July 24,2006 China: Real Estate Developers Gao Hua Securities Investment Research 1 July 24,2006 China: Real Estate Developers New opinion on foreign capital investment announced News: The long-expected foreign capital restriction opinion was finally announced by six Ministries of China today. The opinion is the same as what the market has been expecting in the past weeks. The 14 terms cover various areas of foreign capital investment in China (see Exhibit 1 for details). Analysis: We understand that the central government is trying to achieve multi-targets, including: (1) avoidance of bubble formation in the China property market due to foreign capital speculation, as learned from the lessons of other countries in the region; (2) better supervision and hence control of overseas investment in the China property market; (3) close the loophole of tax evasion, illegal foreign exchange activities by foreign players. Implications: Although the effectiveness of these measures remains to be seen, we estimate a mild impact on the overall property market even if those measures are strictly implemented on a local authority level. We estimate that foreign capital investment only accounts for a single digit of total investment in China or source of funding of developers on a national level. However, these new measures, coupled with the previous measures announced by the central government will have a more profound longer term impact on the China property market, in our view: 1. On the supply side: we expect further deceleration of property investment in China in the medium-term, which will ironically provide price/rental rate support for existing projects; 2. On the demand side: speculation forces will be negatively affected by these measures due to the potential increase in transaction cost. However, we think end- users as well as long-term investors should not be materially affected by those measures. We are more concerned about the near-term outlook for first-tier cities (Shanghai, Beijing, Guangzhou and Shenzhen) where we have seen a higher level of speculation and foreign capital participation; 3. We expect high-end or luxury residential market will be mildly affected. As foreign buyers (incl. those from HK, Macau, Taiwan and overseas Chinese) account for a significant portion of total buyers of this segment, restrictions on foreign buyers will have a negative impact on this segment. We continue to prefer developers with higher exposure to second-tier cities, such as China Vanke (A/B: Conviction Buy/Buy) and COLI (Buy), we also suggest investors to buy on any dips those players with higher exposure to investment properties such as CRL (Neutral). Yi Wang, CFA +86(10)6535-3022 | firstname.lastname@example.org Beijing Gao Hua Securities Company Limited Beijing Gao Hua Securities Company Limited and its affiliates do and seek 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 analyst certification, see the text preceding the disclosures. For other important disclosures, contact your investment representative. Beijing Gao Hua Securities Company Limited Investment Research July 24,2006 China: Real Estate Developers Gao Hua Securities Investment Research 2 Exhibit 1: Summary of the Opinion (translated from Chinese version) I. Regulate the entry into real estate market by FIE 1. Any foreign entity or individual which intends to purchase properties in China for any purpose other than its own-use must establish a business presence in China; 2. The registered capital of a real estate FIE with a total investment equal to or exceeding USD10 mn must not be less than 50% of its total investment. The current equity ratio for foreign investment continues to apply to Real Estate FIE with a total investment of less than USD10 mn (i.e., registered capital should between 50%-70% of the total investment); 3. Establishment of a Real Estate FIE will require (i) approval of the Ministry of Commerce or its local counter parties and (ii) registration with the relevant Administration of Industry and Commerce. These authorities will issue a provisional Foreign Investment Enterprise Approval Certificate and a Business License, each with a term of one year, to the Real Estate FIE. Upon payment of all the land grant fees in full, the Real Estate FIE shall apply for the formal Foreign Investment Enterprise Approval Certificate and Business License from these authorities; 4. A foreign investor which wishes to apply for approval for transfer of any equity interest in a Real Estate FIE, transfer of a property development project or acquisition of a domestic real estate development company shall submit the following documents to the Chinese authorities: I. performance guarantees of the Land Use Rights Granting Contract (国有土地使用权合同), the Project Land Planning Permit （建设用地规划许可证）and the Project Construction Planning Permit (建设工程规划许可证); ii. Land Use Rights Certificate; iii. amendment filing certificate issued by the construction authorities (or Land and House Administration Bureau); and iv.evidence of tax payment issued by the tax authority; 5. Foreign investors shall make appropriate arrangement for the existing employees of the domestic real estate development company in which it invests and manages the bank debts of such company. The purchase price for such acquisition shall be paid by the foreign investor in one lump sum using its own capital; II. Strengthen the administration of Real Estate FIE's operation 6. Any foreign investor is not allowed to conduct property development or related activities if it has not obtained the relevant approval from the Ministry of Commerce and business license; 7. AReal Estate FIE must not obtain any onshore or offshore financing before (i) its registered capital is paid up in full, (ii) it has received the Land Use Rights Certificate and (iii) the capital contribution provided to the project by the investors reaches at least 35% of the total investment of the project. The State Administration of Foreign Exchange or its local counterpart (SAFE) will not approve any foreign currency conversion in relation to loans borrowed by a Real Estate FIE in breach of the above requirements; 8. Any kind of fixed return arrangement (whether in favor of the Chinese party or foreign party) is prohibited; 9. Real Estate FIE should obey with the relevant rules and regulations applied on the real estate market of China. Any irregulative activities will be subject to punishment in accordance with the 15 measures announced by 9 Ministries on May 29,2006; III. Strict administration on buying houses by foreign individuals and institutions 11. The approved purchaser should use his/her own name and should bring a valid certificate to apply for the registration of such purchase with related authorities; 12. SAFE should strictly follow the opinion in regarding to foreign capital inflow, outflow and conversion of approval of FIE, off-share institutions and individual buyers and only allows transmission and conversion of such funds when the purchase is in compliance with the regulations; proceeds received from property transfer are prohibited for off-share transmission if the transactions are not in compliance with related rules and regulations and the relevant transaction related taxation hasn't been paid; IV. Further plan and implementation, supervision responsibilities 13. All local governments should be highly responsible in supervising and implementing above rules. No preferential treatment to FIE is allowed without central government's approval; 14. Further improve the information system to monitor foreign capital inflow and outflow. 10. Only onshore branches and representative offices of foreign entities (except those approved Real Estate FIE) or foreign individuals working or studying in China for one year or above can purchase properties in China for self-use purpose. Foreign entities which have not set up branches or representative offices in Source: Xinhua News. July 24,2006 China: Real Estate Developers Gao Hua Securities Investment Research 3 RegAC I, Yi Wang, hereby certify that all of the views expressed in this report accurately reflect my personal views about the subject company or companies and its or their securities. I also certify that no part of my compensation was, is or will be, directly or indirectly, related to the specific recommendations or views expressed in this report. Investment profile The Goldman Sachs Investment Profile provides investment context for a security by comparing key attributes of that security to its peer group and market. The four key attributes depicted are: growth, returns, multiple and volatility. Growth, returns and multiple are indexed based on composites of several methodologies to determine the stocks percentile ranking within the region's coverage universe. The precise calculation of each metric may vary depending on the fiscal year, industry and region but the standard approach is as follows: Growth is a composite of next year's estimate over current year's estimate, e.g. EPS, EBITDA, Revenue. Return is a year one prospective aggregate of various return on capital measures, e.g. CROCI, ROACE, and ROE. Multiple is a composite of one-year forward valuation ratios, e.g. P/E, dividend yield, EV/FCF, EV/EBITDA, EV/DACF, Price/Book. Volatility is measured as trailing twelve-month volatility adjusted for dividends. Quantum Quantum is Goldman Sachs proprietary database providing access to detailed financial statement histories, forecasts and ratios. It can be used for in-depth analysis of a single company, or to make comparisons between companies in different sectors and markets. Disclosures Coverage group(s) of stocks by primary analyst(s) Yi Wang, CFA: China Property. China Property: Beijing Capital Land, China Overseas Land, China Resources Land, China Vanke (A), China Vanke (B), Guangzhou R&FProperties, Shanghai Forte Land. Company-specific regulatory disclosures The following disclosures relate to relationships between Goldman Sachs Gao Hua Securities Company Limited ("Goldman Sachs Gao Hua") and companies covered by the Investment Research Division of Beijing Gao Hua Securities Company Limited ("Gao Hua Securities") and referred to in this research. There are no company-specific disclosures. Ratings, coverage groups and views and related definitions Buy (B), Neutral (N), Sell (S) -Analysts recommend stocks as Buys or Sells for inclusion on various regional Investment Lists. Being assigned a Buy or Sell on an Investment List is determined by a stock's return potential relative to its coverage group as described below. Any stock not assigned as a Buy or a Sell on an Investment List is deemed Neutral. Each regional Investment Review Committee manages various regional Investment Lists to a global guideline of 25%-35% of stocks as Buy and 10%-15% of stocks as Sell; however, the distribution of Buys and Sells in any particular coverage group may vary as determined by the regional Investment Review Committee. Regional Conviction Buy and Sell lists represent investment recommendations focused on either the size of the potential return or the likelihood of the realization of the return. Return potential represents the price differential between the current share price and the price target expected during the time horizon associated with the price target. Price targets are required for all covered stocks. The return potential, price target and associated time horizon are stated in each report adding or reiterating an Investment List membership. Coverage groups and views: A list of all stocks in each coverage group is available by primary analyst, stock and coverage group at . The analyst assigns one of the following coverage views which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and/or valuation. Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Not Rated (NR). The investment rating and target price, if any, have been removed pursuant to Gao Hua Securities policy when Goldman Sachs Gao Hua is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances. Rating July 24,2006 China: Real Estate Developers Gao Hua Securities Investment Research 4 Suspended (RS). We have suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon. Coverage Suspended (CS). We have suspended coverage of this company. Not Covered (NC). We do not cover this company. Not Available or Not Applicable (NA). The information is not available for display or is not applicable. Not Meaningful (NM). The information is not meaningful and is therefore excluded. Ratings, coverage views and related definitions prior to June 26,2006 Our rating system requires that analysts rank order the stocks in their coverage groups and assign one of three investment ratings (see definitions below) within a ratings distribution guideline of no more than 25% of the stocks should be rated Outperform and no fewer than 10% rated Underperform. The analyst assigns one of three coverage views (see definitions below), which represents the analyst's investment outlook on the coverage group relative to the group's historical fundamentals and valuation. Each coverage group, listing all stocks covered in that group, is available by primary analyst, stock and coverage group at . Definitions Outperform (OP). We expect this stock to outperform the median total return for the analyst's coverage universe over the next 12 months. In-Line (IL). We expect this stock to perform in line with the median total return for the analyst's coverage universe over the next 12 months. Underperform (U). We expect this stock to underperform the median total return for the analyst's coverage universe over the next 12 months. Coverage views: Attractive (A). The investment outlook over the following 12 months is favorable relative to the coverage group's historical fundamentals and/or valuation. Neutral (N). The investment outlook over the following 12 months is neutral relative to the coverage group's historical fundamentals and/or valuation. Cautious (C). The investment outlook over the following 12 months is unfavorable relative to the coverage group's historical fundamentals and/or valuation. Current Investment List (CIL). We expect stocks on this list to provide an absolute total return of approximately 15%-20% over the next 12 months. We only assign this designation to stocks rated Outperform. We require a 12-month price target for stocks with this designation. 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