Based on the real estate industry’s characteristics and the overall requirement of the Group's integrated finance strategy, the Company continuously improves its risk management system, and takes steady steps to build a comprehensive risk management system aligned with the Company's strategies and the nature of businesses. While keeping risks under control, the Company pursues sustainable and healthy business growth to develop into a leading real estate asset management company in China.

In the changing economic environments at home and abroad with evolving regulations, the Company with diversifying business lines improves its risk management organizational structure and standardizes risk management procedures. With risk quantification tools and risk performance appraisal as main approaches, the Company adopts both qualitative and quantitative risk management methods to identify, assess and price risks, achieve risk-return matching and increase risk-adjusted returns.

The Company has developed a clear organizational structure of risk management in accordance with the Company Law of the People's Republic of China, other relevant laws, regulations and regulatory requirements, as well as the Articles of Association of Ping An Real Estate Co., Ltd. and risk governance rules. The Board of Directors is ultimately accountable, the Company’s management is directly responsible, the Company’s Risk Management Department acts as a coordinator, and business and functional departments including the Investment Assessment Department assume their own responsibilities. There are risk management committees under the Board of Directors and the management respectively.

The Board of Directors, as the Company's highest decision-making body, has established a risk management committee to develop a comprehensive risk management organizational structure, determine risk management policies relating to such matters as the overall objective, risk appetite and risk tolerance, and assume ultimate responsibility for the effectiveness of the Company's comprehensive risk management.

The management supervises the effectiveness of the Company's risk management system and performs its comprehensive risk management duties. Under the management there is a risk management committee taking charge of risk management.

As the secretariat and executive body of the risk management committee, the Risk Management Department coordinates risk management under the leadership of the risk management committee.

The Company constantly optimizes its comprehensive risk management system, risk governance structure, and risk management policies, rules and procedures, which lays a solid foundation for the effective integration of risk management into daily operations, and helps achieve the risk management objective of ensuring asset security, facilitating business development and creating value.

• Risk Management Methods

  The Company has established a risk reserve, quasi-regulatory capital and economic capital management system that fully covers the Company's management of expected and unexpected risks. The Company has also developed a credit rating system and an independent credit rating team to strictly control credit risks, and prevent credit risks through credit line limits, rating-based access and so on. Through an annual assessment of comprehensive risk management capabilities, the Company reviews the implementation of all management methods, and identifies and analyzes weak links to improve the risk management system step by step for better risk management.

  The Company constantly improves its risk monitoring and reporting mechanism, and identifies, classifies and analyzes risks in a systematic manner through the risk limit and indicator system, so as to ensure timely risk monitoring and management. The Company also improves operational risk monitoring and reporting by implementing KRI and LDC. In 2019, the Company released the Procedure for Risk Management Information Reporting of Ping An Real Estate to specify the department responsible for reporting risk management information, improve the quality of information reported, strengthen the Risk Management Department’s coordination of risk management, and increase the information collection efficiency.

• Risk Early Warning

  The Company develops risk limits, the significant risk reporting mechanism, the administrative measures for significant capital events, the mechanism of handling critical emergencies, the procedure for risk asset management and disposal, and the rules of managing regulatory information. On this basis, the Company provides effective reminders or early warnings about industry movements, regulatory information or risk events to prevent and resolve risks in a timely manner.

• Performance Appraisal

  The Company has included risk indicators in the performance appraisal, promoted a performance-linked risk appraisal system, and closely linked compliance with performance appraisal based on "accountability and appraisal at every level," in a bid to achieve full coverage of risk management and lay a solid foundation for effective risk management.

The Company boasts a professional management team, an advanced system of credit rating, market assessment and financial projection models, a scientific investment decision making process, a well-established post-investment management mechanism, and a mechanism of risk management before, during and after investment deals.

• Risk Management before Investment

  The Company's business team is responsible for primary project screening. With extensive experience in projects, leaders and key members of the business team have established the first line of defense for the Company's investment risk management, by formulating and implementing project investment standards and implementing the Company's risk management strategies.

• Risk Management during Investment

  Investment decision making is central to investment risk management. As the Company's investment decision maker, the Investment Decision-making Committee makes decisions on investment projects based on their conditions, opinions of the Investment Assessment Department and other functional departments, and the Company's strategies. As secretary to the Investment Decision-making Committee, the Investment Assessment Department is responsible for soliciting opinions of functional departments on proposed projects, assessing the projects independently based on internal and external due diligence results, and overseeing the implementation of investment decisions. The Finance Department has specialists for lending reviews to ensure security.

• Risk Management after Investment

  The Company's Planning & Operations Department, as required by the management, urges post-investment management centers to cooperate in investment management and assess the achievement of operating targets. The risk management team under the Risk Management Department follows up existing projects, monitors key risk indicators regularly, comprehensively assesses project risks and performance, and provides advice on risk management. The audit team under the Risk Management Department carries out special audits of projects and comprehensive reviews of project compliance and implementation of investment decisions, reports identified issues to the management in a timely manner, and follows up remediation. Besides, the Market Research Department researches the market where projects are located and issues market risk warnings in a timely manner.

  The Company’s Risk Management Department, post-investment management centers, Finance Department and other departments concerned conduct regular classification-based risk assessments of existing assets, and impairment or valuation management of different assets under IFRS9. Results of the monthly measurement of asset impairment or valuation are issued to reflect changes in asset risks from the perspective of asset impairment or valuation changes.

In 2019, despite the pressure on economic growth, the Chinese government maintained tight control and stabilized expectations of the housing market, asserting that housing is for living in, not for speculation. Real estate was not used as a short-term economic stimulus. In 2019, the trading volume and overall price of homes was generally stable. In some regions where the demand was overly met during previous periods, there were a decline in prices and a lack of growth momentum. We expect housing sales to remain volatile in the coming year. The Chinese government pushed ahead with the development of a long-term effective mechanism of real estate market regulation, regional integration, land reform and the initiative of encouraging both housing purchase and renting, creating a favorable environment for the real estate industry's long-term development. Considering the market environment and policies, we will lay more stress on market risk management in our investment.

• Stress Tests

  During the project estimation, the Company's Investment Assessment Department reviews the stress testing of price fluctuation conducted by the investment team, and submits stress testing results to the Investment Decision-making Committee for reference. During post-investment management of projects, the Risk Management Department conducts regular and ad hoc stress testing to assess the Company's risk tolerance, and reports the testing results to the Company's management and risk management committee.

• Market Research

  The Market Research Department conducts independent market research and analysis of the proposed projects, and fully reveals potential market risks to facilitate the management's investment decision making. The Department follows hot themes to issue macro and special research reports, assists the management in determining the investment orientation, and helps facilitate innovation. The Department keeps the Company's staff and the Group's management informed of the real estate market by issuing the Daily Update, the Monthly Report on the Real Estate Market and the Monthly Macro-economy Review regularly, and releasing from time to time industry information and thematic research reports via the Company’s WeChat subscription account.

The Company's investments were mainly in the four tier-one cities and key tier-two cities including Hangzhou, Nanjing and Wuhan. The Company also developed business as appropriate in tier-three cities with favorable market environments. Investment in diverse cities reduced the concentration risk of investment regions to a certain extent.

The Company’s business landscape mainly depends on the market environment and investment strategies. Under a prudent investment strategy in the market environment, the Company maintained investment in tier-one cities and further developed business in tier-two cities. The Company achieved a balance between risks and returns in its existing investments, based on the AUM, investment risk management strategies and business operations.

The Company always pays attention to regional risks. The Market Research Department tracked and researched main areas where the Company had existing or prospective investments, and issued market research reports in a timely manner to advise on the Company's business development.