Incremental impact from HPR extension unlikely to be significant…
We believe the government's plan to extend the home purchase restriction
(HPR) policy to more Tier-2 and Tier-3 cities will have limited incremental
impact on the physical market, based on our analysis in which we assume 24
cities would be potentially included in the second round of HPR tightening
this year. The potential incremental impact on our coverage would be minor
—an average 4 pp increase in our coverage universe’s end-2011E NAV and
2012E contract sales exposure to HPR cities (currently 75%/72%, respectively).
…but fundamentals still on a deteriorating trend
That said, we believe the existing HPR policy, tight mortgage policy, and
slowing economic growth could lead to weakening housing demand in the
coming quarters. On the other hand, we expect significant new launches in
the near term as a result of credit tightening and increasing inventory levels
that are exerting pressure on developers’ balance sheets. Our analysis of 9
cities’ launches/inventory/sales data indicates that inventory levels in these
cities are unlikely to stabilize in 2012E, should there be no policy reversion.
Low visibility on policy reversion; range trading to continue
We believe it is too early to expect a policy reversion (particularly HPR) at this
stage. The land market, which has played a critical role in the government’s

policy decision process, still saw 6% yoy revenue growth in 130 major cities in
the first 7 months of this year. With low visibility on timing/format of policy
reversion, we expect the China property sector to continue range trading on:
(1) Undemanding valuation: The sector is currently trading close to the trough
of our coverage universe’s historical trading range vs. our bear-case NAV
(which is 51% lower than our base-case) introduced in Feb 2010; (2) Mediumterm
earnings risk: Our hard landing scenario analysis indicates average 37%-
56% potential downside risk to our base-case 2012E/2013E underlying profit
estimates should policy reversion not happen in 2012. Our onshore coverage
universe, which has been more policy-driven, may perform relatively better
compared with the local market index on a stabilized policy outlook amid
weakening property price trend; (3) Balance sheet risk amid policy tightening
may impact the trading range on the downside. We widen our 12-m target
price discount to NAV for companies with potential funding risk in 2012E
and consequently lower our 12-m TPs by 14%-20%. CL-Buy rated
Evergrande, Vanke (A), and BCD remain our top picks. Key risks include
stronger-/weaker-than-expected sales and/or macro hard landing.

Table of contents
HPR has negatively impacted property price and volume 4
Extension of HPR to have limited impact on our coverage universe 6
Weakening fundamentals until HPR reversion is put into effect 11
Land market trends, one of the key indicators to drive HPR reversion 13
Valuation: Range trade likely to continue; widen our target price discount for companies with higher refinancing risk in
2012E 15
Appendix 29
The prices in the body of this report are based on the market close of August 17, 2011.
The author would like to thank Olivia Xiao for her contribution to this report.