Initiating Coverage, 9 January 2014

IOI Properties Group (IOIPG MK) Buy Property - Real Estate Oper & Svcs Target Price: MYR3.50 Market Cap: USD2,464m Reference Price: MYR2.51

Macro  

Risks   3 Coming Back With a Bang Growth  . 3 0 Value  .

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. 03 0 We initiate coverage on IOIPG with a BUY rating and MYR3.50 FV. . 0 IOIPG’s massive township developments – a segment less vulnerable to 0 sector cooling measures – will provide the company with sustainable 0 sales. IOI’s backing has benefitted IOIPG, with an easier source of landbank and high margins for property developments. Future value will be unlocked via a pool of investment assets worth >MYR2bn.

A successful township developer. IOIPG is one of the largest listed developers in . Almost all of its local projects are township developments – an important factor as demand for landed properties is typically more resilient. This segment is also less sensitive to the recent regulatory changes. IOIPG has MYR26bn worth of projects in the Klang Valley and alone, representing almost 50% of total GDV.

Overseas projects provide diversification. Overseas projects in Xiamen, China, and Singapore give IOIPG the flexibility to be responsive to changes in market conditions. The debut of the Xiamen project was successful, with all 480 units launched in Sept 2013 taken up. Earnings from China are expected to kick in from FY14 onwards.

Backing of IOI means easier source of landbank. Another competitive advantage that IOIPG has over its peers is the backing of a strong parent company, IOI Corp (IOI MK, BUY, FV: MYR4.83) – a plantation company with 163,000ha of oil palm land in Malaysia. IOIPG has sourced landbank from IOI in the past and, due to the cheap land cost, Avg Turnover (MYR/USD) m/m the former’s gross margin is higher at 56-60% vis-à-vis peers 25-30%. Cons. Upside (%) na Upside (%) Further value unlocking potential via property investment assets. 52-wk Price low/high (MYR) - IOIPG has accumulated almost MYR2bn worth of property assets and Free float (%) 50 will add more to the pool, given its pipeline developments such as IOI City Mall, South Beach and Xiamen malls and offices. An asset monetisation exercise is expected in 3-5 years’ time. Shareholders (%) Tan Sri Dato’ Lee Shin Cheng * 44.9 Expect double-digit earnings growth. We expect FY14-15 earnings to grow at 13-15% per year, on the back of MYR1.2bn worth of unbilled sales and MYR20bn development GDV over the next three years. * Based on IOI’s latest shareholding BUY; FV at MYR3.50. Given IOIPG’s MYR8.1bn market cap at listing, Shariah compliant the company is qualified to be on investors’ radar screens. We initiate coverage on IOIPG with a BUY rating and MYR3.50 FV.

Forecasts and Valuations Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Total turnover (MYRm) 1,171 1,052 1,323 1,579 1,883 Recurring net profit (MYRm) 725 600 694 786 901 Net profit growth (%) 3,186.8 (17.3) 15.6 13.3 14.7 EPS (MYR) 0.22 0.19 0.21 0.24 0.28 Loong Kok Wen CFA +603 9207 7614 DPS (MYR) 0.00 0.00 0.00 0.02 0.03 [email protected] Dividend Yield (%) 0.0 0.0 0.0 0.8 1.2 Return on average assets (%) - - 11.6 6.3 6.7 Return on average equity (%) - - 13.4 7.3 7.9 P/E (x) 11.2 13.6 11.7 10.3 9.0 P/B (x) - - 0.79 0.74 0.69 Net debt to equity (%) - - 1.2 Net cash Net cash

Note: Based on MYR2.51 reference price Source: Company data, RHB estimates

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IOI Properties Group (IOIPG MK) 9 January 2014

Grown Bigger The history IOIPG is coming back in a bigger way with a larger market cap of about MYR8.1bn (based on a reference price of MYR2.51) vs MYR1.5-2bn prior to its delisting in 2009. The company was privatised four years ago as part of its efforts to pursue various landbank acquisitions. The stock was also fairly illiquid back then. During the period when it was solely held under IOI, IOIPG aggressively expanded, both locally and overseas. Today, IOIPG has a net asset base of MYR10.6bn (Sept 2008: MYR3.2bn) and a landbank size of about 14,000 acres, including 10,000 acres of development land, compared with about 5,000 acres previously.

Experienced management team. Tan Sri Dato’ Lee Shin Cheng’s youngest son, Mr Lee Yeow Seng, has been appointed as IOIPG’s CEO. Prior to this, he was actively involved in corporate affairs and general management within the IOI group. Lee holds an LLB (honours) from King’s College London. IOIPG is led by a team of professionals – most of which are long-serving staff in IOIPG/IOI. Mr Teh Chin Guan is the property director. Before joining IOI in 2006, he held various senior positions in Berjaya Land (BL MK, NR). Teh now heads the day-to-day operations in the Klang Valley and participates in business planning with other directors. Ms Lee Yoke Har is the senior general manager of marketing and business development. She joined IOI as a legal executive in 1996 and was subsequently transferred to the property division. Lee is responsible for managing and implementing marketing and sales strategies for Klang Valley projects and overseeing the leasing and management of IOIPG’s investment properties.

The board of directors of IOIPG consists of: i. Tan Sri Dato’ Lee Shin Cheng – executive chairman ii. Dato’ Lee Yeow Chor – executive director iii. Mr Lee Yeow Seng – executive director iv. Tan Sri Ong Ka Ting – senior independent non-executive director v. Dr Tan Kim Heung – independent non-executive director vi. Datuk Tan Kim Leong – independent non-executive director vii. Datuk Lee Say Tshin – independent non-executive director

Overview of IOIPG IOIPG has four divisions: i) property development, ii) property investment, iii) leisure & hospitality – golf courses and hotels, and iv) plantations. The property development and investment divisions are the key earnings contributors, making up more than 90% of group profits. To date, IOIPG has a landbank size of about 14k acres, carrying a total GDV of over MYR50bn, based on our estimates. According to the management, the development GDV over the next three years amounts to MYR20.2bn (some land parcels have no development plans as yet). While exposure to the overseas market is minimal in terms of landbank size, the contribution is more material by GDV, ie local:overseas is equivalent to 57%:43%. Locally, most of IOIPG’s existing projects are located in the Klang Valley () and Johor (Kulai). Prior to its listing, the internal restructuring exercise within IOIPG has seen the injection of new sizeable land parcels in Segamat and Tangkak (both in Johor) and in Bahau, . Based on the latest FY13 numbers, almost 100% of the company’s topline comes from operations in Malaysia. Given its joint venture (JV) stake in projects in Singapore, earnings from these projects kick in only at the associate level. IOIPG will have a share base of about 3.2bn. Upon listing, IOIPG’s market cap could potentially surpass that of UEM Sunrise (UEMS MK, NEUTRAL, FV: MYR2.73). In terms of landbank size, total portfolio GDV and earnings base, the company is certainly comparable to top peers in the industry. Hence, it should be on investors’ radar screens for property exposure. Shareholding of the major shareholders post listing has yet to be confirmed, but Tan Sri Lee’s shareholding will likely be around 45%.

See important disclosures at the end of this report 2

IOI Properties Group (IOIPG MK) 9 January 2014

Figure 1: Portfolio exposure by GDV Figure 2: Landbank exposure by region

China Xiamen Singapore China Xiamen Klang Valley 5.7% 0.1% 0.4% 13.8% Klang Valley 26.9%

Singapore 36.8% Johor Others 28.0% 57.7%

Johor 22.0% Others 8.6% Source: Prospectus Source: Prospectus

Figure 3: Revenue breakdown by division Figure 4: GP breakdown by division

Plantation, Others, 1.4% Others, 1.0% Leisure & Plantation, 2.1% Leisure & 1.9% Hospitality, Hospitality, 6.6% 5.4%

Prop. Invt, 8.0% Prop. Invt, 9.9%

Prop. Dev, Prop. Dev, 82.5% 81.2%

Source: Prospectus Source: Prospectus

Figure 5: Ranking of top property developers Company Landbank (acres) Total GDV (MYR m) Market cap (MYR m) UEM Sunrise 12,561 81,154 10,754

IOIP ^ 14,081 52,734 8,130

SP Setia 5,384 98,670 7,106

Sunway 3,850 54,400 4,791

IJM Land 5,850 37,500 4,022

Mah Sing 1,500 16,191 3,195

UOAD 220 17,800 2,504

Market cap as at 8th Jan 2014 ^ Based on reference price at MYR2.51 Source: Company data

See important disclosures at the end of this report 3

IOI Properties Group (IOIPG MK) 9 January 2014

Investment thesis

At a MYR2.51 reference price, we see upside in the stock. The key four angles are: i. Township developments ensure sustainable demand and hence earnings ii. Overseas ventures providing diversification iii. The backing of IOI means an easier source of landbank iv. Further value-unlocking via property investment assets

A successful township developer. IOIPG has about MYR26bn worth of ongoing and new township projects in the Klang Valley and Johor alone, making up almost half of the total portfolio GDV. As an indication, all existing townships in Puchong and Johor contributed about MYR580m and MYR465m respectively to property development revenue in FY13. IOIPG is an established township developer with a track record of more than 20 years in the industry. Over the years, the company has successfully developed a few renowned self-contained townships, such as Bandar Puteri Puchong, Bandar Puchong Jaya, Bandar Putra Segamat and Bandar Putra Kulai. The company’s market position in township development is well-entrenched and this will not change in the long-term. In view of this, the bread-and-butter projects will provide IOIPG with sustainable sales, given Malaysians’ preference for landed properties in general. The township segment is also less sensitive to the recent regulatory changes. Although the remaining landbank is not large for its existing township projects, particularly those in the Klang Valley (Bandar Puteri, Puchong Jaya and 16 Sierra in Puchong), IOIPG will replenish that with the upcoming launch in Bandar Puteri Warisan @ Sepang and Bandar Puteri @ Bangi. Both projects have a GDV of MYR2.5bn and MYR2.6bn, and landbank size of 332 acres and 360 acres, respectively. Bandar Puteri Warisan – The bulk of planned products here include terraces and townhouses. We see strong development potential for Bandar Puteri Warisan. The site is not far from IOIPG’s existing project – 16 Sierra. The land is also located next to the Salak Tinggi express rail link (ERL) station, and opposite Glomac’s new Saujana KLIA township, which has a GDV of MYR1.2bn. More than 10,000 employees and workers at LCCT and KLIA will be the key driver of property demand there. Residents who work in may opt to travel via the ERL, and it will only take about 30 minutes to KL Sentral (a one-way ticket costs MYR12.50). Meanwhile, it was also reported that Xiamen University is going to set up its first overseas branch campus on a 150-acre site at Salak Tinggi, with a student capacity of 10,000. Near to the airport, there are also plans to build a premium outlet. Given all the upcoming developments in the surrounding area, houses at Kota Warisan have appreciated over the years. Linked houses there are currently commanding a market price of about MYR450,000-500,000 per unit. Given IOIPG’s track record in bringing up property value, as proven by its Bandar Puteri Puchong and 16 Sierra projects, we believe this new township project will similarly receive good response from the market. Bandar Puteri @ Bangi – As for the new township in Bangi, the land is strategically located close to the North-South Highway, at the border of and Negeri Sembilan. Along the highway, major developments include Southville by Mah Sing (MSGB MK, NEUTRAL, FV: MYR2.44) and Bandar Seri Putra by UM Land. Due to land scarcity in the city centre and, hence, expensive property prices, demand for properties has gradually shifted towards the city centre’s outer areas as of two years ago. The southern part of the Klang Valley – the Kajang/Semenyih/Bangi enclaves – has been the new focus, due to better connectivity to Kuala Lumpur. SP Setia (SPSB MK, NEUTRAL, FV: MYR3.54), Mah Sing and EcoWorld SB are among the few players that have positioned themselves here. IOIPG’s Bandar Puteri @ Bangi is expected to be similarly well-received, given its track record. The project’s concept is similar to Bandar Puteri Warisan, with a slightly bigger commercial component. The residential precincts will be gated and guarded and well landscaped, with different themed gardens.

See important disclosures at the end of this report 4

IOI Properties Group (IOIPG MK) 9 January 2014

Figure 6: Location of Bandar Puteri Warisan

Salak Tinggi ERL station

Bandar Puteri Warisan (South)

Source: Google Map, RHB

Figure 7: Location of Bandar Puteri @ Bangi

Source: Company

See important disclosures at the end of this report 5

IOI Properties Group (IOIPG MK) 9 January 2014

Although the Iskandar Malaysia market is getting more challenging due to the cooling measures imposed by the Government, the impact to IOIPG will not be too substantial, as most of its projects in Johor are township developments, for which demand is more genuinely driven and less speculative. Bandar Putera Kulai – The 6,000-acre township is IOIPG’s key development project in Iskandar Malaysia, where it still has a balance landbank of over 3,000 acres. Currently, about MYR1.4bn worth of projects have been planned, while the remaining land has no development plans as yet. The location of the township is strategic – it is only a 10-minute drive to the Senai International Airport, 25 minutes to Johor Bahru, eight minutes to Johor Premium Outlet (JPO) and 30 minutes to the Woodlands and Tuas checkpoints to Singapore. Over the years, Bandar Putera Kulai has become a self-contained township – equipped with amenities such as a recreational park, schools, an IOI Mall, shops, golf club and club house. Following the opening of JPO and the subsequent heightening commercial activities in the surrounding area, sales in the township has increased, with FY13 revenue contribution from here doubling to about MYR243m. Other projects in Iskandar Malaysia include Kempas Utama, Lagenda Putra, Bandar Putra Segamat and The Platino. IOIPG has also entered into Medini at an attractive land cost of MYR39 psf (approved with 11x plot ratio and GFA of 2.5m sqf). A few 50-56 storey luxury condominium (condo) blocks – totalling 2,200-2,400 units – will be put up. Given the current bearish sentiment in Iskandar Malaysia, particularly in the high-rise segment, we believe this project will only be rolled out in 2HCY14 when demand recovers.

Figure 8: Location of Bandar Putera Kulai

Source: Company

See important disclosures at the end of this report 6

IOI Properties Group (IOIPG MK) 9 January 2014

Diversification opportunities for overseas ventures. Overseas projects in Xiamen and Singapore give IOIPG the flexibility to be responsive to changes in market conditions. While the projects in Singapore have yet to yield meaningful results, the Xiamen project was highly successful at its debut. Upon its launch in Sept 2013, all 480 units in Phase 1 were sold, racking in CNY800m (MYR432m) in sales. Earnings from the Xiamen development are, hence, expected to kick in from FY14 onwards. Singapore – IOIPG first ventured into Singapore in 2007. All of the projects there are on JV basis, and some are targeted at the higher-end segment, particularly those located at Sentosa Cove – Seascape and Pinnacle. Currently, South Beach is the company’s single-largest development in Singapore, with a total GDV of MYR8.5bn (or SGD3.4bn), out of which MYR6.14bn (SGD2.46bn) is for investment properties and MYR2.4bn (SGD944m) for the residential saleable area. It is a 50.1:49.9 JV project between City Development and IOIPG. The 8.46-acre (99-year leasehold) land that comes with a plot ratio of 4.2x was acquired in April 2011 at a land cost of SGD1,069 per plot ratio (ppr) (total sum: SGD1.7bn). The land is strategically located between Raffles Hotel and Suntec City, and is next to the Esplanade mass rapid transit (MRT) station. This mixed development comprises two 45-storey and 34-storey towers and four conserved blocks including residential apartments, hotels (654 rooms), retail and office lots – with net lettable area (NLA) of 640,991 sqf. Over 70% of the development (ie investment properties such as hotel, office and retail) will be kept for recurring income, while the apartments will be sold at an estimated ASP of about SGD2,700-3,000 psf, which is in line with the current market price in the area. Over the short-term, we think the Singapore property market will continue to see a correction, mainly due to the various rounds of cooling measures imposed by the Singaporean Government. However, in the longer-run, we think property value will be held up, given that land is typically scarce in Singapore. A more open economic environment, GDP growth and the stable SGD will be the factors underpinning the long-term stability of the republic’s property market, notwithstanding recent measures to cool foreign demand. Xiamen – IOIPG entered the China property market four years ago. The development in China is located in Xiamen, which is a second tier-developed city. Increasing urbanisation, population growth and rising household income are the key drivers of property demand there. Currently, IOIPG has two projects there – IOI Park Po Bay and IOI Xiamen 2. IOI Park Po Bay, which has a GDV of MYR563m (CNY1.2bn), is located in Jimei District. It has a land size of 7.66 acres, and the project comprises 632 units of high-end residential duplex town villas and condos, as well as 170 commercial units, with a total saleable area of about 1.1m sqf. IOI Xiamen 2, on the other hand, is a much bigger project. It has a GDV of MYR2.4bn (or CNY4.9bn) for the residential component alone. It is located on a 43.55-acre land plot in Xiamen Jimei District, in the southern part of Xiamen. The site is connected to Jimei or Xiamen Bridge, and it is only a 15 minute drive to Xiamen Gaoqi International Airport on Xiamen Island. The land will be developed into an integrated development, comprising a shopping mall, boutique offices, a 5-star hotel and luxury residences, such as villas, townhouses and high-end condos. The mall and office alone will have an NLA of 670,824 sqf. The project was also zoned as part of the Jimei Cluster development, which includes the development of the entire Jimei township, and expo garden, and new Xiamen Station (an integrated transport hub) with high-speed railway connectivity.

See important disclosures at the end of this report 7

IOI Properties Group (IOIPG MK) 9 January 2014

Benefitting from IOI’s backing. The backing of IOI is a competitive advantage that IOIPG has over its peers. Being a plantation company with over 160k ha of oil palm land, IOI has been an easy source of development landbank for IOIPG in the past. Bandar Puteri and Puchong Jaya in the Klang Valley, as well as Putra Segamat and Putra Kulai in Johor, are the few townships that are being developed on former oil palm plantation land that was previously owned by IOI. The new landbank in Bahau and Segamat were injected during the internal restructuring and prior to the listing, which has allowed IOIPG to enlarge its landbank size without competing in the market at a time when land owners are asking for sky-high prices. We note that these land parcels were not “transferred” to IOIPG at expensive prices, ie the Segamat and Bahau land were injected at MYR3.88 psf and MYR1.89 psf respectively. Although some of the land parcels are not yet ripe for immediate development, infrastructure facilities and road connectivity will nonetheless spread to these new areas in the longer-term, as developments take place over time.

Figure 9: Plantation land owned by IOI (as at 30 June 2013) Location Area (ha) 18,803 - Bentong, Rompin, Pekan

Negeri Sembilan - Tampin, Kuala Pilah 5,776

Johor 24,650 - Segamat, Tangkak, Kluang

Sabah - Kinabatangan, Kunak, Lahad Datu, Sugut, Sandakan 107,486

Sarawak - Baram 8,998

Total 165,713 Source: IOI’s Annual Report 2013

Further value-unlocking via property investment assets. Currently, IOIPG has 2.65m sqf of NLA under its portfolio, of which 1.1m sqf is retail space and 1.12m sqf is office space. The balance comprises some other commercial and residential properties. Including those under construction, the company will have more than MYR2bn worth of property investment assets, and their value is expected to grow as the new assets mature in the medium-term. The bulk of the pool will come from assets in IOI Resort City as well as South Beach Singapore. All of these will be kept for recurring income, and we expect IOIPG to monetise them by injecting them into a REIT, or sell them to an en bloc buyer in 5-8 years’ time. Over the next five years, management aims to achieve an earnings breakdown of 40% and 60% between its property investment and property development divisions. At this juncture, the property investment division only contributes 8% of earnings. IOI Resort City – This project is worth a total GDV of MYR3.1bn, including the commercial and residential components. The commercial segment which is worth MYR2bn includes a shopping mall (4-storey with 1.45m sqf of NLA), a 5- star hotel block, two blocks of 30-storey office towers and over 7,000 carpark bays. The mall, along with the two office towers, is expected to be completed by 2014, and the hotel will be added in the following year. Management is in the midst of leasing out the mall and office space. The sizeable retail mall is expected to bring demand for the new offices there. We are upbeat that more than 75% of the retail space has been pre-committed, with Parkson, Homepro and GSC Cinemas being the anchor tenants. To support the commercial activities of the mall and office towers, the project also includes the residential segment. Some condo units as well as high-end landed houses will be progressively launched over the coming years. The residential segment has a GDV of MYR1.1bn.

See important disclosures at the end of this report 8

IOI Properties Group (IOIPG MK) 9 January 2014

Development potential for IOI Mall Puchong – Given that the mall is strategically located in the heart of Puchong, management also sees the need to revamp or redevelop IOI Mall Puchong, especially the old wing. This is also in line with efforts to build up a sizeable pool of property investment assets. In our opinion, given the amount of developments of property assets over the near-term, any major refurbishment of IOI Mall Puchong will only take place in the medium-term. The old wing is already 16 years old (the new wing is four years old) and, if the asset is properly nurtured, it will be very valuable given the high population density within Puchong (population size of 350,000-400,000). As at end-Jan 2013, the old and new wings were valued at MYR540 psf and MYR709 psf respectively. Hence, we believe a meaningful makeover will boost the asset value.

Figure 10: IOIPG’s portfolio of existing property investment assets Property investment assets IOI Mall, Puchong NLA = 863,797 sqf IOI Mall, Kulai NLA = 274,863 sqf Puteri Mart, Puchong NLA = 45,913 sqf IOI Mart Kulai NLA = 75,966 sqf IOI One & Two Square NLA = 440,995 sqf PFCC Tower 1 & 2 Office: NLA = 376,525 sqf IOI Boulevard Office: NLA = 282,852 sqf IOI Business Park Office: NLA = 21,292 sqf Palm Garden Hotel 151 rooms Putrajaya Marriott Hotel 488 rooms Golf Course 27-hole golf course Source: Company data

Figure 11: Future investment properties currently under construction Description NLA ('000) Expected completion Mall/Complex IOI City Mall, Putrajaya 1,450 2014 South Beach, Singapore 100 2015 IOI Palm City Mall, Xiamen PRC 1,200 2018 2,750 Office space PFCC Towers 4 & 5, Puchong 500 2014 South Beach, Singapore 500 2015 IOI City Tower 1 & 2, Putrajaya 1,000 2016 IOI Palm City Office, Xiamen PRC 300 2018 2,300

Grand total 5,050 Source: Company data

Earnings forecasts and valuations High margin in core divisions. IOIPG recorded gross margin of 56-60% and net margin of 52-62% over the past three years. A further dissection of the earnings shows that IOIPG is in all the high-margin businesses. Again, this reiterates the benefits of having the backing of IOI. The key reason for the high margin in the property development division is mainly because of the cheap landbank injected from the parent company. As such, the development margin was as high as 55-60% compared with SP Setia’s 25-30%, and we expect this trend to continue. While IOIPG is already carrying low land cost for the existing Puchong and Johor townships, the new land parcels were injected at low prices prior to the listing. Acquisition costs for the new Bangi and Sepang township land are also considered rather reasonable at MYR11-15 psf. Meanwhile, IOIPG’s gross margin of about 68-71% for its property investment division is in line with the industry norm. Most property asset holding companies and REITs typically record gross margin of around 70%. As IOIPG expands its property investment asset portfolio, the earnings contribution from this division will become more material.

See important disclosures at the end of this report 9

IOI Properties Group (IOIPG MK) 9 January 2014

Figure 12: IOIPG is in high margin businesses

75%

70%

65%

60%

55%

50%

45%

40%

35%

30% FY10 FY11 FY12 FY13

Prop dev Prop invt Leisure & hospitality Plantation

Source: Company data

Expect double-digit earnings growth for FY14-15. We expect FY14-15 earnings to grow at 13-15% per annum. In comparison to management’s EBIT target of MYR1bn per annum over the next three years, we estimate EBIT at a more conservative MYR918m for FY14, and expect it to break the MYR1bn mark only in FY15. We believe our earnings growth projection is decent and reasonable, in view of its current unbilled sales of about MYR1.2bn and 1QFY14’s net profit of only MYR112.5m. Growth from FY15 onwards is expected to pick up given the company’s development GDV of MYR20bn over the next three years (MYR10bn in Malaysia, MYR7.5bn in Singapore and MYR2.7bn in China) and management’s sales target of MYR2.5-3bn per annum. Compared to other players who do not have as many township developments, IOIPG’s earnings will be more resilient and less affected by the cooling measures imposed by the Government. As a large developer, IOIPG’s net gearing is unusually low at only 0.4%. This will provide scope for the company to gear up for big scale projects without going to the equity market. Note that, there is no dividend policy at the moment. As management perceives that the company is in the growing stage, we believe any dividend payout will just be a token.

Figure 13: IOIPG’s historical sales performance FY11 FY12 FY13 Units Sales value (MYR m) Units Sales value (MYR m) Units Sales value (MYR m) Malaysia Klang Valley 666 572 653 546 966 707 Johor Bahru 969 282 732 270 1,357 611 85 81 21 35 51 32 1,720 935 1,406 851 2,374 1,350 Singapore The Trilinq, Clementi 111 354 Mergui - Farrer Park 49 89 19 29 143 237 Seaview - Sentosa Cove 4 35 8 64 3 21 53 124 27 93 257 612

Grand total 1,773 1,059 1,433 944 2,631 1,962 Source: Company data

See important disclosures at the end of this report 10

IOI Properties Group (IOIPG MK) 9 January 2014

Valuations. We initiate coverage on IOIPG with a BUY recommendation. Our FV of MYR3.50 is based on a 30% discount to RNAV, which is in line with our valuations on Sunway (SWB MK, BUY, FV: MYR3.33), given the latter’s similar exposure to the China and Singapore markets, as well as the property investment segment. Our FV implies a reasonable P/E of 14.4x based on our FY14 earnings forecast, and 1.07x P/B (net asset/share is MYR3.26 as at 1QFY14). IOIPG’s larger earnings base as well as its more resilient nature of earnings, which are underpinned by both sustainable township projects and property investment assets, should justify a premium to the average sector P/E of 10.2x.

Figure 14: Sector peer comparison Year Price Target Mkt Cap PER (x) EPS GWTH (%) P/BV (x) P/CF(x) ROE(%) NDY(%) Rec End (MYR/s) (MYR/s) (MYRm FY13 FY14 FY13 FY14 FY14 FY14 FY14 FY14 Sunway Dec 2.78 3.33 4192.2 10.4 10.5 (1.7) (1.1) 1.1 14.1 11.3 2.9 B UOA Dev Dec 1.87 2.45 2376.4 7.4 6.6 2.5 11.8 1.0 15.1 15.3 7.5 N Paramount Dec 1.51 1.71 510.1 9.1 8.1 (0.2) 12.1 0.7 4.6 8.5 6.0 N IJM Land^ Mar 2.58 3.70 3625.2 11.9 9.8 56.0 22.3 1.1 11.4 12.2 1.7 B E&O^ Mar 1.99 2.70 2259.8 16.9 13.9 3.0 21.4 1.4 17.8 10.5 1.5 TB UEM Sunrise Dec 2.37 2.73 10623.5 18.1 16.9 18.7 7.5 1.6 43.2 9.8 1.7 N SP Setia Oct 2.89 3.54 6649.7 15.5 13.3 (7.6) 16.6 1.4 26.3 11.0 4.2 N Mah Sing Dec 2.26 2.44 2458.9 8.8 8.1 (7.6) 8.9 1.6 57.4 21.4 4.3 N Glomac^ Apr 1.15 1.36 683.5 6.0 5.1 22.1 17.8 0.7 7.8 15.4 5.5 TB Hua Yang^ Mar 2.08 2.76 549.1 4.9 4.8 16.2 2.5 1.1 4.7 26.0 6.3 B Tambun Indah Dec 1.49 2.05 499.0 8.2 6.3 22.0 29.5 1.7 10.4 16.4 5.2 B Sector Avg 12.0 10.2 13.1 12.4 Source: RHB

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IOI Properties Group (IOIPG MK) 9 January 2014

Figure 15: RNAV for IOIPG Land area GDV Effective NPV @ 11% Projects (acres) (MYR mil) stake (MYR mil) Malaysia Klang Valley: 16 Sierra 377.9 1,384 100% 167.6 Bandar Puteri 172.3 2,065 100% 279.5 Bandar Puchong Jaya 47.7 877 100% 130.2 The Hammock, Ampang 3.8 437 100% 51.2 Bdr Puteri Warisan @ Sepang 332.0 2,500 100% 1,702.1 Bdr Puteri @ Bangi 360.0 3,600 100% 333.3 IOI Resort City 504.9 3,100 100% 265.0 Bandar Putera Klang 110.0 169 100% 15.3 Bandar Puteri Klang 42.0 33 100% 3.1

Johor: Kempas Utama 50.0 1,496 100% 140.3 Bandar Putra Kulai 3,127.5 1,356 100% 131.5 The Platino, Jln Skudai 5.4 510 100% 51.8 Bandar Putra Segamat 26.5 102 100% 10.0 Taman Legenda Putra, Kulaijaya 407.2 224 100% 33.0 Kempas Baru 4.1 527 100% 56.1 Plentong land 5.9 530 100% 47.8 Synergy Business Park 300.0 2,372 100% 209.9 Tebrau (ADSB) 37.4 4,500 100% 381.1

Others: Sg. Ara, Penang 1.0 127 100% 10.4 Teluk Kumbar, Penang 2.4 58 100% 4.8 Rompin, Jempol Ng. Sembilan 7.4 592 100% 30.8 Ayer Keroh, Melaka 1,074.4 3,760 100% 147.0

Singapore The Trilinq @ Jln Lempeng 6.0 2,264 88% 204.1 South Beach 8.6 8,497 50% 395.2 City Scape 3.6 1,007 60% 64.4 Seascape @ Sentosa Cove 2,670 50% 114.8 Pinnacle @ Sentosa Cove 4,979 65% 278.2

China, Xiamen IOI Park Bo Bay 7.7 563 100% 50.8 IOI Xiamen 2 43.6 2,434 100% 199.7

Other landbank in Malaysia *: BV (MYR mil) Net surplus (MYR mil) Tangkak land, Johor 273.0 7 100% - Segamat estate, Johor 1,279.2 216 100% - Paya Rumpul, Melaka 264.0 27 100% - Jasin Lalang, Melaka 4,077.1 248 24% - Bahau land, Seremban 1,118.2 92 100% -

Unbilled sales 132.0 Subtotal 14,080.6 52,733.6 5,641.0

Investment properties Description BV (MYR mil) MV (MYR mil) Net surplus (MYR mil) PFCC (Tower 1 & 2) Office: NLA = 376,525 sqf 277 277 0 IOI Mall Puchong NLA = 863,797 sqf 508 508 0 IOI Mall Kulai NLA = 274,863 sqf 70 70 0 One IOI Square Office: NLA = 202,386 sqf 95 95 0 Two IOI Square Office: NLA = 238,609 sqf 110 110 0 Putrajaya Marriott Hotel 488 rooms 124 124 0 Palm Garden Hotel 151 rooms 18 18 0

Under construction: IOI City Mall Retail: NLA = 1.4mil sqf 130 130 0 IOI PFCC Hotel 282 rooms 23 23 0 Tower 4 & 5 PFCC Office: NLA = 440,136 sqf 130 130 0 IOI Resort Putrajaya 350 rooms 36 36 0 IOI Resort carpark 7,078 units 199 199 0 IOI City Tower One Office: NLA = 540,500 sqf 28 28 0 IOI City Tower Two Office: NLA = 540,500 sqf 28 28 0

Subtotal 0

Total 5,641.0 Shareholders' fund 10,561.6 Total RNAV 16,202.5 Share cap 3,239.0 RNAV/share 5.00 Discount 30% Fair value 3.50 * No development plans yet Source: Company data, RHB estimates

See important disclosures at the end of this report 12

IOI Properties Group (IOIPG MK) 9 January 2014

Financial Exhibits

Profit & Loss (MYRm) Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Total turnover 1,171 1,052 1,323 1,579 1,883 Cost of sales (506) (411) (526) (667) (814) Gross profit 665 641 797 912 1,069 Selling expenses (90) (110) (131) (149) (169) Other operating costs 225 139 149 154 167 Operating profit 801 670 814 918 1,066 Operating EBITDA 875 730 924 1,026 1,176 Depreciation of fixed assets (74) (61) (109) (109) (109) Operating EBIT 801 670 814 918 1,066 Net income from investments 57 41 89 98 101 Interest income 36 50 42 44 47 Interest expense (3) (6) (41) (45) (49) Pre-tax profit 890 756 905 1,015 1,165 Taxation (124) (145) (191) (223) (256) Minority interests (40) (11) (20) (6) (7) Profit after tax & minorities 725 600 694 786 901 Reported net profit 725 600 694 786 901 Recurring net profit 725 600 694 786 901

Source: Company data, RHB estimates

Cash flow (MYRm) Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Operating profit 801 670 814 918 1,066 Depreciation & amortisation 74 61 109 109 109 Change in working capital - - (1,623) (381) (453) Other operating cash flow (828) (546) 1,348 339 415 Operating cash flow 47 184 649 984 1,138 Interest received 36 50 42 44 47 Interest paid (3) (6) (41) (45) (49) Tax paid (124) (145) (191) (223) (256) Cash flow from operations (45) 84 459 760 879 Capex - - (3,095) (20) (20) Other new investments - - (2,286) - - Other investing cash flow (6) (53) 3,193 - - Cash flow from investing activities (6) (53) (2,188) (20) (20) Dividends paid - - - - (65) Proceeds from issue of shares (725) (600) 9,642 - - Increase in debt - - 502 - - Other financing cash flow 776 569 (8,609) (205) (347) Cash flow from financing activities 51 (31) 1,535 (205) (412) Cash at beginning of period - - - 381 916 Total cash generated (0) (0) (194) 535 447 Forex effects 576 Implied cash at end of period (0) (0) 382 916 1,364

Source: Company data, RHB estimates

See important disclosures at the end of this report 13

IOI Properties Group (IOIPG MK) 9 January 2014

Financial Exhibits

Balance Sheet (MYRm) Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Total cash and equivalents - - 441 976 1,424 Inventories - - 123 147 176 Accounts receivable - - 457 545 650 Other current assets - - 1,915 2,278 2,710 Total current assets - - 2,937 3,946 4,959 Total investments - - 3,647 3,647 3,647 Tangible fixed assets - - 5,268 5,179 5,090 Intangible assets - - 4 4 4 Total other assets - - 128 128 128 Total non-current assets - - 9,047 8,958 8,869 Total assets - - 11,983 12,904 13,827 Accounts payable - - 486 580 692 Other current liabilities - - 386 386 386 Total current liabilities - - 873 966 1,078 Total long-term debt - - 502 602 602 Other liabilities - - 246 246 246 Total non-current liabilities - - 748 848 848 Total liabilities - - 1,621 1,815 1,927 Share capital - - 3,239 3,239 3,239 Retained earnings reserve - - 4,024 4,745 5,550 Other reserves - - 3,072 3,072 3,072 Shareholders' equity - - 10,335 11,056 11,861 Minority interests - - 27 33 40 Other equity - - (0) 0 0 Total equity - - 10,362 11,089 11,901 Total liabilities & equity - - 11,983 12,904 13,827

Source: Company data, RHB estimates

Key Ratios (MYR) Jun-11 Jun-12 Jun-13 Jun-14F Jun-15F Revenue growth (%) 3.2 (10.2) 25.8 19.3 19.3 Operating profit growth (%) 33.2 (16.4) 21.6 12.7 16.2 Net profit growth (%) 43.2 (17.3) 15.6 13.3 14.7 EPS growth (%) 43.2 (17.3) 15.6 13.3 14.7 Bv per share growth (%) 0.0 0.0 0.0 7.0 7.3 Operating margin (%) 68.4 63.6 61.5 58.1 56.6 Net profit margin (%) 61.9 57.0 52.4 49.8 47.9 Return on average assets (%) 0.0 0.0 11.6 6.3 6.7 Return on average equity (%) 0.0 0.0 13.4 7.3 7.9 Net debt to equity (%) 0.0 0.0 0.6 (3.4) (6.9) DPS 0.00 0.00 0.00 0.02 0.03 Recurrent cash flow per share (0.01) 0.03 0.14 0.23 0.27

Source: Company data, RHB estimates

See important disclosures at the end of this report 14

IOI Properties Group (IOIPG MK) 9 January 2014

SWOT Analysis

Experienced township developer in Malaysia Competition from other Bread-and-butter township projects will sustain developers in property sales and earnings growth the vicinity

Vast landbank in the portfolio awaiting to be developed Potential plantation landbank that can be injected from IOIC

High-end exposure to the Singapore market, which is currently seeing a correction

P/E (x) vs EPS growth P/BV (x) vs ROAE

50% 160% 45% 140% 40% 120% 35% 30% 100% 25% 80% 20% 60% 15% 40% 10% 5% 20%

0% 0%

Jan-11 Jan-12 Jan-13 Jan-14 Jan-15 Jan-11 Jan-12 Jan-13 Jan-14 Jan-15

P/E (x) (lhs) EPS grow th (rhs) P/B (x) (lhs) Return on average equity (rhs)

Source: Company data, RHB estimates Source: Company data, RHB estimates

Company Profile A property arm of IOI Corp, IOI Properties Group (IOIPG) is a specialised township developer in Malaysia, with anchor projects in Puchong, the Klang Valley and Kulai, Johor. Its overseas exposure includes Xiamen, China and Singapore.

See important disclosures at the end of this report 15

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