China Overseas Property : Announcements and Notices - Announcement of Unaudited Interim Results for the Six Months Ended 30 June 2017

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CHINA OVERSEAS PROPERTY HOLDINGS LIMITED

中 海 物 業 集 團 有 限 公 司

(Incorporated in the Cayman Islands with limited liability)

(Stock Code: 2669) ANNOUNCEMENT OF UNAUDITED INTERIM RESULTS FOR THE SIX MONTHS ENDED 30 JUNE 2017 FINANCIAL HIGHLIGHTS

1. During the six months ended 30 June 2017, total GFA under our management increased by 5.5% to 98.6 million sq.m. from last year end, and was 14.7% more comparing with the end of last corresponding period.

2. New/ renewed property management contracts secured during the first half of 2017 amounted to a total contract sum of approximately HK$673.5 million.

3. Revenue increased by 4.1% to HK$1,308.1 million, comparing to HK$1,257.0 million in the last corresponding period. Gross profit increased by 27.1% during the first half of 2017 against last period to HK$393.9 million for the period (2016: HK$309.9 million). Gross profit margin improved to 30.1% for the six months ended 30 June 2017 from 24.7% in the last corresponding period.

4. Profit attributable to owners of the Company for the six months ended 30 June 2017 increased by 36.0% to HK$155.0 million against the last corresponding period (2016: HK$114.0 million). Basic and diluted earnings per share was HK4.72 cents (2016: HK3.47 cents), increased by 36.0%. Average return on equity was 38.4% (2016: 34.6%).

5. The Board declared the payment of an interim dividend of HK1.5 cents per share (2016: HK1.1 cents) for the six months ended 30 June 2017.

The board of directors (the "Board") of China Overseas Property Holdings Limited (the "Company") is pleased to announce the unaudited interim results of the Company and its subsidiaries (collectively, the "Group") for the six months ended 30 June 2017. In ongoing adherence to the customer-oriented business strategy, we have provided premium property management services in Mainland China, Hong Kong and Macau on the back of the recognition and support of property developers and owners with whom we have developed longstanding partnerships. Leveraging the strong brand recognition of "China Overseas Property", the Group seized business opportunities in a timely manner and effectively addressed business risks by strengthening control over the application and allocation of resources, while pursuing business diversification with ongoing expansion in terms of geographic coverage and business volume.

As at 30 June 2017, the Group provided property management services to 500 properties located across 52 cities and regions in Hong Kong, Macau, and the People's Republic of China (the "PRC"), with an aggregate gross floor area ("GFA") under management of approximately 98.6 million sq.m., with the support of 22,692 employees. The categories of properties under management include mid- to high-end residential units/ commercial buildings, commercial complex, hotels and government properties.

The Group operates a diverse range of businesses. Apart from providing premium basic property services, such as facilities repair and maintenance, cleaning and landscape and security management, which would add value to properties and enhance their reputation, we also provide comprehensive, end-to-end property management services for property development projects, including consultation relating to product positioning, recommendations for the selection of equipment models, pre-delivery services, move-in assistance services, delivery inspection services, as well as engineering services quality control and consulting services. Through the provision of sound property management services, we have also developed close relations with the communities we serve and have earned their trust. Such relationship is conducive to the expansion of our mobile internet-based operation of customers' assets and daily services and our effort to tap the immense potential spending powers of these communities.

RESULTS

For the six months ended 30 June 2017, total GFA of the properties under our management increased by 5.5% or 5.1 million sq.m. to 98.6 million sq.m. New/ renewed property management contracts secured during the period amounted to a total contract sum of approximately HK$673.5 million, with a total contract sum (for property management contracts with fixed expiry dates) for services to be rendered of approximately HK$1,464.9 million as of 30 June 2017.

The six-month turnover of the Group increased by 4.1% to HK$1,308.1 million against the corresponding period last year (2016: HK$1,257.0 million). Operating profit for the period rose by 33.2% to HK$220.7 million (2016: HK$165.7 million). The profit attributable to owners of the Company increased by 36.0% to HK$155.0 million, comparing to HK$114.0 million for the same period in 2016. Basic earnings per share was HK4.72 cents (2016: HK3.47 cents), an increment of 36.0%. Average return on equity was 38.4% (2016: 34.6%).

REVENUE AND OPERATING RESULTS

The Group is one of the leading property management companies in the PRC, with operations covering Hong Kong and Macau, which strives to preserve and add value to the properties under our management by providing high-quality and sophisticated services to the customers and maximising customer satisfaction. During the first half of 2017, the GFA under our management increased by 5.5% to 98.6 million sq.m. from 93.5 million sq.m. as at 31 December 2016. This further strengthened our revenue base and improved our market position.

Total revenue increased by 4.1% to HK$1,308.1 million for the six months ended 30 June 2017, comparing to HK$1,257.0 million in the last period. Despite the fact that our property management services revenue rose in line with the increasing GFA under our management, it was offset by the following reasons (i) due to the reform of China tax system, the extension of the pilot programme of replacing business tax (as tax included in price) with value-added tax (as tax excluded in price) in the domestic services industry in the PRC took effect since 1 May 2016 (the "VAT Reform"); (ii) the continuing effect of depreciation of Renminbi against Hong Kong dollar during the past twelve months; and (iii) the increase in proportion of

commission-based property management contracts against the last period.

At the same time, direct operating expenses decreased by 3.5% to HK$914.2 million for the period, mainly due to (i) continuous efforts to reasonably implement cost controls over property management contracts; (ii) the positive effects of the VAT Reform; (iii) the effect of depreciation of Renminbi against Hong Kong dollar during the past twelve months; and (iv) the increase in proportion of property management contracts under commission basis against the last corresponding period.

Accordingly, gross profit for the period increased by 27.1% against last period to HK$393.9 million (2016: HK$309.9 million). Gross profit margin improved to 30.1% for the period from 24.7% in the last period, mainly due to (i) strengthening of reasonable cost controls; and (ii) lower tax burden arising from the VAT Reform.

Other income and gains, net, increased by 66.7% to HK$17.6 million for the period (2016: HK$10.5 million), of which, interest income on bank deposits and unconditional government grants amounted to HK$15.2 million and HK$2.3 million respectively (2016: HK$7.1 million and HK$3.0 million respectively). The increase in interest income mainly benefited from a higher level of cash balances against last period end together with more effective treasury management.

During the period, certain properties held for own-use were changed for rental purpose, the carrying value of investment properties thus increased to HK$93.5 million for the period from HK$66.6 million at last year end. Accordingly, fair value gain on investment properties for the period was HK$4.2 million (2016: HK$0.3 million).

After deducting administrative expenses of HK$194.9 million for the period (2016: HK$155.1 million), operating profit increased by 33.2% to HK$220.7 million (2016: HK$165.7 million). The variation in administrative expenses was mainly arisen from the one-off net reversal of impairment of trade receivables and payments on behalf of property owners for properties managed under commission basis, amounted to a total of HK$32.7 million, upon improved management controls over the procedures to recover receivables and advances in timely manners in the last corresponding period.

Overall, profit attributable to owners of the Company for the six months ended 30 June 2017 increased by 36.0% to HK$155.0 million against the last corresponding period (2016: HK$114.0 million).

SEGMENT INFORMATION

In last year, revenue from consulting services provided to other property management companies has been reallocated to value-added services segment from property management services segment. The segment information in the first half-year 2016 was restated accordingly.

PROPERTY MANAGEMENT SERVICES

Revenue from property management services constituted 92.3% of total revenue for the six months ended 30 June 2017 (2016: 91.5% (restated)), and increased by 5.0% from last period to HK$1,207.4 million (2016: HK$1,149.7 million (restated)). During the six months ended 30 June 2017, we increased our total GFA under management by approximately 5.1 million sq.m. to 98.6 million sq.m. from last year end, and was 14.7% more comparing with the end of last corresponding period (2016: 86.0 million sq.m.). The increase in revenue from property management services was partly offset by (i) the impact of the VAT Reform;

(ii) the effect of depreciation of Renminbi against Hong Kong dollar during the past twelve months; and (iii) increased proportion of commission-based property management contracts against last corresponding period.

For the six months ended 30 June 2017, approximately 84.6% and 8.0% of the segment revenue were generated from regular property management contracts under lump sum basis and commission basis respectively (2016: 85.0% (restated) and 7.3% (restated) respectively). Other property management services, including (for property developers) pre-delivery services and move-in assistance services, represented 7.4% of the remaining segment revenue (2016: 7.7% (restated)).

The segment gross profit margin improved to 28.0% for the period against 22.0% (restated) in the last corresponding period, mainly due to (i) reasonably strengthened cost controls; and

(ii) lower tax burden arising from the VAT Reform. Accordingly, the gross profit of our property management services segment increased by 33.3% to HK$337.7 million for the six

months ended 30 June 2017 (2016: HK$253.3 million (restated)).

After deducting the administrative expenses and taking into accounts the other income, the segment profit of the property management services increased by 27.5% to HK$178.8 million for the current period (2016: HK$140.2 million (restated)).

VALUE-ADDED SERVICES

Revenue from the value-added services segment constituted 7.7% of total revenue for the six months ended 30 June 2017 (2016: 8.5% (restated)), and decreased by 6.2% to HK$100.7 million (2016: HK$107.3 million (restated)). The decrease in revenue was mainly temporarily arisen from design and technical support services under engineering services. During this period, due to the business nature, such activity recorded lower recognised revenue at the initial stage of engineering work.

In respect of the profitability, the performance of other value-added services such as rental assistance for public spaces was satisfactory, and compensated the effect of decreased revenue. The gross profit of the value-added services segment slightly dropped to HK$56.2 million in the first half of 2017 from HK$56.6 million (restated) in the first half of 2016, while gross profit margin slightly increased to 55.8% (2016: 52.7% (restated)).

The segment profit from the value-added services, having taking into accounts other segment income and overhead, increased by 8.8% against last corresponding period to HK$51.5 million (2016: HK$47.3 million (restated)).

LIQUIDITY, FINANCIAL RESOURCES AND DEBT STRUCTURE

The Group adopts prudent financial policies, with effective financial and cash management under centralized supervision, and maintains appropriate leverage with adequate cash balances. As at 30 June 2017, net working capital amounted to HK$1,136.4 million (as at 31 December 2016: HK$949.4 million).

Bank balances and cash slightly increased by 1.7% to HK$2,148.4 million from last year end (as at 31 December 2016: HK$2,112.3 million), in which, 96.4% were denominated in Renminbi and 3.6% were denominated in Hong Kong Dollar/ Macau Pataca.

million long-term revolving loan facilities. Of which, HK$310.0 million and HK$50.0 million were repayable between 1 and 2 years and between 2 and 5 years respectively. The Group was in a net cash position, with a gearing ratio (total borrowings divided by total equity attributable to owners of the Company) of 40.7% as at 30 June 2017. Interest of such borrowings was charged at floating rates with a weighted average of 2.18% per annum.

FOREIGN EXCHANGE EXPOSURE

As the Group mainly recorded its revenue, receivables and payables and expenditures, etc. in Renminbi for its PRC property management business, the management considered that a natural hedge mechanism existed. Meanwhile, fluctuations of exchange rates may impact our net assets value and financial results due to currency translation upon consolidation. If Renminbi appreciates/depreciates against Hong Kong dollar, we would record a(n) increase/decrease in our net assets value and financial results. At present, we have not entered into or traded financial instruments, including derivative financial instruments, for hedging or speculative purpose. Hence, other than the effect of currency translation as mentioned above, we have neither experienced nor expected any material and adverse effect on our business and operations due to the devaluation of Renminbi.

On one hand, the Group would closely monitor the volatility of Renminbi exchange rate, and would consider appropriate currency hedging policy for mitigating apparent exchange rate risk and enter into such hedging arrangement, if and when appropriate.

CAPITAL EXPENDITURE

The capital expenditures, which mainly represent additions to motor vehicles, machinery and equipment, furniture, fixtures and office equipment, were HK$3.0 million for the six months ended 30 June 2017.

MATERIAL ACQUISITIONS, DISPOSALS, SIGNIFICANT INVESTMENT AND FUTURE PLANS OF MATERIAL INVESTMENT

The Group had no material acquisitions, disposals, significant investments and future plans of material investment during the six months ended 30 June 2017.

CONTINGENT LIABILITIES

The Group provided counter-indemnities amounting to approximately HK$78.6 million as at 30 June 2017, for guarantees issued in respect of certain property management service contracts for which we are required to provide performance bonds in the ordinary course of business.

Except as disclosed above, we had no other material outstanding contingent liabilities as at 30 June 2017.

EMPLOYEES

As at 30 June 2017, the Group had approximately 22,692 employees (as at 31 December 2016: 22,637). The pay levels of these employees are commensurate with their responsibilities, performance and the prevailing market condition. The remuneration packages included basic salaries, discretionary bonus and provident fund contributions/ retirement pension scheme. Certain selected key personnel of the Group were also entitled to participate in a share incentive scheme of an intermediate holding company of the Group. The total staff costs incurred for the six months ended 30 June 2017 was approximately HK$723.5 million (2016: HK$708.0 million).

As part of our comprehensive training programme, we have provided classroom and online training to our staff to enhance technical and service knowledge as well as knowledge of industry quality standards and workplace safety standards.

PROSPECTS The Economy

Major economies such as the United States, the United Kingdom and France had their general elections held during the period from late last year to the middle of the current year. While the economic impact of political changes, such as the rise of protectionism, remains to be seen, the U.S. Federal Reserve went on to increase the interest rate twice during the first half of the year following the 0.25% raise announced towards the end of last year. Based on the dot plot indicating the mainstream consensus of FOMC members on interest rate directions, it is likely that there will be one more raise in the second half of the year, and the

upward cycle for U.S. interest rates will continue thereafter. Currently, the central banks in Europe and the United States are mulling the possibility of downsizing their balance sheets, suggesting possible negative impact on global funds and asset prices.

Despite the complicated and volatile global conditions, China continued to sustain stable and positive economic development with a GDP of 6.9% increase against same period in last year, which was slightly above the national annual target. In line with the principles for development under the "New Normal", the nation continued to see improvements in the quality and efficiency of its economic development with enhanced structural supply-side reforms and improved demands, complemented by innovative industries that enhance productivity and competitiveness and assure sustainable and stable economic growth. The positive outcome of these developments, which has been gradually reflected in the spending powers of the people, is conducive to social harmony and stability underpinned by better living conditions for the people.

Property Management

The property management sector in China has been afforded ample opportunities for development in recent years following the implementation of the "National New-type Urbanisation Plan (2014－2020)" (《國家新型城鎮化規劃 (2014－2020年)》) and the

ongoing growth of the nation's property market. The property management sector has gradually evolved from a labour-intensive business focused on traditional property management services to an internet-driven operation characterised by centralisation, automation and application of smart devices. The role of the property manager has transformed from a provider of basic property services to a connector and integrator of services and a platform operator. Through the upgrade of hardware equipment to smart devices and the application of the mobile internet technologies, property management companies have succeeded in improving the efficiency and effectiveness of their services while achieving cost reduction. The multi-dimensional daily needs of patrons under a shared economic environment have facilitated the development of a diverse range of value-added services. The property management business can extend vertically to the business chain of the property development sector, as well as horizontally to the integrated resources for daily services. Property management companies are embracing new prospects of profit growth on

the back of an extended scope of property services thanks to the introduction of innovations and upgrades in services. The gradual improvement and relaxation of relevant policies of the government and the industry, as well as the development towards market-oriented pricing for property services, will further drive the healthy development of the property management sector.

Driven by information technologies relating to the Internet and the Internet of Things and the influx of capital investments, the previously highly fragmented market of the property management sector has been undergoing a process of integration with increasing pace and magnitude. The sector has seen a significantly enhanced level of industry concentration in the midst of leapfrog development and large-scale, premium property management companies enjoying sound reputation, economies of scale and profitability will secure greater opportunities for development.

Group Strategy

The Group competes with its major rivals primarily on branding, service quality, scale and profitability. We are committed to the provision of quality management services to our clients, offering differentiated service products to suit different customer needs in order to establish a positive brand image. With a proven track record of 30 years in service, we have built up a comprehensive service quality monitoring system which has received international service standard certification. We have adopted information technology to improve our quality of service in an effort to enhance customer satisfaction continuously. We focus on market development for mid- to high-end residential and commercial properties, so as to maintain growth in our market share and operating scale. While endeavouring to maintain a high standard in the quality of service, we also strive to enhance labour productivity, control management overhead cost and boost efficiency with the establishment of IT-driven smart platforms.

In view of the potential spending power of the huge population living in residential communities, we are committed to the ongoing development of diversified value-added services to meet the needs of owners, tenants and users across the board for different types of services. Meanwhile, we have been making vigorous efforts to develop our online platform

by employing new technologies, such as the mobile internet and the Internet of Things, so that we can offer quicker and more intuitive experience to customers and enhance our overall competitiveness in the property management sector.

As one of the leading property management companies in the PRC, it is our mission to lead the development of the industry continuously through our performance excellence, to provide perfect housing enjoyment to our customers on the back of high quality services, to preserve and enhance the assets value of clients' properties with comprehensive assets management programs, to provide a pleasant working environment with opportunities for career development for our staff, to build our brand image upon word-of-mouth credentials, and to explore the property management market continuously for the growth of shareholder's value. We would achieve our objectives of meeting customers' needs and sustaining business growth by implementing the following key business strategies:

• To leverage our leading ''China Overseas Property'' brand name to expand our business scope

  On the back of our core competency of focusing on the management of mid- to high-end properties in major cities in the PRC, as well as in Hong Kong and Macau, we would solidify our strong brand recognition as a property management service provider for such properties. We intend to achieve this goal by expanding our range of service offerings to further provide comprehensive and differentiated service solutions to customers, while leveraging our experience in managing high-end properties in Hong Kong to develop the high-end and mixed-use property management market in the PRC and abroad.

  In order to leverage our strength in managing mid- to high-end properties, we would enhance our cooperation with property developers whose profiles are consistent with our brand image and market positioning, especially in relation to the expansion of property management services for commercial properties. Furthermore, to expand our scope of operations, we would endeavor to engage in asset holdings and long-term operations aimed at fulfilling diverse customer requirements and enhancing customer satisfaction, in an attempt to develop a diversified portfolio of value-added services.

• To further expand our business coverage through consolidation of our advanced property management knowhow

  We will leverage our extensive experience in managing mid- to high-end properties to devote our efforts in providing property management consultancy to the full phases of property development, and to continue the expansion of consulting services, professional and technical advisory services as well as one-stop property management consultation. We will provide bespoke services to meet our customers' demands, such as planning design assessments, engineering consultancy and design and equipment advisory services, to achieve the goal of lowering development costs and optimising property functions. Our management knowhow offerings include property management scheme design and modernised quality control techniques, which would help to enhance management efficiency and lower costs arising from property management services. Meanwhile, we would leverage our business platform to integrate resources across the value-chain horizontally and vertically, and collaborate with business partners to explore new business opportunities, e.g. providing leasing and operation services for offices and commercial properties.

• Ongoing promotion of online and offline services to offer superb experience in residential living

We have always been fully committed to the exploration of online / offline services tailored to the characteristics of our business. Taking into account the actual needs of residents in different districts, services catering to the personalised and diversified requirements of patrons are being constantly enriched and improved. These included customers' assets operations such as property operating business, including property leasing and sale, household fitting and renovation; as well as daily operating services such as home services and merchandise sales. As we amass capabilities in such offline services, a solid foundation is provided for creating synergies between online and offline services. We will continue to devote additional resources in the development of our online internet platform to meet the personalised and diversified requirements of patrons. Meanwhile, we will explore opportunities for business growth in connection with the operation of customers' assets and daily services, striving to add value for customers by enhancing their quality of life with