A Vision for Restructuring Alongside Anticipated Growth

Company Report

China

Analyst: James Dai

Holly Tao

(86755) 82485666-2526/4125

China – April 19, 2006

See back of report for disclaimer 1

April 19, 2006

A vision for restructuring alongside anticipated growth

Shenzhen Investment BUY

Stock Code: 0604 Price: HK$2.725

In 2005, Shenzhen Investment, or the Company, reported a net profit of RMB534 million, up 26.5% year on year (yoy). The Company paid an annual dividend per share at RMB0.13, with a dividend yield of 4.9%. Property development and investment properties became the key profits driver in 2005 and in the future. The Company has the determination to restructure its business framework, peel off money-losing, secondary business. In the future, the Company will put more emphasis on the property development and infrastructure investments. Purchasing cost of land is cheap and the industrial land may be altered into other land uses, thus land presents tremendous appreciation potential to the Company. Earnings growth during the period of 2006-08 is expected to sustain at 20% or above. The valuation of NAV per share is HK$3.90. We give our first “buy” rating to the Company with a target price of HK$3.30, which corresponds to a discount of 15% in relation to the valuation of NAV per share. Its projected price-earnings (PE) ratio in 2007 is 10.3 times. Net value per share in 2006 is 1.6 times. (We apologize that we omitted our earnings forecast in the Company Express dated April 17; for specific earnings predictions, investors can read this Company Report.)

End 12/31

Business review in 2005 and Outlook for 2006 and 2007

Net profit in 2005 surged 26.5% to HK$534 million

On April 18, Shenzhen Investment unveiled its annual results for the year ended December 31st 2005. The Company realized a full-year turnover of HK$3.003 billion (HK$, the same as below), representing a jump of 50.2% as compared to 2004. Operating profit substantially climbed 69.5% year on year (yoy) to HK$932 million, while operating profit rate was up 12.9% yoy to 31.04%. After including the revalued revenue of investment properties, in the end the Company registered a net profit of HK$534 million, representing an increase of 26.5% as compared to 2004. Earnings per share (EPS) amounted to HK$0.22, soaring 26.4% yoy. The Company recommended the payment of a final dividend of HK$0.11 per share, representing a 370% growth as compared to a final dividend of HK$0.03 in 2004. The payment of total dividends amounted to HK$0.13 per share. Dividend payout ratio reached 60.4%. Dividend yield was 4.9%, leaping 260% yoy.

Turnover Structure in 2005

60% -- Property development5% -- Transport service

10% -- Property investment 13% -- Manufacturing

10% -- Property management 2% -- Others

Source: The Company, GTJA (HK)

Comparison of operating profits in 2004 and 2005

From left to right: Property development, manufacturing, property management,

Property investment, transport service and others

Blue bar: 04A

Purple bar: 05A

Property development business becomes driving force of earnings growth

Property development business became the key profit driver for the Company in 2005, accounting for 70% in the operating profit. Bolstered by the Mainland China’s sustainable, buoyant macro-economy, the Company recorded property sales of 320,000 square meters (sq.m.), representing an upsurge of 78% yoy. Property turnover leapt 200% to HK$1.799 billion. The majority of its sales revenues were recognized after the completion of large-scale residential developments such as Shum Yip Coast phase one and Prosperous City. Shum Yip Coast phase one, in particular, was the largest contributor. That development in 2005 contributed around one-third of the Company’s turnover. Shum Yip Coast phase two will be completed in 2007. Part of flats will be delivered to buyers in 2006. Phase three is expected to be completed in mid-2008 and then the sales revenues recognition will be booked. Given its cheaper cost of acquiring the site (about HK$900 per sq. m.) and the selling price of each sq.m. of over HK$6,000, which indicates an upward trend, we expect the above two developments will jointly contribute over HK$2 billion in sales revenues over the next two years, thereby retaining its average operating profit rate of 25% or above.

Business overview of Shenzhen Investment during the period 2006-08

Source: The Company, GTJA (HK)

Company profile

Background

The Company is the window enterprise of the Shenzhen municipal government. Its core businesses comprise real estate development and investment, property management, energy & electricity, logistics & transport, infrastructure investment, cable TV network and manufacture of monitors. The parent company, Shum Yip Holdings, holds 56% of its shares. The Company is among the first batch of the five state-owned, authorized large enterprises in the Shenzhen municipality. The major subsidiaries owned by the Company include 100% of Shum Yip Holdings (Shenzhen), 100% of Shenzhen Peng Ji Holdings, 51% of Shenzhen Terra (Holdings), 80% of Shenzhen Shenkong Industrial (Group) and 51% of Shenzhen Shum Yip Logistics Group Holdings; major associates include 34% of Ma Wan Power, 24.72% of Road King, 31.1% of Shenzhen Topway Video Communication, 29% of Shenzhen Gaofa Investment Holdings Company Ltd and 26.76% of Shenzhen SEG-Hitachi Color Display Devices.

Company organization chart

Source: The Company

New investment focus

The Company plans to restructure businesses; focuses on property development, investment and infrastructure businesses

The management of Shenzhen Investment has said that in the future, the Company plans to develop into a company specializing in businesses of the real estate development and investment, as well as infrastructure (including toll roads and ports). The Company will step up efforts in industry consolidation, gradually peel off low-efficiency assets, and retreat from those industries without competitiveness such as the transport and manufacturing businesses. Meanwhile, the Company will accelerate the infrastructure investments, real estate development and investments. The latter two businesses will become the dominant earnings growth driver for the Company in the future. Additionally, the Company is quite likely to purchase 25% of Dachang Bay Phase One in Shenzhen from its parent company Shum Yip Holdings, and it is also likely to acquire Phase Two and Phase Three of Dachang Bay. We think that if the Company succeeds in carrying out the plan, it will enhance its infrastructure investments and is conducive to clearing the Company’s business structure.

Peeling off secondary businesses, the Company is more likely to lift earnings

In terms of business outlook, the core real estate business will be the fastest-growing and it will become the Company’s main profit source. The Company will put an emphasis on the property development and infrastructure investment, whereas it will sell or dispose all the non-core businesses, including transport, cable TV and industrial operations. Affected by surges in fuel oil prices and increasingly competitive industry, its transport business’ profitability was low; it merely realized an operating profit of HK$21.50 million in 2005. On the front of its manufacturing, Shenzhen SEG-Hitachi Color Display Device suffered a loss in 2005, and the Company had to apportion a loss of HK$66.70 million; the low cost-effective situation is likely to linger on for a certain period of time. On the front of information technology, its 31.1%-owned Shenzhen Topway Video Communication saw an increase of 27.3% in turnover in 2005. But a one-off amortization fee led to a loss, and the Company had to apportion a loss of HK$41.50 million. But the resource value of its cable TV network does not diminish, but go up. The Company said its restructuring plan will be completed within 2 years. Like China Overseas Land and Investment that had earlier spun off its construction business and then arranged for its listing, we think that as the Company is peeling off low cost-effective assets and retreat from unprofitable industries, its business framework will become clear-cut. And part of capital will be released, corporate transparency will receive a boost and hence raise its future NAV valuation and market rating.

Gaining presence in Pearl River Delta, demand for Shenzhen real estate keeps growing

Key property business of the Company is located in the Pearl River Delta region, and its property development business of over 70% is situated in Shenzhen. Over the next three years, the Company is expected to see the completion of residential or industrial properties in places like Dongguan and Huizhou. Given the strong demand for real estate in the Pearl River Delta, there is basically no “property bubble”. The Company can continue to benefit from the healthy development of the property market. In 2005, the property market in Shenzhen developed swiftly, witnessing annual turnover hitting 9.93 million sq. m., up 6.1%, and transaction value soaring 24.1% to HK$76.1 billion. Turnover of the residential market was up 10% to 9.01 million sq. m., and the transaction value leaping 29.4% to HK$63.4 billion. In 2005, the citywide commodity home price was HK$7,659 per sq. m. in which the average residential home price was HK$7,040 per sq. m. In the first quarter of this year, the average commercial home price hit as much as HK$8,753 per sq. m., swelling 20.6% yoy in which the average residential home price reached HK$8,126 per sq. m., climbing 25.6% yoy. In recent years, Shenzhen municipality’s economy has seen a rapid development, as indicated by a slew of economic data. For instance, its GDP in the latest five years registered an average growth of 19.8%; in 2005, disposable income of urban residents per capita exceeded HK$30,000; and fixed asset investments across the city totaled HK$117.6 billion. In the first quarter of 2006, the development and investment of properties grew at a pace of around 7%. Against the backdrop of sustainable increase of foreign population and the ever-rising per capita income, we predict the boom of Shenzhen property industry to sustain in the future.

Source︰Shenzhen Municipality Bureau of Land Resources and Housing

Management, GTJA (HK)

House price index in Shenzhen municipality

Dark blue line – Comprehensive Brown line – Office

Yellow line – Residential Light blue line – Commercial

Source︰Shenzhen Municipality Bureau of Land Resources and Housing

Management, GTJA (HK)

House rental index in Shenzhen municipality

Dark blue line – Comprehensive Brown line – Office

Yellow line – Residential Light blue line – Commercial

Purple line – Industrial

Land bought at low prices in earlier years paving way for high gross profit rate of future property business

The company announced its current ownership of land reserve of 3.58 million sq. m. (excluding the construction area of those new properties that just begin constructing), which will be enough for development over the next 5 – 7 years. All the land reserve of the Company was fetched before mid-2005, with a lower cost. Investment properties of the Company are basically located in Futian and Luohu districts, which are the prime locations in the hub of Shenzhen municipality, where land supply is limited and cost of land keeps soaring. The majority of its land had been transferred from the government in the planned economy of the 80s and 90s. Among its developing properties, the land use rights of Shum Yip Coast and Gaofa Fifth Avenue (located in Baoan district) were won in auctions in 2002. In 2006, gross profit rates of its major properties – Pengji Wisdom Centre, Seapine building and Yangguang Garden Phase III are around 40%, and their selling prices show an upward trend. Undoubtedly, substantial land bought at low prices in earlier years lay the firm foundation for the Company’s property business in the future.

Modifications in land use planning, with hidden huge appreciation potential

The Company’s land reserve consists of several industrial and warehousing land uses, such as Bagualing

Industrial Zone, Sungang Warehouse Zone and Terra Chegongmiao industrial zone. These land plots are situated in prime locations of Futian and Luohu districts. Their land uses are likely to be modified in the future if the government implements new urban planning, and they may become the land for commercial and residential purposes. The Company, the window enterprise of Shenzhen municipality, has long kept a close relationship with the government, and it has the advantage to win over the government’s resources and support. Potential planning of the land in the central district is likely to be finalized in the future. Once they are altered into commercial and/or residential land, value of such land will substantially be lifted.

Shenzhen Investment – industrial and warehouse land in Luohu and Futian

Source: The Company, GTJA (HK)

Shum Yip Coast phase one will become the key earnings driver over next 2 years, current sales pace holds stable

Shum Yip Coast is the key residential project of the Company. It is situated at the large-scale waterfront residential area. The gross floor area of 183,800 sq. m. gives rise to gross construction area of 550,000 sq. m. in which residential accounts for 450,000 sq. m. and commercial 10,000 sq. m. Shum Yip Coast’s geographical location is excellent, as it faces eastward with Baoan District Sports and Administration Center, southward with the Pearl River’s Qianhaiwan and westward Xi Xiang River. Shum Yip Coast’s premium is merely HK$900 per sq. m., while the selling price is fixed at around HK$6,000-HK$7,000 per sq. m., thus generating a gross profit rate of about 40%. Beginning from 2003, Shum Yip Coast’s development has been divided into 3 phases within a 4-year development period. Total revenues are expected to reach nearly HK$3 billion, and will bring in considerable investment return to the Company.

Infrastructure investment business steadily growing

Infrastructure investment revenue is another main revenue source of the Company. Currently, its key infrastructure investment assets are Road King and Shenzhen Ma Wan Power. In 2005, Road King contributed a net profit of HK$106 million to the Company, up 15% yoy. Road King is participating in 21 toll road projects in 8 provinces, including Shanxi, Hebei, Henan, Anhui, Hunan, Jiangsu, Guangdong and Guangxi. Since its operating risk has been diversified, business outlook of Road King is upbeat. We expect Road King will continue contributing earnings growth to the Company in 2006. Ma Wan Power’s net profit took a dive, because raw material prices of fuel oil and coal and transport cost headed north. Annual net profit merely amounted to HK$86 million, slipping 6% yoy. We anticipate Ma Wan Power’s earnings will become stable after electricity prices go up in 2006.

High dividend payout ratio

The Company lifted its dividend payout ratio to 60% in 2005 from 30%-40% in the past. The management also said that the Company will maintain a higher dividend payout ratio in the future, so small and large shareholders alike will be able to share its success.

Earnings forecast & investment rating

Forecasting EPS during the period of 2006-08 at HK$0.26, HK$0.32 and HK$0.40

According to the Company’s latest property development timetable, we forecast its operating profits for the period of 2006-08 to hit HK$908 million, HK$972 million and HK$1.347 billion, respectively, and their respective EPSs will be HK$0.26, HK$0.32 and HK$0.40. Property development and investment properties will become dominant driving force of the Company’s earnings growth. The period of 2006-08 will be banner years – property area anticipated to be completed in 2006 will be around 470,000 sq. m. where equity interest of completed floor area will be 284,000 sq. m., down 20%-30% as compared to 2005. The Company is expected to guarantee its earnings growth, because selling prices of its key commercial buildings like Seapine building and Pengji Wisdom Centre, as well as part of flats at Shum Yip Coast phase two will be delivered to buyers and hence book revenues. In 2007, the Company’s completed floor area will sharply grow amid the completion of residential developments in Huizhou and Huinan, thereby pushing its net profit to HK$791 million. In 2008, the Company’s completed floor area is expected to surpass 1.2 million sq. m. and net profit will total HK$987 million, driven by the development of Shum Yip Coast phase three and Wuhan’s Nanhui project. The average growth rate of net profit during the period of 2006-08 will be above 20%.