CHINA RESOURCES LAND:A trailblazer in cross-market consolidation

Establishing anA-share platform. On 23 Nov,CR Land announced it would be acquiringa 20.9% stake (1.4b shares) in China Enterprise (600675 SH)for RMB7.3b or RMB5.23 per share. The acquisition price is at par withthe average trading price of ChinaEnterprise in the past 20 trading days before trading was suspendedin Jun 2016.

A strategic acquisition. We view the acquisition as strategic in nature. Upon completion, CRLand would gain board seats and would be in position to assist in improving ChinaEnterprise’smanagerial quality. Alikely priority would be loweringthe funding cost of China Enterprise, which was as high as 12.8% in 2015. This could be accomplishedby leveragingCRLand’s access to low-cost capital. In our view, the acquisition pavesthe way for future cooperation between CR Land and Shanghai SASAC, China Enterprise’s controlling shareholder. A more concrete outcome of the deal is that itgives CR Land access to GFA2.8m sq.m of prime location land bank owned orto be owned by ChinaEnterprise at an effective cost of around RMB18k per sq.m,a very attractive price relative to current market rates. Finally, ownership of China Enterprise wouldgiveCR Land anA-share listed platform, which opens door to more structural possibilities.

Minimal balance sheet impact.The RMB7.3b is to be paid in cash uponcompletionof the dealexpected inmid-2017. We believe the impact on the balance sheet will beminimal as CRLand would account for the acquisition usingthe equity method. Overall, we view the acquisition positively and reiterate our Outperform rating on CRLand. Weleaveour HK$28.12 target price and forecastsunchangedpending further details of the China Enterprise acquisition due next year, including all the necessary approvals. Key risks to our forecasts arepolicy risk and current risk.