September 9,2008 Goldman Sachs China:Banks Property developer loans:S/T risks,low systemic risks;be selective Continued cash burn at developers poses n-t NPL/macro risks Real estate loan credit quality has held up so far despite weakening prices Property transactions slowed materially and transaction volumes,partly due to the high profit margins on property projects that attracted continued financing flow in 1H08.However,we believe the continuing decline in transaction volumes,weakening buyer sentiment,inventory build-up and falling gross margins will lead to a cash squeeze for some developers,particularly in 4008 and 1H09;we see this as an emerging real estate NPL risk for China banks in 4008/2009. Moreover,we see the scaling back of real estate investment,which is critical for developers to survive,posing risks to macro growth(20pp yoy slowdown in property investment growth may reduce GDP growth rates by~1 pp). Source:CIA. Potential cash flow squeeze at developers Systemic risk low;recovery hinges on affordability,policy easing Unlike US/Japan,we believe systemic risk is low/manageable,as:(1) ing cash indow 0.8 7.7471 affordability is an issue for select cities (e.g.Beijing/Shenzhen)rather than a nationwide problem.We expect affordability in these cities to return to their uow090731.8785 c3shn6L2102065,11245.52235,823 1998-2007 average in 2010,based on our forecast of~12%p.a.rise in China Net cash inflowoulow) 10.022172865,1096379 Ending cash balance 50,17159,70278,12224,330 household income and a 5%-20%property price decline from 2008 to 2009; Source:Wind,and Gao Hua Securities Research estimates. (2)total property loans,including mortgages,are at a manageable 18%of total loans,vs.53%of total commercial bank loans in the US;(3)China Earnings sensitivity to 3%real estate loan mortgages carry recourse and households have low leverage;(4)just as in and mortgage NPL formation the US and Japan,banks prefer to work out restructuring/M&A for distressed developers so long as underlying profitability/viability are intact;and(5) banking liquidity remains high in China,and China has pro-growth policies. We would be more positive if China eased tightening policies,or if inflation %% pressure fundamentally eased post utilities/energy price adjustments. Downside risks include:hard landing of the Chinese economy,behind-the- curve policy easing;collapse of property prices dampening sentiment. Source:Gao Hua Securities Research estimates Be selective;wide differences in lending practices,P&L resilience We see some potential credit loss on property NPLs,partly due to lending For special disclosures as to Goldman Sachs' loopholes despite high collateral levels and tight regulatory requirements. investment in ICBC,see the statement preceding the Reg AC certification. We favor banks with low exposure to developers,low NPL sensitivity to earnings,and conservative lending risk management.We believe ICBC (1398.HK,Buy)is best placed to control risks,while we think SPDB (600000.SS,Sell),Huaxia(600015.SS,Sell)and Industrial (601166.SS, Neutral)are more vulnerable to real estate market deterioration Richard Xu,CFA +86(10)6627-3192|richard.xu@ghsl.cn Beijing Gao Hua Securities Company Limited The Goldman Sachs Group,Inc.does and seeks to do business with Y2Vi.wangghslcn B ao Hua Securities Company Limited eerhat coud anod ning.ma@gs.com Goldman Sachs (Asia)LLC. oniyeactorn neirnvestent esion orc certificatio 1.see the end of the text.Other important disclosures follow the re e c arch/hedo e html 0judy hangghal.cn Bejing aoHua Securitie Company Limited eg Ac certification, m/rese Analys research analyst with FINRA in the U.S. are not registered/qualified as The Goldman Sachs Group,Inc. Global Investment Research
September 9, 2008 China: Banks Goldman Sachs Global Investment Research 1 September 9, 2008 China: Banks Property developer loans: S/T risks, low systemic risks; be selective Continued cash burn at developers poses n-t NPL/macro risks Real estate loan credit quality has held up so far despite weakening prices and transaction volumes, partly due to the high profit margins on property projects that attracted continued financing flow in 1H08. However, we believe the continuing decline in transaction volumes, weakening buyer sentiment, inventory build-up and falling gross margins will lead to a cash squeeze for some developers, particularly in 4Q08 and 1H09; we see this as an emerging real estate NPL risk for China banks in 4Q08/2009. Moreover, we see the scaling back of real estate investment, which is critical for developers to survive, posing risks to macro growth (20pp yoy slowdown in property investment growth may reduce GDP growth rates by ~1 pp). Systemic risk low; recovery hinges on affordability, policy easing Unlike US/Japan, we believe systemic risk is low/manageable, as: (1) affordability is an issue for select cities (e.g. Beijing/Shenzhen) rather than a nationwide problem. We expect affordability in these cities to return to their 1998-2007 average in 2010, based on our forecast of ~12% p.a. rise in China household income and a 5%-20% property price decline from 2Q08 to 2009; (2) total property loans, including mortgages, are at a manageable 18% of total loans, vs. 53% of total commercial bank loans in the US; (3) China mortgages carry recourse and households have low leverage; (4) just as in the US and Japan, banks prefer to work out restructuring/M&A for distressed developers so long as underlying profitability/viability are intact; and (5) banking liquidity remains high in China, and China has pro-growth policies. We would be more positive if China eased tightening policies, or if inflation pressure fundamentally eased post utilities/energy price adjustments. Downside risks include: hard landing of the Chinese economy, behind-thecurve policy easing; collapse of property prices dampening sentiment. Be selective; wide differences in lending practices, P&L resilience We see some potential credit loss on property NPLs, partly due to lending loopholes despite high collateral levels and tight regulatory requirements. We favor banks with low exposure to developers, low NPL sensitivity to earnings, and conservative lending risk management. We believe ICBC (1398.HK, Buy) is best placed to control risks, while we think SPDB (600000.SS, Sell), Huaxia (600015.SS, Sell) and Industrial (601166.SS, Neutral) are more vulnerable to real estate market deterioration. Property transactions slowed materially - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 - 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 GFA Sold Revenue ('000 sqm) Rmb mn Source: CIA. Potential cash flow squeeze at developers Rmb mn 1H07 2H07 1H08 2H08E Operating cash inflow 70,839 120,689 86,521 72,905 Operating cash outflow 78,053 147,747 118,184 153,934 Net operating cash inflow/(outflow) (7,215) (27,058) (31,663) (81,030) Net investing cash inflow/(outflow) (3,809) (10,731) (8,687) (8,585) Net financing cash inflow/(outflow) 21,020 55,112 45,522 35,823 Net cash inflow/(outflow) 10,022 17,286 5,109 (53,792) Ending cash balance 50,171 69,702 78,122 24,330 Source: Wind, and Gao Hua Securities Research estimates. Earnings sensitivity to 3% real estate loan and mortgage NPL formation -13.3% -12.0% -10.7% -8.5% -8.5% -8.3% -8.2% -8.0% -7.0% -6.5% -6.5% -6.2% -4.2% -11.1% -14.0% -12.0% -10.0% -8.0% -6.0% -4.0% -2.0% 0.0% Industrial BOBJ Minsheng SPDB CCB SZDB Hua Xia BONJ CNCB BoCom CMB ICBC BOC (Domestic) BONB Source: Gao Hua Securities Research estimates. For special disclosures as to Goldman Sachs' investment in ICBC, see the statement preceding the Reg AC certification. Richard Xu, CFA +86(10)6627-3192 | richard.xu@ghsl.cn Beijing Gao Hua Securities Company Limited Yi Wang, CFA +86(10)6627-3022 | yi.wang@ghsl.cn Beijing Gao Hua Securities Company Limited Ning Ma +852-2978-1677 | ning.ma@gs.com Goldman Sachs (Asia) L.L.C. Judy Zhang +86(10)6627-3095 | judy.zhang@ghsl.cn Beijing Gao Hua Securities Company Limited 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 the end of the text. Other important disclosures follow the Reg AC certification, or go to www.gs.com/research/hedge.html. Analysts employed by non-US affiliates are not registered/qualified as research analysts with FINRA in the U.S. The Goldman Sachs Group, Inc. Global Investment Research
September 9,2008 China:Banks Table of contents Continued housing market weakness squeezes developer cash flow Real estate market fundamentals continue to deteriorate Why real estate loan NPLs have not shown up so far 5 Risk of cash flow squeeze increasing,particularly in 4008/2009 6 Lending loopholes and fall in collateral value could lead to some real estate loan losses 9 Real estate investment scale-back is a macro downside risk 10 We view the likelihood of systemic risk as low 11 Property market turnaround hinges on inflation and policy easing 16 Be selective;lending practices and earnings sensitivity matter 17 Appendix I:Lending loopholes expose banks to credit risks 22 Appendix ll:Earnings sensitivity to total real estate loan and mortgage credit quality deterioration 27 Appendix lll:Real estate transaction volume slowed notably in major cities 27 Disclosures 32 The prices in the body of this report are based on the market close of September 5,2008. Exhibit 1:China banks valuation comparison 12m PB PE闲 EPS growth() Price 202 0 12HK Bu 500 218 58 15% 2.54 118 22.1 26.3 236 25 109 70 42 CHB H-shns 2.11187 106 9.5 6.7 58 4.14.5 110 0 207 D132155Buw 451 220 53 10% 2.形 2.50 23 12.1 0.3 73 65 42 4.9 53.0 170 28.5 22.1 235 28.3 945 326 1.5 1.93 1-7 118 t0.0 74 61 38 4.5 17. 185 18.5 40 12 250 2.3 210 104 .7 59 5.3 24 239 51 3 山 002 08.4 274 109 224 2 7 1.7 2.11 140 2.7 10.8 88 17.0 900. 8D116a55N 851 1.64 1.79 93 8.8 20.3 19. D.6 105 -19% 1.15 192 Note: The exchange rates we use to estimate the EPS/BVPS data for H-share listed banks:HKD/CNY=0.87 in 2008(8%appreciation),2009 and 2010 Our 12-month price targets for H-shares and A-shares(market-relative)are based on a mid-point P/B,i.e.the average between growth fully loaded P/B and ex-growth P/B.Risks to our Buy-and Neutral-rated stocks include macro hard landing,asset quality and eamings misses.Risks to our Sell-rated stocks include better-than- expected asset quality and eamings,and a significant stimulus package in China For important disclosures,please go to http://www.gs.com/research/hedge.html Source:Company data,Goldman Sachs Research estimates. Since our China banks/property report of April 18 entitled,"Developers/banks:analyzing property price falls:watch 20 volume",the real estate market has continued to weaken,as seen in a further decline in transaction volumes,softening property prices,and accumulating inventory levels in major China cities.While weakened real estate sector fundamentals have not yet had a material negative impact on China banks'asset quality, we see a prolonged weakness in the real estate market as a looming risk for China banks in 4Q08/2009 Goldman Sachs Global Investment Research 2
September 9, 2008 China: Banks Goldman Sachs Global Investment Research 2 Table of contents Continued housing market weakness squeezes developer cash flow 3 Real estate market fundamentals continue to deteriorate 3 Why real estate loan NPLs have not shown up so far 5 Risk of cash flow squeeze increasing, particularly in 4Q08/2009 6 Lending loopholes and fall in collateral value could lead to some real estate loan losses 9 Real estate investment scale-back is a macro downside risk 10 We view the likelihood of systemic risk as low 11 Property market turnaround hinges on inflation and policy easing 16 Be selective; lending practices and earnings sensitivity matter 17 Appendix I: Lending loopholes expose banks to credit risks 22 Appendix II: Earnings sensitivity to total real estate loan and mortgage credit quality deterioration 27 Appendix III: Real estate transaction volume slowed notably in major cities 27 Disclosures 32 The prices in the body of this report are based on the market close of September 5, 2008. Exhibit 1: China banks valuation comparison 5-Sep-2008 Mkt Cap 12m Upside Target Ratings Price (US$ bn) Price tgt /downside P/B (X) 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E 2008E 2009E 2010E 2008E 2009E 2010E H-shares (HKD) ICBC(H) 1398.HK Buy 5.09 218 5.86 15% 2.60 2.54 2.26 11.8 10.1 7.2 6.3 4.3 5.0 17.0 53.0 26.5 22.1 23.5 26.3 BOC(H) 3988.HK Neutral 3.30 107 3.57 8% 1.57 1.59 1.45 9.7 8.2 6.1 5.0 4.7 5.5 17.8 33.4 15.9 17.1 18.5 18.5 CCB(H) 0939.HK Neutral 6.00 180 6.39 6% 2.36 2.52 2.22 11.0 9.9 7.1 6.2 4.3 5.1 11.0 55.6 19.5 24.6 23.9 23.9 BoCom(H) 3328.HK Sell 8.47 53 7.38 -13% 1.87 2.43 2.15 11.9 11.1 7.6 6.6 3.9 3.6 7.5 45.7 13.3 21.5 20.6 20.6 CMB (H) 3968.HK Neutral 23.40 44 22.87 -2% 2.85 3.62 2.92 12.5 11.3 8.4 7.2 2.0 2.2 10.5 56.9 19.9 31.8 28.7 28.7 CNCB (H) 0998.HK Neutral 4.11 21 4.20 2% 1.32 1.46 1.29 8.6 8.1 5.4 4.7 3.2 3.7 6.1 93.5 19.2 17.9 16.8 17.8 H-share average 2.36 2.05 10.9 9.8 7.0 6.0 3.7 4.2 11.6 56.3 19.1 22.0 22.5 22.6 Excluding CMB H-shares 2.11 1.87 10.6 9.5 6.7 5.8 4.1 4.6 11.9 56.2 18.9 20.7 20.7 21.4 A-shares (Rmb) ICBC(A) 601398.SS Buy 4.51 220 5.38 19% 2.76 2.60 2.31 12.1 10.3 7.3 6.5 4.2 4.9 17.0 53.0 26.5 22.1 23.5 26.3 BOC(A) 601988.SS Neutral 3.48 129 3.26 -6% 1.65 1.93 1.77 11.8 10.0 7.4 6.1 3.8 4.5 17.8 33.4 15.9 17.1 18.5 18.5 CCB(A) 601939.SS Neutral 4.93 168 5.85 19% 2.50 2.39 2.10 10.4 9.4 6.7 5.9 4.6 5.3 11.0 55.6 19.5 24.6 23.9 23.9 BoCom(A) 601328.SS Neutral 6.79 49 6.72 -1% 1.97 2.25 1.99 11.0 10.3 7.1 6.1 4.2 3.9 7.5 45.7 13.3 21.5 20.6 20.6 CMB(A) 600036.SS Neutral 20.00 43 21.01 5% 3.03 3.57 2.88 12.3 11.1 8.3 7.1 2.0 2.2 10.5 56.9 19.9 31.8 28.7 28.7 CNCB (A) 601998.SS Sell 5.09 29 3.79 -26% 1.38 2.08 1.85 12.3 11.6 7.7 6.7 2.2 2.6 6.1 93.5 19.2 17.9 16.8 17.8 SPDB 600000.SS Sell 17.99 19 14.08 -22% 1.74 2.75 2.22 9.5 9.5 7.4 6.4 1.9 1.9 (0.0) 94.4 14.5 32.7 25.7 24.8 Industrial 601166.SS Neutral 18.94 14 18.49 -2% 1.72 2.06 1.76 7.5 7.1 5.1 4.4 4.2 3.2 5.5 44.3 20.8 29.2 26.8 27.5 Minsheng 600016.SS Neutral 5.49 15 5.29 -4% 1.52 1.77 1.58 8.4 8.2 5.0 4.3 2.5 3.0 1.7 80.4 21.4 22.6 20.5 21.9 SZDB 000001.SZ Neutral 18.24 6 19.16 5% 1.96 2.31 1.87 10.4 9.8 5.2 4.7 0.0 0.0 5.9 38.4 25.7 25.7 21.0 21.3 Hua Xia 600015.SS Sell 9.64 6 4.78 -50% 1.19 2.74 2.39 10.9 11.4 4.2 3.8 3.7 3.5 (3.8) 76.2 10.2 26.4 22.5 21.7 BONB 002142.SZ Sell 7.69 3 7.29 -5% 1.77 2.11 1.86 14.0 12.7 10.8 8.8 1.4 1.6 10.6 27.4 24.0 15.6 16.0 17.0 BOBJ 601169.SS Neutral 8.57 8 8.87 4% 1.64 1.79 1.58 9.3 8.8 6.4 5.6 3.2 4.0 6.3 46.3 22.7 19.1 20.3 20.6 BONJ 601009.SS Sell 8.97 2 7.22 -19% 1.15 1.55 1.43 11.0 11.0 8.4 7.8 1.7 2.0 0.6 31.5 17.8 13.6 14.5 14.7 A-share average 1.97 2.28 10.79 10.08 6.93 6.01 2.8 3.0 53.6 7.3 19.2 23.1 21.3 21.8 P/B (X) P/E (X) Div yld (%) P/PPOP (X) EPS growth (%) ROE (%) Note: The exchange rates we use to estimate the EPS/BVPS data for H-share listed banks: HKD/CNY= 0.87 in 2008(8% appreciation), 2009 and 2010. Our 12-month price targets for H-shares and A-shares (market-relative) are based on a mid-point P/B, i.e. the average between growth fully loaded P/B and ex-growth P/B. Risks to our Buy- and Neutral-rated stocks include macro hard landing, asset quality and earnings misses. Risks to our Sell-rated stocks include better-thanexpected asset quality and earnings, and a significant stimulus package in China. For important disclosures, please go to http://www.gs.com/research/hedge.html Source: Company data, Goldman Sachs Research estimates. Since our China banks/property report of April 18 entitled, “Developers/banks: analyzing property price falls: watch 2Q volume”, the real estate market has continued to weaken, as seen in a further decline in transaction volumes, softening property prices, and accumulating inventory levels in major China cities. While weakened real estate sector fundamentals have not yet had a material negative impact on China banks’ asset quality, we see a prolonged weakness in the real estate market as a looming risk for China banks in 4Q08/2009
September 9,2008 China:Banks In this report,we try to answer the following questions: 1.Is an escalation in real estate NPLs likely to surface,and when? 2.Is there a systemic risk associated with the real estate market downturn? 3. What would reduce real estate NPL risks and make us more positive on banks with higher real estate loan exposure? 4. Which listed China banks are more defensively positioned in terms of real estate weakness? Continued housing market weakness squeezes developer cash flow Real estate market fundamentals continue to deteriorate China's real estate market'has entered a correction phase following a mini real estate bubble in 2007,in which we saw a quick surge in property prices and project starts. Recent industry data,as well as our recent trip to Tianjin,Wuhan and Chongqing, lead us to believe that there will be a further correction in real estate prices in many major cities as: 1.Total property transaction volumes in major cities in 1H08 and July 2008 declined 30% and 52%yoy(Exhibit 3),respectively,and could remain at depressed levels in light of current gloomy market sentiment,as many home buyers are waiting on the sidelines due to:concerns over further price declines,rising mortgage borrowing costs and stricter mortgage application standards following PBOC/CBRC's new second mortgage rule. Exhibit 2:Real estate transaction volumes moderated in Exhibit 3:Transaction volume declines in major cities 1H08 are even more pronounced Annual sales volume(GFA)1995-1H08 GFA sold and residential real estate sales in 12 major cities 16,000sm b8.00 14.000 B0,00 180.00 12,000 140.00 10,0 120.00 400 8,00m 100.c00 6,000 4,000 2.00 hn-07 ar-07 407 Nov-07 Jan-08 Mar-08 Mav-08 Ju03 GFA Sold Source:CEIC,Gao Hua Securities Research estimates. Source:CIA. 2.Inventory continues to build up in major cities,and inventory levels in 14 cities out of the 16 cities we follow have approached or exceeded 12 months,based on annualized July 2008 ytd transaction volume(Exhibit 5). 1 Note that there are-45 H-share and~65 A-share listed residential property developers, and -58,000 property developers in total in China. Goldman Sachs Global Investment Research 3
September 9, 2008 China: Banks Goldman Sachs Global Investment Research 3 In this report, we try to answer the following questions: 1. Is an escalation in real estate NPLs likely to surface, and when? 2. Is there a systemic risk associated with the real estate market downturn? 3. What would reduce real estate NPL risks and make us more positive on banks with higher real estate loan exposure? 4. Which listed China banks are more defensively positioned in terms of real estate weakness? Continued housing market weakness squeezes developer cash flow Real estate market fundamentals continue to deteriorate China’s real estate market1 has entered a correction phase following a mini real estate bubble in 2007, in which we saw a quick surge in property prices and project starts. Recent industry data, as well as our recent trip to Tianjin, Wuhan and Chongqing, lead us to believe that there will be a further correction in real estate prices in many major cities as: 1. Total property transaction volumes in major cities in 1H08 and July 2008 declined 30% and 52% yoy (Exhibit 3), respectively, and could remain at depressed levels in light of current gloomy market sentiment, as many home buyers are waiting on the sidelines due to: concerns over further price declines, rising mortgage borrowing costs and stricter mortgage application standards following PBOC/CBRC’s new second mortgage rule. Exhibit 2: Real estate transaction volumes moderated in 1H08 Annual sales volume (GFA) 1995-1H08 Exhibit 3: Transaction volume declines in major cities are even more pronounced GFA sold and residential real estate sales in 12 major cities 0 100 200 300 400 500 600 700 800 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 Annualized 1H08 (mn sqm) 22% CAGR between 1995-2007 - 2,000 4,000 6,000 8,000 10,000 12,000 14,000 16,000 Jan-07 Mar-07 May-07 Jul-07 Sep-07 Nov-07 Jan-08 Mar-08 May-08 Jul-08 - 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 GFA Sold Revenue ('000 sqm) Rmb mn Source: CEIC, Gao Hua Securities Research estimates. Source: CIA. 2. Inventory continues to build up in major cities, and inventory levels in 14 cities out of the 16 cities we follow have approached or exceeded 12 months, based on annualized July 2008 ytd transaction volume (Exhibit 5). 1 Note that there are ~45 H-share and ~65 A-share listed residential property developers, and ~58,000 property developers in total in China
September 9,2008 China:Banks Exhibit 4:Inventory levels building up in major cities The earliest Current data of unsold The current The earliest unsold GFA GFA Chg data date data date (mn sqm) (mn sqm Hangzhou 2.9 1.8 57 08/31/08 01/06/08 Nanjing 4.9 3.2 51 08/31/08 02/24/08 Dalian 4.9 3.5 40 08/31/08 04/20/08 Beijing 16.9 13.3 27 08/31/08 01/06/08 Suzhou 4.6 3.6 27 08/31/08 06/01/08 Dongguan 7.1 5.6 26 08/31/08 04/20/08 Shanghai 6.7 5.3 25 08/31/08 01/06/08 Guangzhou 4.6 3.7 23 08/31/08 06/01/08 Chongqing 13.5 11.0 22 08/31/08 06/01/08 Chengdu 16.1 13.2 22 08/31/08 01/06/08 Wuhan 12.8 10.5 22 08/31/08 01/06/08 Xian 14.1 12.1 16 08/31/08 04/20/08 Xiamen 3.8 3.5 10 08/31/08 06/08/08 Shenzhen 5.6 5.2 8 08/31/08 01/06/08 Shenyang 5.3 4.9 8 06/01/08 04/20/08 Source:CIA. Exhibit 5:Inventory levels in 14 major cities will take more than one year to digest (mn sqm) GFAs0din2007 40 vg GF 05-07 Current unsold in entory to YTD sales pace 80fAug24.2008) Pan Bohai Rim Yangtze River Delta- Pearl River Delta -Mid Central China- 35 30 25 20 15 BJ TJ SY D SH NJSUZ HZ SZ GZ DG XM> WH CQ CD XA Note:Estimated annualized transaction vol.according to ytd sales pace is calculated based on the currently average weekly sales speed.BJ=Beijing,TJ=Tianjing,SY=Shenyang,DL=Dalian,SH=Shanghai,NJ=Nanjing,Suz=Suzhou,HZ=Hangzhou, SZ=Shenzhen,GZ=Guangzhou,DG=Dongguan,XM=Xiamen,WH=Wuhan,CQ=Chongqing,CD=Chengdu,XA=Xi'an. GFA numbers indicated in Beijing.Shanghai,Nanjing,Hangzhou,Guangzhou are all for residential properties only;for others, the numbers refer to total commodity properties. Source:Various city govemments,CIA. Goldman Sachs Global Investment Research
September 9, 2008 China: Banks Goldman Sachs Global Investment Research 4 Exhibit 4: Inventory levels building up in major cities Current unsold GFA The earliest data of unsold GFA Chg % The current data date The earliest data date (mn sqm) (mn sqm) Hangzhou 2.9 1.8 57 08/31/08 01/06/08 Nanjing 4.9 3.2 51 08/31/08 02/24/08 Dalian 4.9 3.5 40 08/31/08 04/20/08 Beijing 16.9 13.3 27 08/31/08 01/06/08 Suzhou 4.6 3.6 27 08/31/08 06/01/08 Dongguan 7.1 5.6 26 08/31/08 04/20/08 Shanghai 6.7 5.3 25 08/31/08 01/06/08 Guangzhou 4.6 3.7 23 08/31/08 06/01/08 Chongqing 13.5 11.0 22 08/31/08 06/01/08 Chengdu 16.1 13.2 22 08/31/08 01/06/08 Wuhan 12.8 10.5 22 08/31/08 01/06/08 Xian 14.1 12.1 16 08/31/08 04/20/08 Xiamen 3.8 3.5 10 08/31/08 06/08/08 Shenzhen 5.6 5.2 8 08/31/08 01/06/08 Shenyang 5.3 4.9 8 06/01/08 04/20/08 Source: CIA. Exhibit 5: Inventory levels in 14 major cities will take more than one year to digest 0 5 10 15 20 25 30 35 40 BJ TJ SY DL SH NJ SuZ HZ SZ GZ DG XM WH CQ CD XA (mn sqm) GFA sold in 2007 Avg GFA sold during 05-07 Annualized transaction vol. according to YTD sales pace Current unsold inventory (as of Aug 24,2008) Pan Bohai Rim Yangtze River Delta Pearl River Delta Mid & Central China Note: Estimated annualized transaction vol. according to ytd sales pace is calculated based on the currently average weekly sales speed. BJ=Beijing, TJ=Tianjing, SY=Shenyang, DL=Dalian, SH=Shanghai, NJ=Nanjing, Suz=Suzhou, HZ=Hangzhou, SZ=Shenzhen, GZ=Guangzhou, DG=Dongguan, XM=Xiamen, WH=Wuhan, CQ=Chongqing, CD=Chengdu, XA=Xi’an. GFA numbers indicated in Beijing, Shanghai, Nanjing, Hangzhou, Guangzhou are all for residential properties only; for others, the numbers refer to total commodity properties. Source: Various city governments, CIA
September 9,2008 China:Banks 3.Lastly,property prices have come off peak levels reached in 2007.We believe the continued decline in developers'cash levels,despite active financing in 1H08,will lead to more price discounts for new launches,which will further push down housing prices in 2H08 and 2009. Exhibit 6:Prices in many major cities have declined Latest price changes in major cities Primary market From Centaline (mixed-products) From Soufun Database (mixed products) Latest Chg Chg 07 Peak 07 Peak atest Chg fro Chg Dec-07 07 Peak 07 Peak date fromfrom D happened price 07 peak pri进 happened (Rmb/sqm) Shanghai Jul-08 -4%3 63 Oct-07 9879 Au9-089,154 -89 129 8,163 Jun-07 9.701 Beijing u- 3ep-07 13830 Aug-0812321 Dec-07 13600 Guangzhou Ju-0 21% -14 0ct-07 11,574 Apr-0810,997 59 10.50 Oct-0 11,574 Shenzhen Ju-的 77 4 Oct-0/ 17350 Aug-0B14,473 -24%-10%16151 Aug-07 19.169 Chongging Ju-08 3 De0-07 3967 Aug-084,130 29% 234.057 Dec-07 4057 Chengdu Jul-08-12% ,12% Nov-07 6394 Mar-0B4,162 2% 1%4.120 No-07 4247 Tianjin Jul-08 -283 -53 0ct-07 9350 Au9-086,778 49% 4s7,056 Dec-07 7058 Shenyang Ju-08-11% -10% Dec-07 3484 Ju-083,320 -28% -9%3680 Dec-07 4.516 Zhuhai Jul-08 -23% 64 Sept-07 8914 na n.a. na. n.a. na na 门唐 Wuhan JuL-08 7% Now-07 5783 Aa-0B5250 .g9% .8 5692 Nov-07 5783 Naning Feb-08 2% 2% Dec-07 5.853 gn-085.623 49% 0 5.621 Jun-07 5.857 Hangzhou n.8. n.s. n.s. n.a. n.8. Aug-0815.517 39% 8%14,334 Now-07 15.031 2ndary market From Centaline Chg Chg from D 07 Peak 07 Peak price Shanghai Jul-08 7% 7% Dec-07 12.038 Beijing Jul-08 5% 5% De-07 13246 Guangzhou Jul-08 -45% -29% Nov-07 8818 Shenrhen Jul-08 .18L -9% Aa-07 14910 Chongqing Ju-08 10% 105% Dec-07 2545 Chengdu Feb-08 -10% 14 Dec-07 1,719 Tianiin Jul-08 6% Oct-07 4.993 Ar-0 ,10% ,10% .n8 2671 lul-08 3893 Source:Centaline Research,Soufun Database. Why real estate loan NPLs have not shown up so far Real estate loans'credit quality,according to banks'1H08 results and regulators,has been holding up fairly well in 1H08,despite deteriorating real estate market fundamentals and the relatively high leverage of China developers(see Exhibit 7). Exhibit 7:China property developers are relatively highly leveraged Historical liability/equity ratios,1995-2006 340% 320% 321%318% 318% 309% 314% 300% 301%299% 291% 286% 286% 280% 267% 262% 260% 240% 220% 200%+ 1995 19961997199819992000200120022003200420052006 Source:CEIC,Goldman Sachs Research estimates. Goldman Sachs Global Investment Research
September 9, 2008 China: Banks Goldman Sachs Global Investment Research 5 3. Lastly, property prices have come off peak levels reached in 2007. We believe the continued decline in developers’ cash levels, despite active financing in 1H08, will lead to more price discounts for new launches, which will further push down housing prices in 2H08 and 2009. Exhibit 6: Prices in many major cities have declined Latest price changes in major cities Primary market Latest date Chg from 07 peak Chg from Dec- 07 07 Peak happened 07 Peak price (Rmb/sqm) Latest date Latest price Chg from 07 peak Chg from Dec-07 Dec-07 price 07 Peak happened 07 Peak price (Rmb/sqm) Shanghai Jul-08 -4% 6% Oct-07 9,879 Aug-08 9,154 -6% 12% 8,163 Jun-07 9,701 Beijing Jul-08 0% 5% Sept-07 13,630 Aug-08 12,321 -9% -9% 13,600 Dec-07 13,600 Guangzhou Jul-08 -21% -14% Oct-07 11,574 Apr-08 10,997 -5% 4% 10,586 Oct-07 11,574 Shenzhen Jul-08 -7% 4% Oct-07 17,350 Aug-08 14,473 -24% -10% 16,151 Aug-07 19,169 Chongqing Jul-08 3% 3% Dec-07 3,967 Aug-08 4,130 2% 2% 4,057 Dec-07 4,057 Chengdu Jul-08 -12% -12% Nov-07 6,394 Mar-08 4,162 -2% -1% 4,120 Nov-07 4,247 Tianjin Jul-08 -28% -5% Oct-07 9,350 Aug-08 6,776 -4% -4% 7,056 Dec-07 7,056 Shenyang Jul-08 -11% -10% Dec-07 3,484 Jul-08 3,320 -26% -9% 3,660 Dec-07 4,516 Zhuhai Jul-08 -23% 6% Sept-07 8,914 n.a. n.a. n.a. n.a. n.a. n.a. n.a. Wuhan Jul-08 -8% -7% Nov-07 5,783 Aug-08 5,250 -9% -8% 5,692 Nov-07 5783 Naning Feb-08 2% 2% Dec-07 5,853 Jan-08 5,623 -4% 0% 5,621 Jun-07 5,857 Hangzhou n.a. n.a. n.a. n.a. n.a. Aug-08 15,517 3% 8% 14,334 Nov-07 15,031 2ndary market Latest date Chg from 07 peak Chg from Dec- 07 07 Peak happened 07 Peak price (Rmb/sqm) Shanghai Jul-08 7% 7% Dec-07 12,038 Beijing Jul-08 5% 5% Dec-07 13,246 Guangzhou Jul-08 -4% -2% Nov-07 8,618 Shenzhen Jul-08 -18% -9% Aug-07 14,910 Chongqing Jul-08 10% 10% Dec-07 2,545 Chengdu Feb-08 -10% 1% Dec-07 1,719 Tianjin Jul-08 5% 6% Oct-07 4,993 Shenyang Apr-08 -10% -10% Jan-08 2,671 Zhuhai Jul-08 4% 9% Nov-07 3,893 From Centaline (mixed-products) From Centaline From Soufun Database (mixed products) Source: Centaline Research, Soufun Database. Why real estate loan NPLs have not shown up so far Real estate loans’ credit quality, according to banks’ 1H08 results and regulators, has been holding up fairly well in 1H08, despite deteriorating real estate market fundamentals and the relatively high leverage of China developers (see Exhibit 7). Exhibit 7: China property developers are relatively highly leveraged Historical liability/equity ratios, 1995-2006 262% 291% 321% 318% 309% 301% 299% 314% 267% 286% 286% 318% 200% 220% 240% 260% 280% 300% 320% 340% 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: CEIC, Goldman Sachs Research estimates