October 1, 2015 Malaysia SECTOR RESEARCH | SEE PAGE 14 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PP16832/01/2013 (031128) Malaysia Property Lackluster outlook Developers turning more cautious/negative – cuts in sales targets, delays in new launches, and rescission of land deals are the order of the day. Sector lacks strong re-rating catalysts. Our strategy remains a defensive one. Maintain NEUTRAL. Top pick – SPSB. What’s New The Aug-Sep 2015 results season proved to be a mixed bag, with SP Setia (SPSB) beating expectations while Eco World (ECW) underperformed. As for other developers under our coverage, results were in line, backed by huge unbilled sales accumulated over the last two years (1-2x of our FY15F/16F revenue forecasts). Key trends we observed in 2Q-3Q 2015 include: 1) higher marketing costs (hence, lower operating margin), 2) lackluster sales performance (most failed to meet/cut sales target except for ECW) and delays in property launches and 3) rescission of land deals (i.e. Mah Sing and Tropicana). Elsewhere, ECW took us by surprise by acquiring >2,000 acres of landbank in Selangor despite its highly- geared balance sheet (e.0.66x by end-FY10/16). What’s Our View Our ongoing discussions with industry players point to property sales remaining slow. While some projects have shown some signs sales stabilization, there are no signs of a pick-up. Most developers are cautious and are switching to a defensive mode. Sunway and Glomac would likely revise down their sales targets, we think. We have lowered UEMS’ FY15/16 profit forecasts by 6-7% but raised its TP by +11% to MYR1.10 when it replaced its new share placement plan with RCPS. We maintain HOLD rating on UEMS. The rise in living costs, alongside the weaker stock market and currency, are factors that will continue to weigh on buying sentiment, and thus property demand, which we think will only recover towards 2H16. Analyst (Unchanged) NEUTRAL Wong Wei Sum, CFA (603) 2297 8679 [email protected]Stock Mkt cap Rating Price TP Upside (USD'm) (LC) (LC) (%) 16E 17E 16E 17E 16E 17E SP Setia 1,904.9 Buy 3.23 4.07 26 17.3 7.8 1.0 0.9 4.6 10.3 Sunway 1,279.8 Hold 3.19 3.48 9 10.1 10.2 0.8 0.9 4.0 3.9 UEM Sunrise 1,272.7 Hold 1.25 1.10 (12) 13.3 14.0 0.8 0.8 2.4 2.3 Eco World Development 742.7 Buy 1.40 1.69 21 38.7 19.5 0.9 0.9 0.3 0.7 Mah Sing Group 713.7 Hold 1.32 1.39 5 7.9 7.5 0.9 0.9 6.8 7.1 Glomac 133.9 Hold 0.82 0.96 17 5.5 4.9 0.6 0.5 7.3 8.1 P/E (x) P/B (x) Dividend yld (%)
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October 1, 2015
Mala
ysi
a
SEC
TO
R R
ESEA
RC
H |
SEE PAGE 14 FOR IMPORTANT DISCLOSURES AND ANALYST CERTIFICATIONS PP16832/01/2013 (031128)
Malaysia Property
Lackluster outlook Developers turning more cautious/negative – cuts in sales
targets, delays in new launches, and rescission of land deals
are the order of the day.
Sector lacks strong re-rating catalysts. Our strategy remains a
defensive one. Maintain NEUTRAL. Top pick – SPSB.
What’s New The Aug-Sep 2015 results season proved to be a mixed bag, with SP
Setia (SPSB) beating expectations while Eco World (ECW)
underperformed. As for other developers under our coverage,
results were in line, backed by huge unbilled sales accumulated
over the last two years (1-2x of our FY15F/16F revenue forecasts).
Key trends we observed in 2Q-3Q 2015 include: 1) higher marketing
The Aug-Sep 2015 results season was a mixed bag with ECW under-
performing our expectations and consensus due to higher-than-expected
administrative and marketing costs incurred on new property
launches/sales galleries, while SPSB beat expectations thanks to the
better-than-expected operating margin from its just-completed Fulton
Lane project in Melbourne. As for other developers under our coverage,
results were in line backed by huge unbilled sales accumulated over the
last two years (1x to 2x of our FY15F/FY16F revenue forecasts).
Most developers’ balance sheets remained healthy with net gearing of
0.25x-0.38x (Mah Sing has net cash of 0.8sen/share) except for ECW,
whose net gearing could hit 0.66x by end-FY10/16, from 0.3x as at July
2015, due to aggressive landbanking and the lack of significant earnings
contributions from its projects, as most were launched from mid-2014
onwards.
We have cut our earnings forecasts by 6-47% (for Mah Sing, Sunway and
ECW) while maintaining forecasts for Glomac. We have also adjusted
SPSB’s earnings 2015-2017 earnings forecasts by -43% to +25% as Battersea
Power Station phase 1 will only be completed by 1Q 2017, instead of end-
2016, we were told.
Table 1: Developers under our coverage: Results round-up, latest sales and unbilled sales
Co FYE Results FY15 sales target
(MYRm)
Actual sales
(MYRm)
% of FY15 sales target
Unbilled sales (MYRm)
Remarks
Mah Sing
Dec 2Q15/in line
3,430 1,063.3 31% MYR4.8b as at end-June 2015, or 2.0x of our FY15F revenue
Management cut its 2015 sales target by 33% to MYR2.3b. We cut FY15/16/17 net profit forecasts by -7.4%/-14.7%/-19.4% and sales assumption by -23% to MYR2.37b.
Sunway Dec 2Q15/in line
1,200 353.0 29% MYR1.7b as at end-June 2015, or 1.1x of our FY15F revenue
We trimmed our FY15/16/17 earnings forecasts by -5.6%/-9.5%/-7.4% and sales assumption for FY15 by -18% to MYR1.07b.
UEMS Dec 2Q15/in line
2,000 600.0 30.0% MYR3.8b as at end-June 2015, or 2.6x of our FY15F revenue
We maintained our earnings forecasts and sales assumption of MYR2.06b but lower our TP by 22% to factor in lower land price assumptions in our RNAV estimates (-11% to -33%) for its landbank in Nusajaya given the weaker property outlook in Iskandar Malaysia.
Eco World
Oct 3Q15/below expectation
3,000 2,371.5 79.1% MYR4.0b as at end-Aug 2015, or 2.9x of our FY10/15F revenue
We cut our FY15/16/17 earnings forecasts by -38%/-47%/-40%. We have also lowered our sales assumption for FY10/15 by -13% to MYR2.98b.
Glomac Apr 1Q16/in line
680 30.0 4.4% MYR737m as at end-July 2015, or 1.0x of our FY4/16F revenue
We maintained our earnings forecasts and sales assumption but lowered our TP to MYR0.96 (-7sen) to factor in the latest landbank status.
SP Setia Dec 3Q15/above expectation
4,000 2,537.0 63.4% MYR9.9b as at end-July 2015, or 1.7x of our FY15F revenue
We adjusted our FY15/16/17 earnings forecasts by +10%/-43%/+25% to factor in: 1) change in FYE, 2) the slower construction progress at Battersea Power Station phase 1 and 3) better-than-expected profit margin from its Fulton Lane project.
Source: Companies, Maybank KE
October 1, 2015 3
Malaysia Property
Key trends we observed in 2Q – 3Q15
Hit by high marketing expenses, margins to stay subdued
Some developers’ (eg ECW, Glomac and Mah Sing) earnings were dragged
down by the surge in marketing / administrative expenses in 2Q-3Q15,
resulting in a -1ppt to - 17ppt YoY decline in operating margins. We expect
margins to stay subdued in the coming period in anticipation of more
discounts/rebates/marketing incentives given to attract property buyers,
given the softness in property demand.
As ECW is still at its infant stage, it has been very aggressive in promoting
and creating brand awareness (via concerts, media, windmill fair, etc).
Unlike other developers which have delayed most of their property
launches to 4Q15/2016, ECW launched three new projects in Selangor (Eco
Sanctuary), Penang (Eco Terraces) and Johor (Eco Tropics) in June 2015
and opened six to seven new sales galleries YTD, including one in
Singapore.
ECW’s net margins are likely to be unexciting in the short term (2015F: 3%,
2016F:3.5%) due to high administrative (new staff hired for new projects
such as Bukit Bintang City Centre project [redevelopment of ex-Pudu Jail
land] and marketing costs (ongoing A&P expenses for new and existing
projects) but they should improve gradually from 2017 onwards as the
developments mature and when Ecoworld’s brandname gains traction.
Sales prospect remains challenging
Except for ECW whose sales driven by three new projects launched in June
2015, most developers under our coverage saw weaker-than-expected
locked-in sales. They (including WCT) cut sales targets by -10% to -33%,
delayed new property launches to 4Q15/2016, continued to focus on
affordable housing and put their high-rise/high-end projects on the
backburner.
We expect sales to stay weak in 3Q-4Q15 in view of the macro headwinds
(higher living expenses post-GST implementation, volatile crude oil prices,
weakening Ringgit, volatile equity market) and prolonged tightening
property and lending measures to continue weighing on buyers’ sentiment.
Judging from the planned launches and current market conditions, we
think Sunway and Glomac’s sales targets are rather aggressive and there is
the likelihood that they may have to cut targets. Presently, our FY15F and
FY4/16F sales assumptions for Sunway (MYR1.08b) and Glomac (MYR586m)
are 11% and 14% below management’s targets of MYR1.2b and MYR680m
respectively.
October 1, 2015 4
Malaysia Property
Developers under our coverage: Revise in sales targets in 2Q-3Q15
Co Initial sales target (MYRm)
New sales target (MYRm)
Change in sales target (%)
Remarks
Mah Sing 3,430 2,300 -33% Cut sales target, delayed some new launches to 2016 and canceled two land deals given the weak property market outlook.
Sunway 1,200 1,200 (?) NA Likely to revise down its sales target due to the delay in new property launches.
UEMS 2,000 2,000 NA Management remains confident of its FY15 sales target given strong responses to its new Melbourne project - Conservatory.
Eco World 3,000 3,000 NA
Management remains confident of its FY15 sales target.
Glomac 680 680 NA Management remains confident of its FY4/16 sales target and expects sales to pick up in 2HFY4/16 supported by MYR802m worth of new launches.
SP Setia 4,600 4,000 -13% Cut sales target due to the slower-than-expected take-up rate for Battersea Power Station phase 3.
WCT 650 584 -10% Cut sales target due to the delay in launching its Sabah project.
Source: Companies, Maybank KE
Cash is king; most are on defensive mode
Our ongoing discussions with developers revealed that developers are
cautious on the property market outlook and are on a defensive mode.
They prefer to conserve cash in times of uncertainty and reduce sales risks
by delaying some projects (especially for high-rise/high-end). Focus is also
on clearing the existing unsold properties in hand.
Mah Sing has recently rescinded two land deals worth MYR16.8b in total
GDV – Puchong (89 acres of industrial land with potential GDV of MYR9.3b)
and Seremban (960 acres of agricultural land worth MYR7.5b in GDV) given
the challenging economy outlook. Elsewhere, Tropicana (TRCB MK; not
rated) has cancelled its proposed 85-acre of land acquisition (with
e.MYR3.7b in GDV) in Mukim Plentong, Iskandar Malaysia.
Having said that, ECW took us by surprise by acquiring 2,198.4 acres of
leasehold land in Mukim Ijok, Selangor for MYR1.2b cash or MYR12.34psf).
To avoid overstretching its balance sheet (estd.0.66x end-FY10/16), ECW is
seeking JV partners for this project whereby ECW will hold at least a 30%
stake in the SPV. A similar SPV/JV structure will be used for future
landbanking given its highly-geared position.
October 1, 2015 5
Malaysia Property
Latest statistics show no signs of picking up
The latest Aug 2015 banking statistics point to ongoing weakness in
The sector’s lacklustre short-term outlook has resulted in a 9.9% fall in
Bursa Malaysia Property Index (BMPI) since Jan 2015. While the valuations
of some property stocks appear attractive, we advise investors to be
selective, focusing on those with healthy balance sheets and low exposure
to Iskandar Malaysia hotspots. The sector lacks a strong re-rating catalyst
and the slowdown in property demand could last for another nine months
till 2H16, we believe. The negative lag impact on earnings could start to
feature from 2H16-FY17, we estimate.
From a top-down approach, we maintain our NEUTRAL call on the sector.
Stock wise, property stocks under our coverage are presently trading at an
average 39-57% discount to our RNAV estimates. We advocate investors to
go defensive in stock selection. SP Setia (SPSB MK; BUY; MYR4.07 TP) is our
top pick for the property sector.
SP Setia (SPSB MK; BUY; MYR4.07 TP) We like SPSB for its: i) earnings defensiveness backed by MYR9.9b of
unbilled sales as at end-July 2015 (1.7x of our FY10/15 revenue forecast)
and strategically located landbank secured at cheap land cost (which
allows it to be more flexible in pricing and product launches in times of
uncertainty), and ii) dividend payout policy of 50% (which offers a 5.2% net
yield for the current year, based on our earnings estimates). SPSB has been
paying more than 60% of its net profit over the last few years.
UEM Sunrise (UEMS MK; HOLD; MYR1.10 TP) As for UEMS, we have lowered our FY15F/16F/17F earnings forecasts by
7.3%/6.2%/6.4% but raised EPS by 3.5%/4.6%/4.4% to factor in the abortion
of its proposed new share placement to Khazanah involving 524.4m of new
shares at MYR1.47/share issue price. Instead, the new share placement
will be replaced by 793m of new UEMS-RCPS at MYR1.00/share.
To recap, proceeds from the UEMS RCPS will be used to redeem the RCPS
issued by its subsidiary, Bandar Nusajaya Development S/B (BNDSB) in 2005
as part settlement of an outstanding loan previously granted by Khazanah
Nasional Bhd. The redemption of the RCPS, due in Nov 2015, will turn
BNDSB into a fully-owned subsidiary of UEMS. BNDSB currently owns the
majority of the land in Nusajaya including East Ledang, Puteri Harbour,
Gerbang Nusajaya and Nusa Bayu via its subsidiaries.
Consequently, our RNAV estimate for UEMS is raised to MYR2.82/sh (+11%).
Pegging it to an unchanged 0.39x P/RNAV, we value UEMS at MYR1.10.
October 1, 2015 9
Malaysia Property
Valuations
Stocks
Price
(MYR/share)*
(a)
RNAV
(MYR/share) (b)
P/RNAV TP
(MYR/sh)
(b) x (c )
Upside
(%)
Rating
Our valuation basis -
P/RNAV Current
P/RNAV (x)
Our valuations
- P/RNAV (x) (
c)
Eco World
(ECW MK)
1.40 2.68 0.52 0.63 1.69 20.6 BUY We value Eco World at 0.63x P/RNAV (-0.2x below SPSB's historical P/RNAV mean). The discount is to reflect its relatively high net gearing ratio. Also, since most of the land was acquired during the property upcycle in 2012-2013, it would have less flexibility in pricing/product during times of uncertainty.
Glomac
(GLMC MK)
0.82 1.91 0.43 0.50 0.96 16.5 HOLD We value Glomac at its historical P/RNAV mean of 0.5x.
Mah Sing
(MSGB MK)
1.32 2.18 0.61 0.64 1.39 5.5 HOLD We value Mah Sing at 0.64x P/RNAV (-0.15x below its historical mean). The discount is to reflect its considerable exposure to the high-rise property segment e.g. Icon City, Southville City (offices), Southbay City and KKCC. Mah Sing has the highest foreign shareholdings (17.2% as at early Sep 2015) among the stocks under our coverage.
SP Setia
(SPSB MK)
3.23 5.57 0.58 0.73 4.07 25.9 BUY We value SP Setia at a discounted valuation - 0.73x P/RNAV, which is 0.1x below its historical mean. Potential re-rating catalysts include more clarity from PNB on management succession and asset injections plans.
Sunway
(SWB MK)
3.45 5.89 0.59 0.59 3.48 0.7 HOLD Large exposure to the luxury property segment and Iskandar Malaysia, which is currently facing stiff competition with the entry of Chinese developers. We value Sunway at its historical P/RNAV mean of 0.59x. As compared to UEMS, Sunway has a more diversified and recurring earnings base.
UEM
Sunrise
(UEMS MK)
1.25 2.82 0.44 0.39 1.10 -12.0 HOLD Large exposure to the increasingly crowded Iskandar Malaysia while its Klang Valley projects are mostly high-end products. We value UEM Sunrise at 0.39x P/RNAV (-0.2x below its historical mean).
* as at 29 Sep 2015
Source: Maybank KE
October 1, 2015 10
Malaysia Property
Foreign shareholdings for stocks under our coverage remain flat / declining
Source: Companies
6.2 6.1 6.15.9
5.9 5.5 5.5 5.4
21.420.8
20.519.9 19.9
19.519.3
17.2
8.2
8.2
8.1 8.0 7.8 7.6 7.7 7.48.4 8.4 8.88.7 8.9
9.09.5 8.9
12.77 12.8 12.85 13.01
12.05
11.22 11.1
0.7 0.6 0.6 0.6
2.6 1.91
1.8
1.9
0.0
5.0
10.0
15.0
20.0
25.0
Jan 15 Feb 15 Mar 15 Apr 15 May 15 June 15 July 15 Aug 15
Glomac Mah Sing SP Setia Sunway^ UEM Sunrise Eco World
(%)
October 1, 2015 11
Malaysia Property
Peer comparison 1 Company Eco World UEMS SP Setia Sunway Mah Sing Glomac
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October 1, 2015 15
Malaysia Property
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DISCLOSURES
Legal Entities Disclosures
Malaysia: This report is issued and distributed in Malaysia by Maybank Investment Bank Berhad (15938-H) which is a Participating Organization of Bursa Malaysia Berhad and a holder of Capital Markets and Services License issued by the Securities Commission in Malaysia. Singapore: This material is issued and distributed in Singapore by Maybank KERPL (Co. Reg No 197201256N) which is regulated by the Monetary Authority of Singapore. Indonesia: PT Kim Eng Securities (“PTKES”) (Reg. No. KEP-251/PM/1992) is a member of the Indonesia Stock Exchange and is regulated by the BAPEPAM LK. Thailand: MBKET (Reg. No.0107545000314) is a member of the Stock Exchange of Thailand and is regulated by the Ministry of Finance and the Securities and Exchange Commission. Philippines: Maybank ATRKES (Reg. No.01-2004-00019) is a member of the Philippines Stock Exchange and is regulated by the Securities and Exchange Commission. Vietnam: Maybank Kim Eng Securities JSC (License Number: 71/UBCK-GP) is licensed under the State Securities Commission of Vietnam.Hong Kong: KESHK (Central Entity No AAD284) is regulated by the Securities and Futures Commission. India: Kim Eng Securities India Private Limited (“KESI”) is a participant of the National Stock Exchange of India Limited (Reg No: INF/INB 231452435) and the Bombay Stock Exchange (Reg. No. INF/INB 011452431) and is regulated by Securities and Exchange Board of India. KESI is also registered with SEBI as Category 1 Merchant Banker (Reg. No. INM 000011708) US: Maybank KESUSA is a member of/ and is authorized and regulated by the FINRA – Broker ID 27861. UK: Maybank KESL (Reg No 2377538) is authorized and regulated by the Financial Services Authority.