The Goldman Sachs Group, Inc. December 12, 2005 Coverage view: Neutral China Property Property developers Play on second-tier cities. In 2006-2007, we expect higher growth potential in second-tier cities/Shenzhen than in other first- tier cities. We believe developers with existing landbank in these cities will maximize NAV accretion. Sector policy risk remains high near term. We initiate a Neutral coverage view; top pick: COLI. Initiate sector with Neutral coverage view; prefer COLI (Outperform) We believe developers that have existing exposure in second-tier cities and Shenzhen will be able to capture the higher growth potential in these markets, which will translate into faster NAV accretion in 2006-2007. We prefer China Overseas Land (COLI, OP), and estimate that 44% of the companys end-2006E GAV and half of its 2006E-2007E profits will be generated from second-tier cities and Shenzhen, compared with the sector averages of 33% and 22%. We expect average 24%/32% price rises in 2nd-tier/Shenzhen in 2006-2007 Affordability in most second-tier cities is generally better than in first-tier cities, which we believe will drive faster urbanization and resettlement. We expect an average 24% price rise in 2006-2007 for most second-tier cities. Given limited supply and increasing affordability, we forecast a 32% price increase in Shenzhen during the same period. Second-tier cities less vulnerable to near-term risks than first tier Although policy risk is high in all geographical regions, we believe growth in second-tier cities will be less affected by government policies than that in first-tier cities. China property valuation comparison Price Current NAV Prem/ (Disc) Forward NAV Prem/( Disc)Target Potential upside Target price prem/(Disc) to NAV StockRating(HK$)(HK$)(%)(HK$)(%)05E 06E07E05E06E07E(HK$)(%)(%) China OverseasOP3.3754.02 (16) 4.40 (23) 16 11 9 3 4 5 3.7511 (15) Shanghai Forte LandIL2.9753.80 (22) 4.16 (28) 10 9 7 4 4 6 3.104 (25) China Resources LandIL3.2003.00 7 3.81 (16) 18 14 12 2 2 2 3.05(5) (20) Beijing Capital LandIL2.2753.08 (26) 3.46 (34) 23 17 10 2 3 4 2.25(1) (35) PE (X)Yield (%) Source: Company data, Gao Hua Securities Research estimates. Why read this report New sector coverage Identifies high-growth areas for NAV accretion Analyzes impact of policy on growth Useful market data points Yi Wang, CFA Beijing Gao Hua Securities Company Limited Beijing: 86-10-6535-3022 Anthony Wu Goldman Sachs (Asia) L.L.C. Hong Kong: 852-2978-0634 Analysts employed by non-US affiliates are not required to take the NASD/NYSE analyst exam. Global Investment Research The Goldman Sachs Group, Inc. does and seeks to do business with companies covered in its research reports. As a result, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. For Reg AC certification, see page 44. For other important disclosures, see page 51, go to or contact your investment representative. China Property Property Developers Goldman Sachs Global Investment Research - December 12, 2005 Table of contents 1 Overview: Play on second-tier cities 4 Second-tier cities: Faster, less volatile growth than first tier 13 First-tier cities: Apart from Shenzhen, most face a slowdown 23 Company snapshots 24 China Overseas Land (OP): Solid national player 30 Shanghai Forte Land (IL): Finding the way out 35 China Resources Land (IL): On the right track 40 Beijing Capital Land (IL): Stuck in the middle 45 Appendix 47 Definitions 48 Our property sector assumptions 49 Disclosures Expected news flow/events Date Event Comment Mid-December 2005 Listing of Guangzhou investment (123.HK/NC)s REIT (size HK$1.5-HK$2.1bn) First REIT of mainland property assets. Late January 2006 National Statistics Bureau to announce China property sector 2005 annual data We expect to see the government comment on whether tightening measures have achieved their targets. March-April 2006 Annual property sector results announcements We expect most property companies will report strong earnings growth in 2005, except for Beijing Capital Land. Source: China Land and Resources Net, Bloomberg, Gao Hua Securities Research estimates. The prices in this report are based on the market close of December 8, 2005. Property Developers China Property Goldman Sachs Global Investment Research - December 12, 2005 1 Overview: Play on second-tier cities Higher growth potential in second-tier cities Urbanization and resettlement are the key growth drivers. With affordability ratios in second-tier cities at historical lows, supply/demand ratios improving, and rapid growth through urbanization and resettlement, we forecast average r