 4 annual growLh ln demand for resldenLlal properLy slnce 1999.
Cn Lhe oLher hand, floor space compleLlon for resldenLlal properLy has grown aL approxlmaLely 9.3 pa
ln Lhe pasL decade, roughly aL Lhe same pace as demand growLh from llvlng quallLy lmprovemenL and
urbanlzaLlon. 1haL sald, supply appears Lo have sllghLly ouLpaced demand slnce 2004 and could be one
of Lhe culprlLs for Lhe currenL condlLlons ln Chlna's real esLaLe markeL (LxhlblL 12).
Lxh|b|t 12: No Nat|ona| 8ubb|e - roperty Supp|y and Demand nave been Large|y |n 8a|ance |n the ast
Decade

5ootce. N85, clc, 8teoo Mottoy, cottet & co.
Long-term demand for res|dent|a| property robust. uesplLe slgnlflcanL headwlnds for Chlna's properLy
markeL ln Lhe near Lerm, we belleve lLs long-Lerm prospecLs are sound. Chlna's lmprovemenL ln llvlng
quallLy, as measured by llvlng space per caplLa, has been closely Lralllng Lhe 1alwanese experlence for
Lhe pasL 13 years. ln 1977, per caplLa llvlng space ln 1alwan was only 13 square meLers. lL grew Lo 29
square meLers by 1993. 1hls compares wlLh 13 square meLers ln 1993 and 28 square meLers ln 2007 for
Chlna (LxhlblL 13). Clven Lhe culLure slmllarlLy beLween Chlna and 1alwan, we belleve Lhls comparlson ls
valld and demand for properLy ln Chlna should conLlnue Lo grow, followlng Lhe 1alwanese experlence.
Lxh|b|t 13: Ch|na's ua||ty of L|v|ng |s 1ra|||ng 1a|wan's Deve|opment Lxper|ence, and Shou|d
Cont|nue.

5ootce. N85, 1olwoo Notloool 5totlstlcs, 8teoo Mottoy, cottet & co.

uemand from
urbanlzaLlon
uemand from Llvlng
CuallLy lmprovemenL
lloor Space CompleLed
('99=100)
90
110
130
130
170
190
210
90
110
130
130
170
190
210
99 00 01 02 03 04 03 06 07
1993:28.6
2007: 28.4
10
13
20
23
30
33
40
43
10
13
20
23
30
33
40
43
77 79 81 83 83 87 89 91 93 93 97 99 01 03 03 07
1alwan Llvlng Area er Cap
Chlna Llvlng Area er Cap (Lag 13 years, from '93)

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8rean Murray, CarreL & Co. LqulLy 8esearch 14
INDUS1RY RLPOR1 Ch|na kesearch

Important D|sc|osures




All prlces are as of Lhe markeL close on 9/18/2008.
AL Lhe Llme Lhls reporL was publlshed, 8rean Murray, CarreL & Co., LLC made a markeL ln Chlna Pouslng & Land uevelopmenL (CPLn).
ln Lhe normal course of lLs buslness, 8rean Murray, CarreL & Co., LLC does and lnLends Lo seek compensaLlon for lnvesLmenL banklng and/or
non-lnvesLmenL banklng servlces from Lhe companles ln lLs coverage unlverse. As a resulL, lnvesLors should be aware LhaL Lhe llrm may have a
confllcL of lnLeresL LhaL could affecL Lhe ob[ecLlvlLy of Lhls reporL. lnvesLors should conslder Lhls reporL as only a slngle facLor ln maklng Lhelr
lnvesLmenL declslons. non-u.S. research analysLs LhaL may have conLrlbuLed Lo Lhls reporL are noL reglsLered/quallfled as research analysLs
wlLh Lhe lln8A.
1he research analysL(s) or research assoclaLe(s) prlnclpally responslble for Lhe preparaLlon of Lhls research reporL has recelved compensaLlon
based upon varlous facLors, lncludlng quallLy of research, lnvesLor cllenL feedback, sLock plcklng, compeLlLlve facLors and flrm revenues. 1he
compensaLlon ls deLermlned excluslvely by research managemenL and senlor managemenL (noL lncludlng lnvesLmenL banklng).


8rean Murray, CarreL & Co. LqulLy 8esearch 15
INDUS1RY RLPOR1 Ch|na kesearch

# of Secur|t|es of 1ota| Secur|t|es
# of I8-ke|ated Secur|t|es |n
ast 12 mos. of 1ota| Secur|t|es
8u? 101 33.19 13 14.83
PCLu 44 24.04 0 0
SLLL 7 3.83 0 0
nC1 8A1Lu 31 16.94 2 6.43
1C1AL 183

Note . 5tock ptlce volotlllty moy coose tempototy ooo-ollqomeot of some totloqs wltb some totqet ptlces.



Va|uat|on Methodo|ogy and k|sks. We use Lhe nAv meLhodology Lo evaluaLe Chlna Pouslng & Land uevelopmenL (CPLn). We esLlmaLe Lhe
underlylng value of Lhe company Lo be ~$7-8. 1he land ln 8aqlao consLlLuLes ~70 of Lhe company's esLlmaLed nAv. 8lsks Lo Lhe achlevemenL
of our prlce LargeL lnclude (1) SlgnlflcanL lndusLry headwlnds, especlally ln Lhe 1ler-1 clLles, could permeaLe Lhe healLhy local xl'an markeL. (2)
Small developers who are sLrapped for cash could llquldaLe Lhelr pro[ecLs ouL of desperaLlon. oLenLlal !v parLners could afford Lo spend Llme
cherry plcklng, and hence could delay Lhe !v negoLlaLlon. (3) Land prlces ln xl'an could plummeL, and hence dramaLlcally reduce Lhe
company's valuaLlon.
Ana|yst Cert|f|cat|on
l, Pao Pong, ClA, hereby cerLlfy LhaL Lhe vlews expressed ln Lhls research reporL accuraLely reflecL my personal vlews abouL any and all of Lhe
sub[ecL securlLles or lssuers referred Lo ln Lhls documenL. 1he analysL and assoclaLe analysL furLher cerLlfy LhaL Lhey have noL recelved and wlll
noL be recelvlng dlrecL or lndlrecL compensaLlon ln exchange for expresslng Lhe recommendaLlon conLalned ln Lhls publlcaLlon.

D|sc|a|mers
Some companles LhaL 8rean Murray, CarreL & Co., LLC follows are emerglng growLh companles whose securlLles Lyplcally lnvolve a hlgher
degree of rlsk and more volaLlllLy Lhan Lhe securlLles of more esLabllshed companles. 1he securlLles dlscussed ln 8rean Murray, CarreL & Co.,
LLC research reporLs may noL be sulLable for some lnvesLors. lnvesLors musL make Lhelr own deLermlnaLlon as Lo Lhe approprlaLeness of an
lnvesLmenL ln any securlLles referred Lo hereln, based on Lhelr speclflc lnvesLmenL ob[ecLlves, flnanclal sLaLus and rlsk Lolerance. 1hls reporL
may dlscuss numerous securlLles, some of whlch may noL be quallfled for sale ln cerLaln sLaLes and Lo cerLaln caLegorles of lnvesLors. 8eaders
are advlsed LhaL Lhls analysls reporL ls lssued solely for lnformaLlonal purposes and ls noL Lo be consLrued as an offer Lo sell or Lhe sollclLaLlon
of an offer Lo buy. 1he lnformaLlon conLalned hereln ls based on sources whlch we belleve Lo be rellable buL ls noL guaranLeed by us as belng
accuraLe and does noL purporL Lo be a compleLe sLaLemenL or summary of Lhe avallable daLa on Lhe company, lndusLry or securlLy dlscussed ln
Lhe reporL. asL performance ls no guaranLee of fuLure resulLs. Any oplnlons expressed hereln are sLaLemenLs of our [udgmenL as of Lhe daLe
of publlcaLlon and are sub[ecL Lo change wlLhouL noLlce. LnLlLles lncludlng buL noL llmlLed Lo Lhe llrm, lLs offlcers, dlrecLors, employees,
cusLomers, afflllaLes may have a poslLlon, long or shorL, ln Lhe securlLles referred Lo hereln, and/or oLher relaLed securlLles, and from Llme Lo
Llme may lncrease or decrease such poslLlon or Lake a conLra poslLlon. 1he llrm (or persons relaLed LhereLo) may make a markeL ln Lhe
securlLles menLloned hereln, and may from Llme Lo Llme perform lnvesLmenL banklng or oLher servlces for, or sollclL lnvesLmenL banklng or
oLher buslness from, and may have oLher relaLlonshlps wlLh any company menLloned ln Lhls reporL. 8rean Murray, CarreL & Co., LLC ls a
member of SlC, lln8A, llcensed wlLh varlous sLaLe securlLles regulaLory auLhorlLles, and a reglsLered u.S. 8roker-uealer. no parL of Lhls reporL
may be reproduced ln any form wlLhouL Lhe express permlsslon of 8rean Murray, CarreL & Co., LLC. AddlLlonal lnformaLlon ls avallable upon
requesL.