Aug-11 Sep-11 Sep-11 Sep-11 Source: Bloombergir.chartnexus.com/sunway/doc/Sunway-Malaysia_Initiation... · 2011-10-12 · similar business profile as the bigger construction boys,business

Construction and Materials MALAYSIA October 5, 2011

IMPORTANT DISCLOSURES. INCLUDING ANY REQUIRED RESEARCH CERTIFICATIONS, ARE PROVIDED AT THE END OF THIS REPORT.

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Size does matter The merged Sunway group offers value, not just because of its share price decline but also the potential synergies from more in-house construction of its property projects. We also like the growth prospects for its construction division, which could clinch more ETP/10MP jobs.

Sunway offers exposure to Malaysia’s rising construction activities. It is also an integrated property group that enjoys recurring income from property investments and REITs. We begin coverage with an OUTPERFORM, pegging our target price to a 20% discount to its RNAV.

Potential synergies Post merger, Sunway has a fairly similar business profile as the bigger construction boys, with property and construction being the main earnings contributors and drivers. The group targets merger synergies worth 1-2% of revenue over the next two years, coming from (i) better cost management and efficiency, (ii) increased construction of in-house properties by the construction unit, and (iii) sharing of construction design technology, leading to fewer design faults and delays.

5th largest order book Sunway’s RM2.5bn outstanding construction order book is the 5th largest among the construction

stocks under our coverage. It is driven by ETP and 10MP projects as well as ongoing in-house property development projects. Sunway’s construction unit specialises in building, civil and infrastructure works, both for the public and private sectors. With its bigger size and balance sheet, the group can hold its own among the big construction boys in the battle for large-scale jobs, having been shortlisted for the KVMRT project.

Recurring income from property Sunway’s property division, which contributes 70% of pretax, boasts a remaining landbank of 2,160 acres and has one of the largest portfolios of investment properties in Malaysia, which provides it with recurring income. Klang Valley projects will be the main contributors to property development earnings while overseas projects will provide a platform for longer-term growth. The outstanding property GDV of RM14.4bn is good for another 5-8 years.

Notes from the Field

Sharizan Rosely Malaysia

T (60) 3 20849864 E [email protected]

Company Visit Expert Opinion

Channel Check Customer Views

“The merger aims to create bigger entity for business scale, realize synergies between the group’s construction and property arms, and enhance brand name”

─ Tan Sri Jeffey Cheah, Chairman

Sunway Bhd SWB MK / SWAY.KL Current RM1.87 SHORT TERM (3 MTH) LONG TERM

Market Cap Avg Daily Turnover Free Float Target RM2.68 US$754.5m US$1.40m 40.1% Previous Target NA RM2,417m RM4.10m 1,293 m shares Up/downside 43.32%

Conviction

Sources: CIMB. COMPANY REPORTS

1.5

1.7

1.9

2.1

2.3

2.5

2.7

74

79

84

89

94

99

104Price Close Relative to FBMKLCI (RHS)

Source: Bloomberg

5

10

15

Aug-11 Sep-11 Sep-11 Sep-11

Vol m

Financial Summary

Dec-10A Dec-11F Dec-12F Dec-13F

Revenue (RMm) 3,134 3,578 3,825 4,106

Net Profit (RMm) 688.1 301.8 347.3 391.0

Core EPS (RM) 0.53 0.23 0.27 0.30

Core EPS Growth 0.0% (56.1%) 15.1% 12.6%

FD Core P/E (x) 3.50 8.25 7.40 6.57

DPS (RM) 0.10 0.08 0.09 0.10

Dividend Yield 5.56% 4.01% 4.81% 5.21%

EV/EBITDA (x) 5.12 7.54 6.13 5.23

P/FCFE (x) 20.17 8.31 NA NA

Net Gearing 54.6% 65.8% 48.2% 39.6%

P/BV (x) 0.93 0.86 0.70 0.62

Recurring ROE 11.2% 11.2% 10.7%

% Change In Core EPS Estimates

CIMB/consensus EPS (x) 1.01 0.92 0.99 0.99

Consensus EPS (RM) 0.53 0.25 0.27 0.31

52-week share price range

Current Target

1.87

2.68

1.67 2.49

SOURCE: CIMB, COMPANY REPORTS

Sunway Bhd October 5, 2011

2

PEER COMPARISON

Research Coverage

Bloomberg Code Market Recommendation Mkt Cap US$m Price Target Price Upside

Gamuda GAM MK MY OUTPERFORM 1,805 2.80 5.13 83.2%

IJM Corp Bhd IJM MK MY OUTPERFORM 1,949 4.54 7.67 68.9%

Malaysian Resources Corp MRC MK MY OUTPERFORM 744 1.72 3.21 86.6%

Muhibbah Engineering MUHI MK MY TRADING BUY 129 1.01 1.70 68.3%

Sunway Bhd SWB MK MY OUTPERFORM 755 1.87 2.68 43.3%

WCT Bhd WCT MK MY OUTPERFORM 500 1.99 3.99 100.5%

Rolling P/BV (x)

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Gamuda IJM Corp Bhd

Malaysian Resources Corp Muhibbah EngineeringSunw ay Bhd WCT Bhd

Rolling FD Core P/E (x)

0

1,000

2,000

3,000

4,000

5,000

6,000

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11

Gamuda IJM Corp Bhd

Malaysian Resources Corp Muhibbah EngineeringSunw ay Bhd WCT Bhd

Sector Average: P/BV vs Recurring ROE

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12

0%

3%

6%

9%

13%

16%

19%

22%

25%

Rolling P/BV (x) (lhs) Recurring ROE (rhs)

Sector Average: FD Core P/E vs FD Core EPS Growth

0

5

10

15

20

25

30

35


-60%

-40%

-20%

0%

20%

40%

60%

80%

Rolling FD Core P/E (x) (lhs) FD Core EPS Grow th (rhs)

Valuation

FD Core P/E (x) P/BV (x) EV/EBITDA (x)

Dec-10A Dec-11F Dec-12F Dec-10A Dec-11F Dec-12F Dec-10A Dec-11F Dec-12F

Gamuda 22.33 17.07 10.78 3.06 2.99 2.83 40.01 29.38 14.05

IJM Corp Bhd 22.18 14.88 11.84 2.63 2.51 2.36 15.09 10.90 9.08

Malaysian Resources Corp 29.51 25.78 17.00 3.07 2.74 2.37 21.33 13.08 9.05

Muhibbah Engineering 11.89 5.56 4.96 0.67 0.66 0.64 9.95 6.30 6.29

Sunway Bhd 3.50 8.25 7.40 0.93 0.86 0.70 5.12 7.54 6.13

WCT Bhd 12.37 9.68 8.86 1.48 1.31 1.15 5.57 4.50 4.24

Growth and Returns

FD Core EPS Growth Recurring ROE Dividend Yield

Dec-10A Dec-11F Dec-12F Dec-10A Dec-11F Dec-12F Dec-10A Dec-11F Dec-12F

Gamuda 9.8% 30.8% 58.4% 13.3% 17.7% 26.9% 4.75% 5.47% 5.67%

IJM Corp Bhd -6.9% 49.1% 25.7% 11.9% 17.3% 20.5% 3.05% 3.27% 3.35%

Malaysian Resources Corp 60.5% 14.5% 51.7% 9.2% 11.2% 15.0% 0.04% 0.30% 0.17%

Muhibbah Engineering 95.9% 113.9% 12.1% 6.4% 12.0% 13.1% 3.47% 3.96% 4.48%

Sunway Bhd na -57.6% 11.5% 11.2% 11.2% 5.56% 4.01% 4.81%

WCT Bhd 25.5% 27.8% 9.1% 13.4% 15.5% 14.8% 5.03% 5.90% 6.22%


Calculations are performed using EFA™ Monthly Interpolated Annualisation and Aggregation algorithms to December year ends


3

FY10 net profit boosted by

RM393m asset revaluation

and deferred tax reversal.

Assumed 30% dividend net

payout ratio

Share price info

Share price perf. (%) 1M 3M 12M

Relative -10.3 -10.9 -18.0

Absolute -18.0 -24.9 -24.9

Major shareholders % held

Tan Sri Jeffrey Cheah 47.7

Government of Singapore Investment Corp

12.2

P/BV vs Recurring ROE

0.00

0.20

0.40

0.60

0.80

1.00

1.20


11.15%

11.16%

11.17%

11.19%

11.20%

11.21%

11.22%

Rolling P/BV (x) (lhs) Recurring ROE (rhs)

FD Core P/E vs FD Core EPS Growth

0.0

2.0

4.0

6.0

8.0


-70%

-60%-50%

-40%

-30%-20%

-10%

0%10%

20%

FD Core P/E (x) (lhs) FD Core EPS Grow th (rhs)

Profit & Loss

(RMm) Dec-10A Dec-11F Dec-12F Dec-13F

Revenue 3,134 3,578 3,825 4,106

Cost Of Sales - - - -

Gross Profit 3,134 3,578 3,825 4,106

Total Operating Costs (2,542) (3,136) (3,325) (3,546)

Operating Profit 592 441 501 561

Operating EBITDA 592 461 520 581

Depreciation And Amortisation - (19) (20) (20)

Operating EBIT 592 441 501 561

Net Interest Income (74) (102) (109) (98)

Exchange Gains - - - -

JV/Associates Profit 199 95 110 106

Other Income - - - -

Profit Before Tax (pre-EI) 717 434 502 569

Exceptional Items - - - -

Pre-tax Profit 717 434 502 569

Taxation 280 (100) (116) (132)

Profit After Tax 997 335 386 437

Minority Interests (309) (33) (39) (46)

Net Profit 688 302 347 391

Recurring Net Profit 688 302 347 391

Cash Flow


Pre-tax Profit 717 434 502 569

Depreciation And Non-cash Adjustments (125) 27 18 12

Change In Working Capital (199) (432) (71) (78)

Tax Paid - (100) (116) (132)

Other Operating Cashflow (199) (95) (110) (106)

Cashflow From Operations 194 (166) 223 265

Capex - (20) (20) (20)

Proceeds From Disposals Of FAs/subsidiaries - (281) (349) (347)

Acquisition Of Subsidiaries/investments - - - -

Other Investing Cashflow - - - -

Cash Flow From Investing - (301) (369) (367)

Debt Raised/(repaid) - 859 (502) (196)

Equity Raised/(Repaid) - - - -

Dividends Paid - 97 116 126

Net Cash Interest (74) (102) (109) (98)

Other Financing Cashflow (283) 8 403 217

Cash Flow From Financing (357) 861 (91) 49

Total Cash Generated (163) 394 (237) (53)

Change In Net Cash (163) (465) 265 143

Free Cashflow To Equity 119 290 (756) (396)

BY THE NUMBERS



4

Borrowings rose due to

RM910m loan to satisfy cash

portion of the merger

Balance Sheet


Fixed Assets 969 970 970 970

Intangible Assets 330 330 330 330

Other Long Term Assets 2,686 2,967 3,316 3,663

Total Non-current Assets 3,985 4,267 4,616 4,963

Total Cash And Equivalents 881 1,256 1,000 922

Inventories 302 516 552 593

Accounts Receivable 1,143 1,957 2,092 2,246

Other Current Assets 714 1,100 1,163 1,232

Total Current Assets 3,040 4,829 4,807 4,993

Trade Creditors 1,380 2,362 2,526 2,711

Short-term Debt 506 455 409 368

Other Current Liabilities 68 68 68 68

Total Current Liabilities 1,953 2,885 3,003 3,147

Total Long-term Debt 2,006 2,916 2,460 2,305

Other Liabilities - - - -

Deferred Tax 81 81 81 81

Total Non-current Liabilities 2,087 2,997 2,541 2,387

Shareholders' Equity 2,599 2,795 3,421 3,918

Minority Interests 386 419 458 504

Preferred Shareholders Funds

Total Equity 2,985 3,213 3,879 4,422

Key Drivers


Outstanding Orderbook 1,333.0 2,513.0 3,513.0 5,013.0

Orderbook Depletion N/A N/A N/A N/A

Orderbook Replenishment 1,180.0 1,000.0 1,500.0 1,500.0

ASP (% Change, Primary Product/service) N/A N/A N/A N/A

Unit Sales Growth (%, Primary Product/service) N/A N/A N/A N/A

Utilisation Rate (%, Primary Product/service) N/A N/A N/A N/A

ASP (% Change, Secondary Product/service) N/A N/A N/A N/A

Unit Sales Growth (%, Secondary Product/service) N/A N/A N/A N/A

Utilisation Rate (%, Secondary Product/service) N/A N/A N/A N/A

BY THE NUMBERS

Key Ratios

Dec-10A Dec-11F Dec-12F Dec-13F

Revenue Growth N/A 14.1% 6.9% 7.3%

Operating EBITDA Growth N/A -22.1% 12.9% 11.6%

Operating EBITDA Margin 18.9% 12.9% 13.6% 14.1%

Net Cash Per Share (RM) (1.27) (1.64) (1.45) (1.36)

BVPS (RM) 2.0 2.2 2.7 3.0

Gross Interest Cover 5.9 3.3 3.5 4.4

Tax Rate -39.1% 22.9% 23.1% 23.1%

Net Dividend Payout Ratio 19.5% 32.0% 33.4% 32.1%

Accounts Receivables Days N/A 158.1 193.7 192.8

Inventory Days N/A N/A N/A N/A

Accounts Payables Days N/A N/A N/A N/A

ROIC (%) N/A 11.3% 11.6% 13.3%

Return On Average Capital Employed N/A 7.8% 8.0% 8.5%



5

Size does matter 1. BACKGROUND

1.1 Merger of Sunway Holdings and Sunway City

The product of the merger of Sunway Holdings and Sunway City, Sunway Bhd is principally a construction and property group with involvement in other businesses such as trading and manufacturing, quarry & building materials and healthcare. Property which includes REIT and hospitality & leisure contributes 40% of revenue while the remaining 60% is split equally between construction and investments. In terms of pretax profit, property contributes 70% and the balance 30% comes from construction and investments.

Figure 1: Recap details of merger

Merged entities Offer price Breakdown

per share

Sunway Holdings

- Ordinary shares RM2.60 RM2.08 per Sunway Berhad's shares + 52 sen cash

- Warrants RM1.50 RM1.20 per Sunway Berhad's shares + 30 sen cash

Sunway City

- Ordinary shares RM5.10 RM4.08 per Sunway Berhad shares + RM1.02 cash

- Warrants RM1.29 RM1.03 per Sunway Berhad's shares + 26 sen cash

Free warrants

Ratio 1 warrant : 5 Sunway Berhad's shares

Strike price RM2.80

Tenure 5 Years

Merger was announced in Nov-10

80% of purchase consideration satisfied by issuance of Sunway Berhad shares

20% of purchase consideration paid in cash

Total consideration for Sunway Holdings = RM1.9bn

Total consideration of Sunway City = RM2.6bn SOURCES: CIMB, COMPANY REPORTS

1.2 Restructured business components

The merged group’s business profile is fairly similar to bigger construction companies such as IJM Corp, Gamuda and WCT where construction and property are the main profit contributors and growth drivers. Sunway’s expertise in construction lies in civil engineering, infrastructure and building works, which the construction unit also undertakes for the group’s property division. The group’s strength in the property segment lies in its size and overseas exposure (Australia, India and China). Its property investment division has one of the largest portfolios in Malaysia.

Table of Contents

1. BACKGROUND p.4

2. OUTLOOK p.8

3. RISKS p.13

4. FINANCIALS p.17

5. VALUATION AND RECOMMENDATION p.20


6

Figure 2: Group structure and shareholding

Tan Sri Dato Seri Dr Jeffrey Cheah GIC

Sunway

Integrated property Construction Investment

- Property development - Design & build - Trading/manufacturing

- Property Investment - Building & civil - Quarry & building materials

- Hospitality - Geotechnical - Healthcare

- Leisure - M&E Engineering - Others

Sunway REIT - Precast concrete

GIC = The Government of Singapore Investment Corporation Pte Ltd

47.7% 12.2%

36.7%

SOURCES: CIMB, COMPANY REPORTS

1.3 Merger synergies and benefits

Before the merger exercise, the business components of Sunway Group were fragmented. The construction division and some of the property development projects were housed under Sunway Holdings while various other businesses such as property development, investment and REIT were held by Sunway City. Integration of key business components, creation of a bigger entity, realisation of synergies between the group’s property and construction arms and enhancement of overall brand presence were the key objectives of the merger.

We expect the group to extract merger synergies from (i) better cost management and efficiency, (ii) more collaboration between the construction and property development on in-house works, and (iii) sharing of a construction/building design technology called Virtual Design and Construction (VDC). This should reduce design faults and delays and lead to better monitoring of input costs. We gather that Sunway is the first company in Malaysia to adopt the advanced version of the VDC software. Cost savings and operational efficiencies through the merging of the group’s treasury operations will be underpinned by lower borrowing costs and higher discounts in group procurement of building materials. The group targets merger synergies worth 1-2% of revenue over the next two years.

Figure 3: Three key synergies

Efficiency & cost competitiveness Size & scale Two property arms under one brand

- Sharing of technologies through VDC. - Larger group procurement = better discounts - Integration of market strategy

- VDC reduces design faults. - Combined group treasury = lower cost - Enhance brand presence

- VDC reduces construction cost & delays - Streamlining of support functions

- Better monitoring of variation costs through VDC. - Stronger balance sheet

Virtual Design and Construction (VDC) SOURCES: COMPANY REPORTS

2. CONSTRUCTION OUTLOOK

2.1 Broad-based construction skill sets

Sunway’s construction expertise is broad-based, with specialty in building, civil and infrastructure works, both for the public and private sectors. In 2005-10, the group completed RM3.9bn worth of construction jobs, of which 69% were local jobs and the balance were mainly highway or road projects in India. In-house property development accounted for 22% of the total value of jobs completed. The group’s largest project in the past five years was the construction of the Kuala Lumpur Convention Centre worth RM549m, which was completed in 2005. Other jobs where values ranged between RM100m and


7

RM300m were mainly local building projects and various highways and road jobs in India.

Figure 4: Sunway's completed construction jobs 2005-10

Projects Year Client Value

completed RM m

South Klang Valley Expressway (IB) 2010 Muhibbah Engineering 208.0

As-Syakirin Mosque At KLCC Park (Extension) 2010 KLCC (Holdings) 13.1

East-West corridor rehabilitation and upgrading works for NH-76, Rajasthan, India 2010 NHAI 284.2

Sunway Medical extension 2010 Sunway Medical Centre 85.0

Extension/additional campus for UiTM, Selangor 2010 U-Wood Holding 181.0

Commercial and office building 2008 Aston Star 154.9

Commercial and office building 2008 Aston Star 40.4

Factory for aircraft composite components 2008 MAHB 119.8

Goldhill Apartment 2008 Nirwana Indah 56.7

Construction and Completion of Sales Gallery & Show Units - SuncityKL 2008 Sunway City 3.2

Sun-U Residence Front And Side Entrance And Guard House, Bandar Sunway 2008 Sunway City 0.4

Euphoria - Ministry of Sound London At Sunway Resort Hotel - Interior Design Fit-Out Work 2008 Sunway Design 4.5

Building works and utilities at Taman Sri Hartamas 2008 Sunway D'Mont Kiara 147.4

34 units of Town Houses 2008 Sunway D'Mont Kiara 35.3

Earthworks, retaining walls and acillary works for a mixed development 2007 Angel Wing (M) 31.3

Package 3 of KL-Putrajaya Highway 2007 Maju Holdings (M) 165.0

Four Laning of NH-4 package III, Karnataka, India 2007 NHAI 214.8

Grand Trunk road improvement 2007 NHAI 338.9

Four Laning including bypass for NH-4, Karnataka, India 2007 NHAI 93.0

6-storey hospital with 3 level basement car park 2007 Prince Court Medical Centre 25.8

Shopping complex - 4 storey of shops, 1 storey of office 2007 Sunway Carnival 90.3

Monash University 2007 Sunway City 119.2

134 units of 2-storey terrace houses with utilities and infrastructure in Shah Alam 2007 Sunway City 17.3

2-block apartment and a 4-level car park 2007 Sunway City 13.0

Mix development and infrastructure works 2007 Sunway D'Mont Kiara 2.4

Pyramid 2 2007 Sunway Pyramid 298.7

10-storey shopping mall and car park 2007 Sunway Pyramid 9.3

Proposed Design and Construction of Distribution Center 2007 Zuellig Pharma 54.9

Kuala Lumpur Convention Centre, Kuala Lumpur City Centre (KLCC) 2006 KL Convention Centre 193.4

Earthworks phase 1 2006 Sunway South Quay 7.6

Infrastructure, roads, drainage and sewerage reticulation 2005 Central Challenger (M) 15.2

Kuala Lumpur Convention Centre, Kuala Lumpur City Centre (KLCC) 2005 KL Convention Centre 549.3

Four laning of existing 2 lane for NH-2 2005 NHAI 250.0

Sunway Shopping Mall in Perak 2005 Peluang Klasik (M) 16.0

Terrace housing units 2005 Sunway Kinrara 10.2

Sunway counter for Sunway Lagoon 2005 Sunway Kinrara 5.6

2-storey terrace houses and 134 units of 2-storey shop lots in Penang 2005 Sunway Tunas 1.0

Site clearance, earthworks, retaining walls, infrastructure and ancillary works 2005 Syarikat Shoib Properties 9.0

Total 3,864.9 SOURCES: COMPANY REPORTS

2.2 Niche in building works

Scrolling through Sunway’s past projects, we observe a focus on building works. 58% of the RM3.9bn worth of jobs completed over the past five years were building-related works, of which 39% were in-house projects and the balance were external projects. Highway and road-related jobs made up 36% of total projects completed. They include the RM208m works for the South Klang Valley Expressway (SKVE) completed in 2010 and the RM165m package 3 of the KL-Putrajaya Highway completed in 2007.


8

Figure 5: Completed jobs by category (RM m) Figure 6: Breakdown of completed jobs

Title:

Source:

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300

600

900

1,200

1,500

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build

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4%

Earthw orks &

infrastructures,

2%

In-house building

jobs, 22%

External building

jobs, 36%Highw ays/Road

w orks, 36%

SOURCES: COMPANY REPORTS SOURCES: COMPANY REPORTS

2.3 Merger yields size for larger jobs

A major benefit of the merger is size. Sunway now has the size and the balance sheet to bid for larger and competitive projects. YTD, the group has clinched RM1.2bn worth of local jobs, bringing the total outstanding order book to RM2.5bn. A notable win was the recent award of a RM569m contract for the Kelana Jaya LRT extension package 2. Its total project wins of RM1.2bn YTD accounted for 19% of the total project awards of RM6.4bn for the construction sector. In terms of value of contracts, Sunway was one of the contractors which clinched medium- to large-scale jobs with values of between RM200m and RM600m.

Figure 7: Sunway's project awards YTD

Projects RM m

Jalan Tun Razak 23

BioXcell - Central Facilities Utility 74

Sultan Abdul Aziz Shah Airport 37

Facilities works for Legoland Park in Iskandar 258

UiTM campus expansion & KLCC link bridge 219

LRT Kelana Jaya line extension package 2 569

Total 1,180 SOURCES: BURSA MALAYSIA


9

Figure 8: Major construction project awards YTD

Date Contractor Project RM m

3-Jan-11 Sunway Holdings UiTM Campus expansion (Zone 1 phase 2) and proposed link bridge in KL 219

8-Feb-11 PJI Holdings Subcontracting works for Kolej Universiti Insaniah campus 56

1-Mar-11 Tim Sekata-Bina Puri JV Industrialised building system job for two schools 47

4-Mar-11 Sunway Holdings Facilities works for Legoland Theme Park in Johor 258

4-Mar-11 Fajarbaru Builders Nominated subcontracting works for Kelana Jaya LRT line extension package A 87

4-Mar-11 Fajarbaru Builders Nominated subcontracting works for Ampang LRT line extension package A 63

7-Mar-11 Sunway Holdings Central Utilities Facility at Biotechnological Park Bio-Xcell in Johor 74

10-Mar-11 AZRB Remaining works for East Coast Expressway (ECE) phase 2 145

30-Mar-11 Ireka Corp Architectural and M&E works for offices and hotel development in KL 233

1-Apr-11 Mitrajaya Subcontract works for Ampang LRT extension station 3, 4 & 5 TPSS Kinrara 1 & 2 91

4-Apr-11 Aliran Ihsan Upgrade and extension of Semanggar water treatment plant in Kota Tinggi, Johor 28

4-Apr-11 Mitrajaya Public residential development in Putrajaya 26

23-May-11 Mitrajaya Rawang Specialist Hospital 46

23-May-11 Quality Concrete-Puncak Niaga JV Sarawak water supply project 667

27-May-11 WCT Pinewood Studios at Medini, Iskandar 28

3-Jun-11 Mudajaya Civil works for Janamanjung power plant extension 720

10-Jun-11 Gadang Holdings Sg. Buloh depot for MRT SBK Line 24

10-Jun-11 PJI Holdings Subcontract works for fire protection services at KLIA 11

16-Jun-11 Merge Energy Panching water treatment works in Kuantan, Pahang 38

21-Jun-11 CMC Engineering-Colas-Uniway System works for Kelana Jaya LRT extension 674

24-Jun-11 Muhibbah Engineering Multipurpose wharf and extension of existing wharf at West Port, Klang 338

6-Jul-11 MRCB "Little India" in Brickfields, Pines Bazaar in KL and government quarters 129

19-Jul-11 Mitrajaya Freshwater laboratory complex, Pahang 14

16-Aug-11 MRCB LRT extension package B - Ampang line 1,300

16-Aug-11 MRCB Segmental box girders (SBGs) for LRT extension Kelana Jaya line 67

16-Aug-11 Sunway LRT extension package B - Kelana Jaya line 569

6-Sep-11 Taliworks Subcontract works for extension of Mengkuang Dam 339

8-Sep-11 Pintaras Jaya Piling contract 55

Total 6,346 SOURCES: CIMB, COMPANY REPORTS

2.4 Fifth largest order book

Sunway’s RM2.5bn outstanding order book is the 5th largest among the construction stocks under our coverage. Its overseas contracts, which make up 17% of the total outstanding order book, are concentrated in the Middle East and Singapore. This compares to IJM Corp’s RM4bn outstanding order book of which 25% comes from overseas (Middle East and India), Gamuda’s RM4.1bn order book where 20% are contracts from the Middle East and Vietnam, WCT’s RM3.2bn contracts in hand, of which 50% comes from the Middle East and Mudajaya’s RM4.8bn order book where the Indian IPP equipment and procurement works constitute more than 50%.

Figure 9: Outstanding order book

Projects Outstanding value

RM m

Precinct 4, Putrajaya (2 Gov't office buildings 61.0

Precinct 1, Putrajaya (Hotel & office) 110.0

Impiana Hotel 38.0

The Pinnacle (Substructure) 190.0

Sunway Velocity (Shop offices & apartment) 179.0

PML Diaries (Factory) 22.0

Putrajaya P7 & P8 Infra & GDC plant 56.0

UiTM campus expansion & KLCC link bridge 207.0

Legoland 237.0

BioXcell - Central Facilities Utility 74.0

LRT Kelana Jaya line phase 2 569.0

Others 324.0

Total local jobs 2,067.0

Abu Dhabi - Rihan Heights 131.0

Singapore - Precast 315.0

Total overseas jobs 446.0

Total outstanding order book 2,513.0 SOURCES: CIMB, COMPANY REPORTS


10

Figure 10: Sunway's order book is the fifth largest within our coverage

Title:

Source:


4,100 4,000

1,6002,200

4,800

3,2382,513

1,000

5,000

1,000

1,000

1,000

2,000

1,500

0

1,500

3,000

4,500

6,000

7,500

9,000

10,500

Gamuda IJM Corp MRCB Muhibbah Mudajaya WCT Sunw ay

orderbook Potential replenishment by end 2011


2.5 Target of new jobs on par with other players

Sunway’s target of RM1bn-1.5bn worth of new contracts p.a. is broadly similar to the targets for the other construction companies that we cover. This is realistic given the opportunities that the 10MP, ETP and Greater KL initiatives present for the next five years. On the local construction scene, we expect to see the award of various contracts covering a wide range of skill sets and expertise. Unlike the larger IJM Corp and Gamuda, Sunway’s potential new jobs include contracts from its property division. This usually makes up ~20% of its outstanding order book but is expected to rise to 30-40% in the medium term as various in-house property developments are expected to come onstream in the next 2-3 years. Sunway needs to secure another RM320m worth of new contracts before end-2011 to meet its target of RM1.5bn worth of contract wins, which should lift its order book close to RM3bn.

Figure 11: Comparison of order book and replenishment targets (RM m)

Companies Outstanding order book

Potential replenishment by

end 2011 Enlarged

Gamuda 4,100 1,000 5,100

IJM Corp 4,000 5,000 9,000

MRCB 1,600 1,000 2,600

Muhibbah 2,200 1,000 3,200

Mudajaya 4,800 1,000 5,800

WCT 3,238 2,000 5,238

Sunway 2,513 1,500 2,833 SOURCES: CIMB, COMPANY REPORTS

2.6 One of the main contenders for MRT

Prasarana’s list of shortlisted contractors which will tender for the MRT SBK line first stage (10.6km elevated) package highlighted Sunway as one of the frontrunners. The group is among the 14 listed contractors, which include IJM Corp, MRCB, WCT, Muhibbah Engineering and Mudajaya. Though Sunway does not have experience in rail-related projects, its success in winning the recent LRT extension package B for the Kelana Jaya line should give it some advantage. Furthermore, the merged group has the scale to undertake larger rail contracts.


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Figure 12: Exposure among 14 listed contractors for MRT SBK line's first stage

Listed contractors Elevated civil works Station works Depots

Open Bumiputera Open Bumiputera Open Bumiputera

Ahmad Zaki Yes Yes No Yes No Yes

Fajarbaru Builders No No Yes No Yes No

Gadang Yes No Yes No Yes No

IJM Corp Yes No Yes No Yes No

Loh & Loh Yes No Yes No Yes No

MRCB Yes No No No No No

Mudajaya Yes No No No No No

Muhibbah Engineering Yes No Yes No Yes No

Naim Holdings No Yes Yes Yes Yes Yes

Sunway Yes No Yes No Yes No

Trans Resources Corp Yes Yes Yes Yes Yes Yes

TSR Capital No Yes No Yes No Yes

WCT No No Yes No No No

Zecon No Yes No No No No

Total available packages for elevated civil works = 8

Total available packages for station works = 8

Total available packages for depot works = 2 SOURCES: CIMB, COMPANY REPORTS

2.7 Shortlisted for all scope of works for MRT

The group made it to the shortlist for all three scope of works for the MRT – elevated, stations and depot works. A total of 18 packages will be awarded from Dec 11 at the earliest. We earlier estimated the total cost to be RM3.1bn-3.3bn based on a benchmark cost per km of RM298m-313m. Depending on the scope of works, Sunway could bag RM200m-300m worth of jobs from MRT elevated and station works.

Figure 13: Details of MRT SBK Line's first stage

Total distance : 10.6km

Areas of coverage : Taman Bukit Ria to Plaza Phoenix - 5.4km

: Taman Suntex to Bandar Tun Hussein Onn - 5.2km

Scope of works : Elevated portion, Stations, Depots

Total number of packages : 18 (elevated-8, stations-8, depots-2)

Benchmark cost/km : RM298-313m

Estimated total cost : RM3.1bn-3.3bn

Estimated value/package for elevated portion : RM230-250m

Estimated value/package for stations works : RM150-170m

Estimated value/package for stations works : RM30-80m SOURCES: CIMB, COMPANY REPORTS


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3. PROPERTY OUTLOOK

3.1 Huge landbank

The merged Sunway group has a combined landbank of 2,160.4 acres, of which 90% are located in Malaysia (41% in the Klang Valley). The overseas landbank is located in India, Australia, China, and Singapore. The landbank in the Klang Valley is mostly located in prime areas. Total gross development value (GDV) is RM22.3bn while its effective share of GDV works out to RM14.4bn over the next 5-8 years. Some 66% of the total outstanding GDV will come from Malaysia. The other large contributor to GDV is the group’s two projects in China.

Figure 14: Property development key details

Remaining landbank : 2,160.4 acres

% of Malaysian landbank : 90%

% of overseas landbank : 10%

Total GDV : RM22.3bn

Effective GDV : RM14.4bn

Development period : 5-8 years SOURCES: CIMB, COMPANY REPORTS


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Figure 15: Composition of outstanding landbank by geography Figure 16: Composition of outstanding GDV by geography

Title:

Source:


Singapore, 0.5%Australia, 3%

China , 4%

India, 2%

Malaysia, 90%

Title:

Source:


India, 3%

China , 23%

Malaysia, 68%

Australia, 1%Singapore, 4%

SOURCES: COMPANY REPORTS SOURCES: COMPANY REPORTS

Key property development projects by remaining GDV are the RM3.9bn Sunway South Quay in Bandar Sunway and RM3.1bn Sunway VeloCity in Kuala Lumpur. Other sizeable projects include Sunway Damansara (RM826m GDV), Sunway Johor (RM932m GDV), Semenyih (RM729m GDV), and Sunway Integrated Resort (RM660m GDV). Sunway has two projects strategically located along the route of the MRT SBK line. They are RM500m Sunway Nexis at Dataran Sunway and the RM3.1bn Sunway Velocity located in Cochrane.


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Figure 17: Remaining landbank and GDV

Land siza Stake Total GDV Effective GDV

(acres) (%) (RM m) (RM m)

Malaysia

Sunway Damansara 18.2 60% 825.5 495.3

Sunway South Quay 52.4 60% 3,892.7 2,335.6

Sunway Kayangan 5.4 60% 21.6 13.0

Sunway Semenyih 398.1 70% 728.6 510.0

Sunway Cheras 6.9 100% 16.8 16.8

Sunway Duta 3.2 60% 120.0 72.0

Sunway Melawati 30.6 100% 554.9 554.9

Sunway Alam Suria 14.1 100% 60.1 60.1

Sunway integrated resort 18.5 100% 660.1 660.1

Casa Kiara III 2.9 80% 230.0 184.0

Sunway Velocity 19.5 59% 3,063.1 1,807.2

Sunway Tower KL 1 1.0 100% 240.0 240.0

Bangi 3.0 100% 59.0 59.0

Melawati 2 2.0 100% 43.0 43.0

Taman Equine 33.0 100% 250.0 250.0

Sg Long, Balakong 111.0 80% 277.0 221.6

Mont Putra 163.0 100% 156.0 156.0

Sunway City Ipoh 899.2 65% 285.8 185.8

Sunway City Penang 15.8 100% 173.7 173.7

Sunway Grand 3.8 100% 37.6 37.6

Sungai Ara, New Land 68.3 100% 840.7 840.7

Bukit Mertajam, New Land 17.8 100% 149.6 149.6

Bukit Lenang, New Land 64 80% 932 745.6

Subtotal 1,951.7 13,617.7 9,811.5

Overseas

Sunway OPUS Grand India 23.8 50% 702.4 351.2

Sunway MAK Signature Residence 14.0 60% 181.0 108.6

Wonderland Business Park (Sydney) 65.5 45% 441.0 198.5

Sunway Guanghao 3.7 65% 66.8 43.4

Tianjin Eco City 90.9 60% 5,343.9 3,206.3

Tampines, Singapore 5.0 30% 1,070.0 321.0

Sembawang, Singapore 0.8 100% 75.0 75.0

Yuan Ching Road, Singapore 5.0 30% 828.0 248.4

Subtotal 208.7 8,708.0 4,552.4

Total 2,160.4 22,325.7 14,363.9 SOURCES: CIMB, COMPANY REPORTS

4. KEY DOMESTIC PROPERTY PROJECTS

4.1 Sunway South Quay

South Quay is the last major parcel of land in Bandar Sunway. The 800-acre Bandar Sunway, which was launched in 1987, is an integrated township built on former mining land. The township features a popular theme park. Commercial and residential buildings surround the water-based theme park and can command premium prices over neighbouring non-water facing buildings. Sunway plans to replicate the success of the theme-park-facing developments to Sunway South Quay, which is a stone’s throw away. South Quay will take another 7-8 years to complete.

4.2 Sunway Velocity

Sunway Velocity is located close to KL city centre and measures 23 acres. The project is situated between Jalan Peel and Jalan Cheras and is next to the mammoth Cochrane redevelopment. It is strategically located along the 42km route of the MRT SBK line. The plan calls for an integrated commercial project with total gross floor area of 8m sq ft. The shopping mall will have 900,000 sq ft of net lettable area and will cost RM630m to build. Indicative rental rates are RM7-8 psf. Pricing for shops with 4-5 offices should range between RM5m and RM9m while office space will be priced at RM600k to RM2.7m. This development is slated to be completed in 5-7 years.


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Figure 18: Sunway Velocity components

Type Units GDV (RM m)

Shop office 1,182 1,230

Serviced apartments 1,116 530

Shop @ serviced apartments 17 34

Offices suites 179 223

Shopping mall 1 1,600

Total 2,495 3,617 SOURCES: CIMB

4.3 Sunway Damansara

Sunway Damansara is located within the Kota Damansara area. The RM2.7bn project which was launched in 1997 measures 400 acres and encompasses the recently completed 98,000 sq ft Sunway Giza shopping complex. Although 18 acres of land remain undeveloped, the GDV is high at RM1.1bn due to the relative maturity of the area. The development will take another 5-7 years to complete. This is in another strategically located catchment area because it runs along the elevated portion of the MRK SBK line. We also understand that one of the MRT stations will be built in the vicinity of the project, which is another attraction for commercial property buyers.


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Figure 19: Remaining launches in Sunway Damansara


Retail 47 260

SOHO 152 78

Office suites 117 103

Future N/A 756

Total 1,197 SOURCES: CIMB

4.4 Sunway Semenyih

Sunway Semenyih is located in Semenyih, near Kajang. The 800-acre RM1.2bn township project came about when Sunway Holdings undertook the construction of the Kajang Ring Road and Sunway acquired the land for only RM4 psf. Future launches which have an estimated GDV of RM1.1bn include landed properties such as terraced houses, cluster homes and semi-detached homes. The project was launched in 2000 and the development is expected to take another 10-15 years to complete.

Figure 20: Sunway Semenyih’s remaining launches


Terrace house 470 185

Cluster homes 144 69

Semi D 106 88

Future N/A 763

Total 1,105 SOURCES: CIMB

4.5 Sunway Integrated Resort

Sunway Integrated Resort (SIR) represents the remaining phases of 19.4 acres of undeveloped land surrounding Sunway Lagoon. It is the most prime land left in Bandar Sunway and will mostly be used for commercial, retail and residential buildings which will be kept as investment properties. Only the serviced apartment component of Sunway Pyramid Phase 3 will be sold. Sunway will develop a 25-storey grade A office building with 560,000 sq ft net lettable area on a 1.8-acre piece of land next to Menara Sunway. The total cost is RM280m and construction will be fully completed by 2013. Sunway expects to get rental rates of RM5-6 psf as demand for office space in the area is strong. It is also in the planning stages for Sunway Pyramid Phase 3 which is adjacent to the existing mall. Construction of Sunway Pyramid Phase 3, SunMed Cancer Centre and Nurse Apartment will begin next year and will take three years to complete.

Figure 21: Future additions to Sunway Integrated Resort

Type Acres GDV (RM m)

The Pinnacles 1.8 550

Sunway Pyramid Phase 3 1.8 270

SunMed Cancer Centre 1.0 102

Nurse Apartment 1.8 60

Sunway Corporate Precinct 2,3,4 5.0 334

Others 8.1 90

Total 18.7 1,406 SOURCES: COMPANY REPORTS


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Figure 22: Sunway Integrated Resort

SOURCES: COMPANY REPORTS

5. OVERSEAS PROPERTY DEVELOPMENTS

5.1 RM4.6bn for overseas ventures

Based on its effective stake, the group has overseas property projects with RM4.6bn GDV, which is quite sizeable. Although this should be long-term positive as it allows the group to establish a presence in countries outside Malaysia, the challenge continues to be political and regulatory risks. Like other property developers that have ventured overseas such as IJM Corp, Gamuda, and WCT, Sunway has to go through the approval process for its projects before it can get them off the ground.

The group remains optimistic about its overseas property ventures and targets overseas property earnings to contribute up to 50% of property development profits in 2015. The key overseas property project is the 60:40 Tianjin Eco-City joint venture with Sino-Singapore Tianjin Eco-City Investment and Development Co (SSTEC). SSTEC is the master developer of the 7,500-acre township. The other major project is the RM950m project in Hyderabad, India.

5.2 Focusing on China and Singapore

China’s two property projects constitute 71% of the remaining overseas GDV of RM4.6bn while the three property ventures in Singapore make up 14%. The balance comes from India (10%) and Australia (4%). The 98-acre Tianjin Eco-City, which is the group’s first JV with SSTEC, has an estimated GDV of RM5.3bn and is a mixed condo and commercial development catering mostly to the affordable category. The project is located next to the planned LRT/MRT station along the Eco-Valley and is 2.5km from the planned CBD. The indicative pricing for launches in the medium term is Rmb1,100 psf (RM550 psf). This project will take 5-7 years to complete. Another integrated property project is located at the new central business district (CBD) of New Jiangyin Harbour City. This project has a balance GDV of RM67m with 3.7 acres of remaining land. Sunway has a 65% share in the JV while Guanghao Real Estate holds the balance.


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Figure 23: Tianjin Eco City

Project name : Tianjin Eco City

Total gross land area : 7,500 acres

Target population : 350k

Est. number of homes : 110k

Location : Tianjin, China

JV structure : Sunway (60%), SSTEC (40%)

Land size for development : 98 acres

Total GDV : RM5.3bn

No. of units : > 5k units

Development period : 5-7 years

Target launch GDV in 2012 : RM534m

No. of units : 881

Type : Condominium

Expected launch : 1H 2012 SOURCES: CIMB, COMPANY REPORTS

In Singapore, the group has three ongoing property projects with a total remaining GDV of RM1.9bn. It consists of (i) 575 high-rise executive condo units in Tampines (RM321bn remaining GDV based on Sunway’s 30% stake), (ii) 684 high-rise design-build-and-sell units in Yuan Ching Road (RM248.4m remaining GDV based on Sunway’s 30% stake) and (iii) 15 units of 3-storey terraced houses in Sembawang (RM75m remaining GDV).

In India, the group has two property projects with a total outstanding GDV of RM883m. The first is the 50%-owned Opus Grand project in Hyderabad (RM702m GDV) and the second venture is the 60%-owned MAK (RM181m GDV) project. The group has been selective in its launches, having held two launches worth RM93m over the past 12 months. The projects are expected to be completed in seven years.

6. PROPERTY INVESTMENT

6.1 One of the largest in Malaysia

Sunway has one of the largest investment property portfolios in Malaysia. Its investment properties are among the most strategic assets too due to the resounding success of Bandar Sunway. 85% of Sunway REIT’s net property income is expected to be contributed by the four assets in Bandar Sunway. Property investment assets still held directly by the group and yet to be injected into Sunway REIT include 1) two theme parks, Sunway Lagoon in Bandar Sunway and Lost World of Tambun in Perak, 2) one hotel each in Penang, Cambodia and Vietnam, 3) two education buildings, i.e. Monash University Sunway Campus and Sunway University College, 4) the Sunway Medical Centre hospital and 5) the recently completed Sunway Giza shopping mall. The group will also be keeping the proposed Velocity mall and Sunway Tower KL 1 for rental income. The proposed Sunway Tower KL 1 building is adjacent to Sunway REIT’s Sunway Tower.


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Figure 24: Property investments in the pipeline

Location : Bandar Sunway

Type : 25-storey, Grade A, disabled friendly office building

GDV : RM320m

NLA : 560k sq ft

Car parks : 950

Project name : Sunway Velocity Shopping Mall

Location : Kuala Lumpur

Type : Shopping Mall

GDV : RM1.6bn

NLA : 845k sq ft

Car parks : 2,210

Project name : Sunway Pyramid 3

Location : Bandar Sunway

Type : Mixed commercial development

GDV : RM500m

NLA : 220k sq ft

Car parks : 1,027 SOURCES: CIMB, COMPANY REPORTS

6.2 Sunway REIT

Sunway REIT owns eight properties – five in the Klang Valley, two in Penang and one in Perak. 67% of the REIT’s revenue comes from retail assets, 23% from hotels and 10% from office. The assets in Bandar Sunway alone make up 85% of estimated net property income in FY11. The assets in Penang – Sunway Carnival Shopping Mall and Sunway Hotel Seberang Jaya – chip in 8% of property income. The remaining 2% comes from the hypermarket in Ipoh. Though the group has injected most of its prime investment properties into Sunway REIT, it still has several property developments that could be injected in future. Future injections depend on various factors such as ongoing expansion and maximisation of rental income. Including Sunway Tower in Kuala Lumpur, Klang Valley assets will contribute an estimated 90% of group property income.

Figure 25: Sunway REIT’s assets



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Figure 26: Sunway Integrated Resort


7. QUARRY, BUILDING MATERIALS, & TRADING

7.1 Quarry

Sunway ventured into the quarry business in 2005 with three quarries and has since expanded to seven quarries. Production capacity stands at ~670k tonnes/month, which represents about 10% of the total quarrying capacity in the Klang Valley and 6% nationwide. Its quarries are operating at 60% utilisation rate. The group also owns eight asphalt plants locally, with 20% market share in the Klang Valley and 9% nationwide. Back in 2008, Sunway started supplying a minimum of 1m tonnes of aggregates p.a. (with 5 + 5 optional years) to the government of Trinidad and Tobago. Apart from that, the group also has a presence in Vietnam with two quarries located in Hatay and Vung Tau. Total production capacity is 210k tonnes/month.

Figure 27: Quarry production capacities and utilisation rates

Quarries Monthly production Monthly capacity Utilisation

(tonnes) (tonnes) rate (%)

Malaysia

Kuala Kangsar 35,000 70,000 50%

Rawang 70,000 100,000 70%

Cheras 30,000 70,000 43%

Kajang 150,000 200,000 75%

Paka 35,000 60,000 58%

Melaka 70,000 100,000 70%

Taiping 50,000 70,000 71%

Subtotal 440,000 670,000 66%

Vietnam

Hatay 63,000 90,000 70%

Vung Tau 84,000 120,000 70%

Subtotal 147,000 210,000 70%

Total 587,000 880,000 67% SOURCES: COMPANY REPORTS

Sunway’s building material division, Sunway Global, is located China. It makes various building material products such as pipes, pavers and spun piles. The pipe manufacturing plant is located in Anhui and has a production capacity of 41k tonnes p.a. The paver plants are located in Shanghai and Dongguan and have a combined annual production capacity of 1.8m m2. The spun pile segment is located in Zhuhai and has a production capacity of 400k tonnes p.a.

The group’s trading business held under Sunway Marketing has 42 branches that operate in over 70 countries. 70% of this segment’s pretax profit comes


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from overseas. Key products are hoses and fittings which have already established a market presence in Singapore, mainly in the oil and gas and marine sectors. Sunway’s other business components include hospitality and leisure.

8. SWOT ANALYSIS

8.1 Size as a key benefit of merger

The merged Sunway group now has the size and scale needed to take on larger and more competitive construction projects. This should provide it with some advantage in the bid for the MRT SBK line for which it has been shortlisted. The group’s niche is in building and civil works, which should drive the targeted RM1bn-1.5bn new contracts p.a. There is also support from in-house construction works which are expected to increase in the next 2-3 years. The merged group also houses the property development arms of Sunway Holdings and Sunway City, which is positive in terms of enhancing its brand presence. However, we note that reliance on in-house works to drive the activities of the construction division could limit the group’s exposure to other potential external works given the limits on its resources. In the case of the property division, there are opportunities to venture into new property markets locally, for instance, Johor and East Malaysia.

8.2 Local market still has room for growth

Although the group remains optimistic about overseas property, we are not excited about its prospects in the medium term given the political and regulatory risks. However, we are positive in the longer term as the overseas projects will provide visibility to earnings beyond the next 2-3 years. Prospects for both the construction and property divisions, which are two of the main earnings drivers, are still positive. For the property business, there are still opportunities for the group as it can capitalise on its 1) success in township development, 2) ability to develop land on difficult terrain, and 3) experience in creating an integrated resort concept that allows for considerable synergies and replicating it to other projects.

Figure 28: SWOT analysis

Strength Opportunities

- Merged group provides the size and scale for larger/competitive construction jobs. - Execution of ETP and 10MP provides greater visibility of jobs.

- Integration of key business components provides stronger brand name. - Property development provides in-house opportunities for construction division.

- Ability to acquire strategically located land and embark on JV with landowners. - Expand into other property markets in Malaysia including Johor and East M'sia.

- Property investment assets are some of the best in Malaysia. - Replicate successful Bandar Sunway development locally and overseas.

- Able to unlock value through 37%-owned Sunway REIT - Inject more property investment assets into Sunway REIT to further unlock value.

- Geographical footing outside Malaysia provides long-term earnings visibility.

Weaknesses Threats

- In-house works may limit exposure to external projects. - Competition from other cost efficient contractors in bidding for open tender jobs.

- Poor past track record of earnings volatility and sales inconsistency. - Aggressive developers have gained market share due to consistent sales strategy.

- Ambitious pricing for certain property projects leading to low take-up rates. - Policy measures to cool down speculation could dampen sentiment and demand.

- Over-reliance on new overseas projects to drive earnings growth of the group. - Overseas property markets are fraught with local intricacies. SOURCES: CIMB, COMPANY REPORTS

9. RISKS

9.1 Delays in execution of major construction jobs

The outlook for the construction sector over the next five years remains anchored to the implementation of the Economic Transformation Programme (ETP), Greater KL Initiatives and the 10th Malaysia Plan (10MP). Similar to other contractors, a delay in the rollout of key projects under these initiatives would put Sunway’s RM1bn-1.5bn target of new contracts at risk. Also, potential challenges from opposition parties due to the high absolute cost of the mega jobs could delay their implementation. The RM40bn-50bn cost of the KVMRT alone makes it the most expensive mega project in the nation’s history,


22

surpassing the RM20bn development cost for Putrajaya, RM10bn for KLIA and Gamuda-MMC’s RM12.5bn northern double-tracking project.

9.2 Escalation of raw material prices

For most contractors, the rise in the price of key inputs such as cement and steel remains a threat to margins. However, new contracts typically include cost escalation clauses or already price in the expected rise in raw material costs. We do not expect a repeat of the situation in 2008 when raw materials surged to unprecedented levels. Overall, margins for contractors have been on the uptrend since the past four quarters and there is more room for expansion as legacy jobs with lower margins make way for new jobs with better margins.

9.3 Overseas carry higher risks

Sunway continues to rely on new overseas projects, particularly in China and India, to drive future property development earnings growth. While this is a natural progression for developers that are looking to expand its overseas presence, there are different legal and regulatory frameworks that should be considered. Many Malaysian companies have ventured into countries such as China, India, Vietnam and Singapore but so far, the results have been more negative than positive. We still see opportunities for Sunway to tap into other local property segments like Johor and East Malaysia.

9.4 Macro environment

Although we do not expect a double-dip recession in Europe or the US, our economics team acknowledges that the risk is rising. A double-dip scenario would affect Asia’s exports and would be negative for the Malaysian economy. A slowdown in Malaysia economic growth would spill over to the property sector. Also, the recent sharp fall in the stockmarkets around the world could erode confidence and dent property purchases. However, we note that Sunway’s recurring income via its property investments may provide some cushion against a slowdown in sales.

9.5 Policy risks for property sector

In response to fears of overheating in the property sector, the government imposed in Jan-10 a 5% RPGT for the disposal of property within the first five years and a 70% LTV ratio cap for the third property purchased. There are concerns that government may revert to the old sliding scale for RPGT rates, starting with 30% in the first year and falling to 5% in the fifth year. However, we believe that before the general elections, the government is unlikely to announce any policies that would have a negative effect on the property sector.

10. FINANCIALS

10.1 Construction and property as main earnings drivers

We project net profit growth of 2-15% p.a. over the next three years, mainly driven by RM1-1.5bn assumed new contracts coming from 10MP and ETP initiatives as well as in-house jobs. For the property division, we have assumed RM1.2bn-1.7bn worth of property sales (RM300m-400m overseas sales p.a.), backed by the group’s outstanding GDV of RM14.4bn. As our assumptions are conservative, there is upside to our forecasts if project flows for the construction division turn out better than expected and the property division turns in stronger-than-expected sales, particularly for its overseas projects. Property earnings should contribute a stable 70% to total net profit while the construction division will make up around 15-20% over the next 2-3 years.

10.2 Balance sheet

We are forecasting gearing to be relatively stable at 40-67%, which is broadly in line with the group’s target gearing ratio. Cash stood at RM1bn at end-2QFY11 while borrowings amounted to RM2.3bn, which includes the RM910m raised to satisfy the 20% cash portion of the merger exercise. The group does not have a formal dividend payout policy and we assume a net payout ratio of around 30% over the next three years.


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Figure 29: Dupont analysis

FYE Dec 2010 2011F 2012F 2013F Comments

ROE (%) 28.8 11.2 11.2 10.7 ROE in 2010 boosted by revaluation gains

Tax & MI retention (%) 0.96 68.0 67.9 67.6 MI reduced post the listing of Sunway REIT

Interest burden (%) 1.21 0.98 1.00 1.02 Interest coverage still above 1x

EBIT margin (%) 18.9 11.8 12.6 13.2 Dragged by construction's single-digit margins

Asset turnover (x) 0.45 0.39 0.41 0.41 Asset utilisation to be lifted by foreign projects’ contributions

Equity multiplier (x) 2.70 3.05 2.75 2.54 Assets lowered post listing of Sunway REIT

Notes:

Tax retention = Net profit/Pretax

Interest burden = Pretax/EBIT

Asset utilisation = Sales/Average assets

Equity multiplier = Avg assets/Avg equity SOURCES: CIMB, COMPANY REPORTS

11. VALUATION AND RECOMMENDATION

11.1 Buying opportunity

Since its relisting as a merged entity in Aug 11, Sunway’s share price has fallen 33% from the reference price of RM2.80. This is not surprising as the stock was suspended largely throughout the completion of the merger exercise and this overlapped with the period when investors were fretting over the global economic situation. The decline in Sunway’s share price was broadly in line with the 27-38% decline for construction stocks under our coverage. We are not overly concerned as stocks which are in cyclical industries tend to decline more during choppy markets. The flip side of this is that these stocks recover more strongly than low-beta stocks when risk appetite recovers and the market rebounds.

Figure 30: Share price performance of construction stocks under coverage

31-Dec-09 31-Dec-10 change 31-Dec-10 YTD change

Gamuda 2.60 3.81 47% 3.81 2.80 -27%

IJM Corp 4.48 6.23 39% 6.23 4.54 -27%

MRCB 1.27 1.99 57% 1.99 1.72 -14%

Muhibbah 1.00 1.50 50% 1.50 1.01 -33%

Mudajaya 3.73 3.20 -14% 3.20 2.02 -37%

WCT 2.60 3.19 23% 3.19 1.99 -38%

Average 33% -29% SOURCES: CIMB, COMPANY REPORTS

11.2 Value emerging

We see value emerging for Sunway as it now stands at a 44% discount to its RNAV of RM3.35/share compared to the average discount of 53% for the construction stocks under our coverage. We view RNAV valuation as the most appropriate valuation method as it factors in Sunway’s massive landbank. Our RNAV calculation incorporates the group’s completed and ongoing property developments which are valued for their remaining landbank and property assets. The total value of properties constitutes 63% of Sunway’s total RNAV. 37%-owned Sunway REIT is valued at its share of market capitalisation. Other components include construction profits which are pegged to our CY13 target market P/E of 13.4x and other businesses where we apply a 20% discount to 13.4x P/E. In terms of breakdown, construction makes up 24% of RNAV.

11.3 Initiate with OUTPERFORM and RM2.68 target price

With a bigger size and balance sheet, the merged Sunway group is in a stronger position to benefit from the expected rollout of jobs under the ETP and 10MP. The group can hold its own among the big construction boys in the battle for large-scale jobs. In fact, it is among the frontrunners for the KVMRT project. Its property division boasts a combined remaining landbank of 2,160 acres and has


24

one of the largest portfolios of investment properties in Malaysia, which will give it recurring income. There is also potential to realise the value of its property assets through 37%-owned Sunway REIT. We begin coverage on Sunway with an OUTPERFORM recommendation and target price of RM2.68, pegged to a 20% discount to RNAV, lower than the 30% discount given to Mudajaya but higher than the 10% applied to WCT and MRCB in view of political and regulatory risks stemming from Sunway’s overseas property exposure. Potential re-rating catalysts include (i) a general recovery in market sentiment, (ii) project wins, and (iii) potential injection of investment properties into Sunway REIT.

Figure 31: Summary of stock recommendations, upside, and share price discount to RNAV

Companies Ticker Rec. Closing price TP Target price Upside RNAV Trading

(RM) (RM) basis (%) /share discount to

RNAV

Gamuda GAM MK Outperform 2.80 5.13 On par with RNAV 83% 5.13 -45%

IJM Corp IJM MK Outperform 4.54 7.67 On par with RNAV 69% 7.67 -41%

MRCB MRC MK Outperform 1.72 3.21 10% disc. To RNAV 87% 3.56 -52%

Muhibbah MUHI MK Trading Buy 1.01 1.70 40% disc. To RNAV 68% 2.83 -64%

Mudajaya MDJ MK Buy 2.02 4.81 30% disc. To RNAV 138% 6.88 -71%

Sunway SWB MK Outperform 1.87 2.68 20% disc. To RNAV 43% 3.35 -44%

WCT WCT MK Outperform 1.99 3.99 10% disc. To RNAV 101% 4.44 -55%

Average 84% -53% SOURCES: CIMB, COMPANY REPORTS


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Figure 32: RNAV

Type Location Size/units Area (sg ft) Price Stake Value

Completed buildings RM m

Sunway Lagoon Theme Park Petaling, Selangor 59.9 ac 728,326 200.0 100% 145.7

Sunway Medical Centre Petaling, Selangor 4.5 ac 755,940 250.0 80% 151.2

Sunway Hotel Georgetown Penang 240.0 units 0 150,000.0 100% 36.0

Monash University Sunway Campus Petaling, Selangor 12.0 ac 754,000 220.0 100% 165.9

Sunway University College Petaling, Selangor 12.4 ac 615,983 220.0 100% 135.5

Sunway Giza Sunway Damansara, Selangor 1.4 ac 98,000 500.0 60% 29.4

Lost World of Tambun Tambun, Perak 39.8 ac 728,326 80.0 65% 37.9

Sunway Hotel Phnom Penh Phnom Penh, Cambodia 138.0 units 125,313 300,000.0 53% 21.7

Sunway Hotel Hanoi Hanoi, Vietnam 142.0 units 9,365 300,000.0 100% 42.6

On going developments

Sunway City Penang Seberang Perai, Penang 15.8 ac 210,394.8 100.0 100% 21.0

Sunway Grand Penang 3.8 ac 768,767.9 100.0 100% 76.9

Sg. Ara - new land Penang 68.3 ac 3,484,800.0 12.0 100% 41.8

Bukit Mertajam - new land Penang 17.8 ac 7,729,724.0 12.0 100% 92.8

Sunway Damansara Petaling, Selangor 18.2 ac 1,048,489.2 120.0 60% 75.5

Sunway City Ipoh Ipoh, Perak 899.2 ac 32,666,515.2 5.0 65% 106.2

Sunway Velocity Kuala Lumpur 19.5 ac 984,456.0 220.0 50% 108.3

Sunway Tower KL 1 Kuala Lumpur 1.0 ac 43,560.0 1,000.0 100% 43.6

Sunway Kayangan Bukit Raja, Selangor 5.4 ac 367,646.4 40.0 100% 14.7

Sunway Integrated Resort Petaling, Selangor 18.5 ac 845,064.0 10.0 100% 8.5

Sunway Semenyih Ulu Langat, Selangor 398.1 ac 17,341,671.6 10.0 100% 173.4

Sunway Cheras Selangor 6.9 ac 301,870.8 25.0 100% 7.5

Sunway South Quay Bandar Sunway, Selangor 52.4 ac 2,517,768.0 200.0 60% 302.1

Casa Kiara III Sri Hartamas, KL 2.8 ac 130,680.0 180.0 80% 18.8

Sunway Duta Kuala Lumpur 3.2 ac 136,342.8 300.0 60% 24.5

Sunway Melawati Setapak, KL 30.6 ac 1,427,896.8 35.0 100% 50.0

Sunway Alam Suria Shah Alam, Selangor 14.1 ac 1,045,440.0 40.0 50% 20.9

Sunway OPUS Grand India Hyderabad, India 23.8 ac 1,524,600.0 20.0 50% 15.2

Sunway MAK Signature Residence Hyderabad, India 14.0 ac 609,840.0 20.0 60% 7.3

Sunway Guanghao Jianyin, China 3.7 ac 740,520.0 80.0 39% 23.1

Tianjin Eco City Tianjin, China 90.9 ac 3,789,720.0 100.0 65% 246.3

Wonderland Business Park Sydney, Australia 65.5 ac 3,971,800.8 100.0 31% 123.1

Bukit Lenang - new land Johor 64.0 ac 2,787,840.0 30.0 80% 66.9

Taman Equine Selangor 33.0 ac 1,437,480.0 20.0 100% 28.7

Bangi Selangor 3.0 ac 130,680.0 10.0 100% 1.3

Sg. Long Balakong 111.0 ac 4,835,160.0 20.0 80% 77.4

Mont Putra Selangor 163.0 ac 7,100,280.0 20.0 100% 142.0

Melawati 2 Selangor 2.0 ac 87,120.0 20.0 100% 1.7

Tampines Singapore 5.0 ac 217,800.0 780.8 30% 51.0

Sembawang Singapore 0.8 ac 34,848.0 732.0 100% 25.5

Yuan Ching Road Singapore 5.0 ac 217,800.0 573.4 30% 37.5

Total value of properties 2,799.5

Market cap Stake

Rm m

Sunway REIT 2,958.2 37% 1,085.7

FY13 Net profit Stake P/E

RM m

Construction 81.2 100% 13.4 1,088.5

Quarry & Trading 60.9 100% 10.7 653.1

Property investments 768.4

Net current asset less dev. Properties 354.6

Total borrowings (2,285.0)

Total RNAV 4,464.8

No. of shares (m) 1,292.5

Warrants outstanding (m) 258.0

Strike price (RM) 2.80

Proceeds from warrants 722.40

FD no. of shares (m) 1,550.51

FD RNAV (RM) 5,187.15

RNAV/share (RM) 3.35

Discount to RNAV 20%

Target price (RM) 2.68 SOURCES: CIMB, COMPANY REPORTS


26

Figure 33: Sector Comparisons

PriceTarget

Price(local

curr)

(local

curr)CY2011 CY2012 CY2011 CY2012 CY2011 CY2012 CY2011 CY2012

Gamuda GAM MK OUTPERFORM 2.80 5.13 1,805 17.1 10.8 20.1% 17.4% 26.9% 28.9 13.6 3.9% 4.1%

IJM Corp Bhd IJM MK OUTPERFORM 4.54 7.67 1,949 14.9 11.8 27.3% 17.4% 20.7% 10.6 9.0 3.3% 3.4%

Muhibbah Engineering MUHI MK Trading Buy 1.01 1.70 129 5.6 5.0 42.1% 11.9% 13.1% 6.2 6.1 2.9% 3.3%

MTD ACPI Engineering ACP MK UNDERPERFORM 0.51 0.53 37 na 28.3 na -4.1% 2.3% 23.3 7.2 1.3% 1.4%

WCT Bhd WCT MK OUTPERFORM 1.99 3.99 500 9.0 8.3 19.8% 15.7% 14.8% 4.4 4.2 4.2% 4.5%

Malaysian Resources Corp MRC MK OUTPERFORM 1.72 3.21 744 25.8 17.0 34.1% 11.5% 15.0% 12.8 9.0 0.2% 0.1%

Malaysia weighted average 15.1 11.1 26.2% 15.4% 19.6% 11.3 8.8 3.9% 4.1%

Adhi Karya ADHI IJ OUTPERFORM 455.0 1,180 91 4.2 4.1 29.8% 20.2% 18.4% 2.4 1.9 5.9% 6.0%

Pembangunan Perumahan PTPP IJ UNDERPERFORM 290.0 650.0 156 5.0 4.1 21.7% 21.2% 23.1% 3.7 2.7 4.3% 6.0%

Total Bangun Persada TOTL IJ Outperform 215.0 380.0 81 6.3 5.7 23.1% 19.0% 19.7% 2.1 1.6 5.8% 8.0%

Wijaya Karya WIKA IJ OUTPERFORM 465.0 830.0 311 8.1 6.4 17.9% 14.9% 16.2% 4.5 4.3 3.1% 3.2%

Indonesia weighted average 5.0 4.4 25.3% 20.4% 20.6% 2.9 2.1 5.1% 6.6%

CH. Karnchang CK TB UNDERPERFORM 5.90 7.52 313 52.5 13.7 na 2.4% 7.4% na 918.1 1.5% 1.5%

Italian-Thai Development ITD TB Neutral 2.98 4.67 401 90.7 10.5 64.4% 1.3% 11.1% 12.2 9.6 1.5% 3.0%

Sino-Thai Eng & Construction STEC TB Outperform 8.65 19.40 330 13.0 12.7 31.8% 16.8% 15.5% 7.7 6.1 2.3% 3.1%

Thailand weighted average 29.2 12.0 96.0% 4.9% 10.6% 14.5 10.9 1.8% 2.6%

Yongnam Holdings YNH SP Outperform 0.23 0.40 215 4.6 4.5 10.0% 23.3% 19.9% 4.2 3.8 2.7% 2.7%

Singapore weighted average 4.6 4.5 10.0% 23.3% 19.9% 4.2 3.8 2.7% 2.7%

Average (all) 16.1 11.2 37.6% 12.3% 15.6% 7.7 6.4 2.4% 2.7%

CompanyBloomberg

TickerRecom.

Market

Cap

(US$ m)

EV/EBITDA (x)Dividend Yield

(%)Core P/E (x)

3-year

EPS

CAGR

(%)

Recurring ROE

(%)



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Recommendation Framework #1 *

Stock Sector

OUTPERFORM: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 12 months.

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 12 months.

NEUTRAL: The stock's total return is expected to be within +/-5% of a relevant benchmark's total return.

NEUTRAL: The industry, as defined by the analyst's coverage universe, is expected to perform in line with the relevant primary market index over the next 12 months.

UNDERPERFORM: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 12 months.

TRADING BUY: The stock's total return is expected to exceed a relevant benchmark's total return by 5% or more over the next 3 months.

TRADING BUY: The industry, as defined by the analyst's coverage universe, is expected to outperform the relevant primary market index over the next 3 months.

TRADING SELL: The stock's total return is expected to be below a relevant benchmark's total return by 5% or more over the next 3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe, is expected to underperform the relevant primary market index over the next 3 months.

* This framework only applies to stocks listed on the Singapore Stock Exchange, Bursa Malaysia, Stock Exchange of Thailand and Jakarta Stock Exchange. Occasionally, it is permitted for the total expected

returns to be temporarily outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

CIMB Research Pte Ltd (Co. Reg. No. 198701620M)


29

Recommendation Framework #2 **

Stock Sector

OUTPERFORM: Expected positive total returns of 15% or more over the next 12 months.

OVERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 12 months.

NEUTRAL: Expected total returns of between -15% and +15% over the next 12 months.

NEUTRAL: The industry, as defined by the analyst's coverage universe, has either (i) an equal number of stocks that are expected to have total returns of +15% (or better) or -15% (or worse), or (ii) stocks that are predominantly expected to have total returns that will range from +15% to -15%; both over the next 12 months.

UNDERPERFORM: Expected negative total returns of 15% or more over the next 12 months.

UNDERWEIGHT: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 12 months.

TRADING BUY: Expected positive total returns of 15% or more over the next 3 months.

TRADING BUY: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of +15% or better over the next 3 months.

TRADING SELL: Expected negative total returns of 15% or more over the next 3 months.

TRADING SELL: The industry, as defined by the analyst's coverage universe, has a high number of stocks that are expected to have total returns of -15% or worse over the next 3 months.

** This framework only applies to stocks listed on the Hong Kong Stock Exchange and China listings on the Singapore Stock Exchange. Occasionally, it is permitted for the total expected returns to be temporarily

outside the prescribed ranges due to extreme market volatility or other justifiable company or industry-specific reasons.

Corporate Governance Report of Thai Listed Companies (CGR). CG Rating by the Thai Institute of Directors Association (IOD) in 2010.

ADVANC Excellent FUTUREPF not available QH Very Good

AMATA Excellent GLOBAL not available RATCH Excellent

AOT Excellent GLOW Very Good ROBINS Excellent

AP Very Good HANA Very Good ROJNA Very Good

BANPU Excellent HEMRAJ Excellent SAMART Excellent

BAY Excellent HMPRO Very Good SAMTEL Excellent

BBL Very Good ITD Very Good SCB Excellent

BCP Excellent IVL not available SCC Excellent

BEC Very Good KBANK Excellent SCCC Very Good

BECL Excellent KTB Excellent SIRI Very Good

BH Very Good LH Very Good SPALI Very Good

BIGC Very Good LPN Excellent STA Good

BTS Good MAJOR Very Good STEC Very Good

CCET Very Good MCOT Excellent TASCO Very Good

CK Very Good MINT Very Good THAI Very Good

CPALL Very Good PS Very Good TMB Excellent

CPF Excellent PSL Excellent TOP Excellent

CPN Excellent PTT Excellent TRUE Very Good

DELTA Very Good PTTAR Excellent TTA Excellent

DTAC Very Good PTTCH Excellent TTW Very Good

PTTEP Excellent TUF Very Good

Documents

Aug-11 Sep-11 Sep-11 Sep-11 Source: Bloombergir.chartnexus.com/sunway/doc/Sunway-Malaysia_Initiation... · 2011-10-12 · similar business profile as the bigger construction boys,business