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CFA INSTITUTE RESEARCH CHALLENGE Sunway University Student Research This report is published for educational purposes only by students competing in the [Financials Sector, REIT Industry] CFA Institute Research Challenge. Sunway REIT

Date: 22 February 2014 Current Price: RM 1.30 (as of 21.2.14) Recommendation: BUY Ticker: SREIT:MK (Bloomberg) USD/RM: 3.29 Target Price: RM 1.56 (20% upside)

Market Profile 52-week high (RM) 1.65 52-week low (RM) 1.23

Previous close 1.30 Market Capitalization 3800 Highlights (RM million) Outstanding units 2923.7  We issue a BUY recommendation with a target RM 1.56, an upside of (million) 20% from current stock price. Sunway REIT (SunREIT) is one of the Free Float 42.6% largest REIT in Malaysia in terms of its property value. SunREIT is a EPS (2014F) (sen) 7.5 diversified REIT with a portfolio of primarily retail properties and P/E (FY2014)(Target 24 diversification into hotels, offices and others segments. px/EPS) ROE (FY2014) 7.5%  Main growth drivers – (1) Sustainable organic growth from vibrant township. (2) Positive rental reversion rates from retail sector. (3) Upside Source: Team’s estimates potential from future post-refurbishment of Sunway Putra Place in . (4) Future yield-accretive acquisitions available from pipeline assets.

 Stable financial position – (1) Low gearing is maintained, and is expected to remain constant in the near future, in line with management’s current strategy of managing capital structure. (2) Frequent rental reversion in retail malls and office buildings will increase projected earnings. (3) Increasing cash balance ensuring liquidity of the company.

 Risks issues – (1) Halted revenue and increased costs from current refurbishment exercise. (2) Increases in base lending rates increase interest rate and refinancing risks. (3) Rising costs due to various factors impacting profitability. Forecast 2011 2012 2013 2014F 2015F 2016F Summary Net Property 244,015 299,198 309,196 307,284 332,659 363,172 Income (RM’000) Profit for the 166,059 188,992 217,433 201,729 224,090 251,261 year/period (RM’000)

Earnings per unit 6.2 7.1 7.9 7.5 8.3 8.7 (RM) Distribution per 6.6 7.5 8.3 8.0 8.4 8.8 unit (sen)

SUNWAY UNIVERSITY 1 Important disclosures appear at the back of this report. CFA INSTITUTE RESEARCH CHALLENGE

Diagram 1: Breakdown of Business Description Revenue for 31 December 2013 Sunway Real Estate Investment Trust (SunREIT) is a Malaysian-based real Revenue breakdown estate investment trust company managed by SunREIT Management Sdn Bhd. SunREIT is a subsidiary of Sunway Berhad, a giant conglomerate engaging 6% primarily in properties and construction. The investment objective is to Retail provide unit holders with exposure to a diversified portfolio, as evident in its 23% Offices investments which includes retail, hospitality, office and other real estate assets. Revenues generated are mainly from the retail segment, which is more than 63% Hotel 60% of total revenue (refer Diagram 1). 9% Others

Currently, SunREIT has 3 growth strategies as follows: Source: Company data, Team’s  Organic growth – Comprises of vibrant township factors such as having estimates a large population catchment and high commercial activities that enable sustainable asset management and asset enhancement opportunities. Asset Diagram 2: Unitholders’ management initiatives (AMIs) include rental reversion, optimisation of Composition tenancy mix and operational efficiency enhancement. Asset enhancement initiatives (AEIs) include an increase in the net lettable area (NLA) for retail Unitholders' Composition and office properties, reconfiguration of space available and refurbishment of properties. 19.9%  Acquisition growth – Maintains an active acquisition strategy by Foreign acquiring yield accretive assets based on a foundation of sustainability in 80.1% Domestic growth. The main consideration for acquisition are the retail and mixed use assets, located in high growth cities and townships in Malaysia, which are compatible and synergistic to the assets portfolio. Source: Company data, Team’s  Capital and risk management – Through optimising the capital estimates structure and cost of debt, diversifying its sources of debt funding, hedging strategies to manage interest rate risk and minimising refinancing risks by Diagram 3: Unitholders’ managing debt maturity profile. Composition There are marginal changes in the unitholders’ composition of SunREIT as at Unitholders' Composition 31 December 2013. Institutional investors remain a majority unitholder, comprising 54.9% of the total units issued. However, there had been a decrease Individual 10.6% in the percentage of institutional investors as a result of an increase in retail unitholders (refer Diagram 3). Foreign unitholders of SunREIT consist of Sunway 54.9% 34.5% Berhad 19.9%. This has declined from 20.2% as at 30 September 2013, clearly indicating a decrease in foreign investors in SunREIT. There is a correlation Institutions with the decrease of foreign investors with the depreciation in ringgit (refer Diagram 2). Source: Company data, Team’s estimates Industry Overview and Competitive Positioning Compelling Retail Market

In 2012, Kuala Lumpur was ranked as the second best shopping destination in Asia Pacific according to the latest Globe Shopper Index by the in-house

research unit for The Economist, which augurs well for the retail market. Chart 1: Retail Sales Growth, Furthermore, with unemployment rate of below 3% and household income 2010-2013 growth of 7.2% per annum since 2009, consumer confidence is picking up and subsequently the growth of the industry. Retail sales growth for 2013 was forecasted at 6.0%, generating sales of RM 93 billion (refer Chart 1). These factors had made it an appealing option for investors.

However, due to an imbalance between completion and take-up rates of new spaces, the retail sector saw a slight moderation as average occupancy rate of shopping complex declined marginally from 79.5% in 2011 to 79.1% in 2012. This imbalance is expected to heighten competition between existing and new

Source: shopping centres. Thus, for existing shopping malls to remain relevant, they Malaysian Retailers Group, DTZ would have to take proactive measures such as AEIs, promotional activities and Consulting & Research, May 2013 events to attract shoppers. Nevertheless, prime retail centres are not substantively threatened by new competition due to their strong location and experienced management teams.

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Chart 2: Supply of Office Space Challenging office sector Supply of office spaces in Kuala Lumpur and have been rising in recent years. In 2012, office space in Petaling Jaya and stood at a total of 18.2m sq. ft., an increase of 6% from 2011 (refer Chart 2). In Kuala Lumpur, the proposed built office space is 67.4m sq. ft., an increase of 4% from 2011. This resulted in a decrease in occupancy rates in Kuala Lumpur and Subang Jaya, while Petaling Jaya’s occupancy rate only shows a marginal increase (refer Table 1). It is likely that occupancy rate will continue its downward trend due to oversupply.

Source: DTZ Consulting & As a result, current rental rates are expected to remain flat, resulting in Research, May 2013 difficulty of maintenance in light of rising costs (refer Chart 3). This had resulted in a pressurized sector with competitive rates. However, REITs with Table 1: Occupancy Rates of strong leases would be able to maintain occupancy and ride out the storm Offices until the market stabilized. Offices in a highly strategic location, especially in Occupancy 2011 2012 high growth cities and townships will not be affected as much. Rates Petaling Jaya 75% 76.4% Stable Hospitality Market In 2012, a total of 25.03 million tourist arrivals were recorded compared to Subang Jaya 67.9% 61.3% 24.71 million recorded for the same period in 2011, representing a growth of 95% 95% 1.3% in tourist arrivals (refer Table 2), showcasing the enhancement of the Kuala Lumpur 86.1% 84.5% hospitality and leisure sub-sector. As a result, the national average occupancy rate of three to five star hotels performed better with 54.5% in 2012 (2011: Source: DTZ Consulting & 51.4%). Furthermore, Visit Malaysia Year 2014 is expected to promote Research Malaysia further as a tourism destination, stimulating the hotel segment and

boosting revenue with the higher tourist visitation. Chart 3: Rental Rates in Kuala

Lumpur Emphasis on organic growth Organic growth plays an important role in the improvement of distribution per unit (DPU). This is further emphasized in 2013 as it is getting tougher for REITs to find good-quality and yield accretive acquisitions, leading to limited buying opportunities. This is due to demanding prices from sellers and stiffer competitions from other asset owners. This led to the emphasis on organic growth.

This is advantageous for existing REITs with an established portfolio. Although there are several potential REITs with the possibility of getting listed, Source: CBRE Research existing REITs, being the incumbents of the industry are more experienced in terms of management skills. Table 2: Tourist Arrivals & Receipts to Rising Bond Yield Malaysia The yield of Malaysian Government Securities has risen with the outflow of Year Arrivals Receipts funds following the US Federal Reserve’s impending move to reduce its asset (mil) (RM ‘bil) purchase that has been in place since 2009. A comparison shows that a REIT 2012 25.03 60.6 company is still producing a higher distribution yield than the others apart 2011 24.71 58.3 from the Employees Provident Fund (refer Graph 1). It could be argued that Source: Tourism Malaysia REITs are more similar to bonds, meaning that in order to maximize income; investors should consider a buy-and-hold strategy. As a result of the increasing Graph 1: Comparative Yield of bond yield, investors may tend to shy away from REITs as due to a higher risk, long-hold assets investors still require a higher yield than bond.

REITs are long-hold stock, so even with a yield compression, returns will still be favourable, especially REITs who invested heavily in the retail sector. In conclusion, REITs still looks to be an attractive investment, and raising capital from the equity market to achieve their objective of recycling capital will not be an issue in the near future.

Corporate Governance on REITs Source: Bloomberg, Bank Negara Investors need to be aware that there are governance issues in the REIT Malaysia, Maybank2u.com industry in Malaysia. For example Malaysian REITs, and similarly in Hong Kong and Singapore, has adopted an external manager model, rather than an

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Table 3: List of yield accretive internal manager model commonly used in Australia and Japan. In externally assets managed REITs, the manager is often a separate company and is owned by the REIT-able assets Type Size (sq ft) REITs’ sponsors, which can create potential conflicts of interest.

Monash University Campus Education 850,853 The external manager model has different layers of fees which at times has Sunway University College Education 615,983 been the subject of debate raised by activist investors. Why do you need to pay Sunway Giza Retail 98,000 acquisition fee when a property is sold from a sponsor to a REIT? Why The Pinnacle Office 580,000 performance fees paid is based on Net Property Income which does not include Sunway Velocity Retail 800,000 debt charges? Source: Team’s estimates Backing from supportive sponsor Graph 2: Property Value of M- SunREIT has negotiated the right of first refusal from the sponsor. This to say, REITs should any 100% owned subsidiary intend to offer any of their investment properties for sale to a third party at a specific price or terms, the sponsor or the Property Value (MYR m) entity in question must first extend the offer to SunREIT at the same terms and offer price.

KLCC Stapled REIT As a result of this agreement, SunREIT has access to many yield accretive IGB REIT assets with an estimated value of RM 2 billion – RM 3 billion (refer Table 3). PAV REIT This will help achieve their target of obtaining a property appraised value of SunREIT RM 7.0 billion within 5-7 years from its date of listing. It is evident from the

Quill Capita past that SunREIT used this to its advantage, with the acquisition of Sunway

CMMT Medical Centre. This acquisition had resulted in SunREIT’s total asset value increasing to RM 5.18 billion, and also the diversification of SunREIT’s Axis REIT portfolio. 0 5000 10000 15000

Source: Bloomberg, Malaysia KE Sustainable Organic Growth With high exposure in the retail sector (63.7% of total asset value and 70.7% of Table 4: projected FY2014 revenue), it is likely to provide a buffer during the economic Shareholders % holdings downturn as it proves more resilient in earnings compared to other sectors such SUNWAY BHD 34.5 as offices and hotels. As at 31 December 2013, SunREIT has a diversified mix Cornerstone Investors: of tenant, totalling 1,022 tenants as well as four hotel master leases and one CAPITAL GROUP 11.1 COMPANY hospital master lease. The top 10 tenants only account for 16.4% of total EPF 9.9 revenue of SunREIT. This allows SunREIT to spread the risk of over-reliance NOMURA 8.4 on key tenants. SKIM AMANAH 7.5 SAHAM BU Past rental reversion has indicated SunREIT is sustainable, consistently having Free float (Maybank 42.6 IB’s estimates) positive rental reversion rates for all properties. In FY2013, rental reversion Source: Team’s estimates remains positive for all properties, with reversion of 18.1% for Shopping Mall, achieving a new high with expectation of continued Graph 3: Free Float of M-REIT pattern in the future as predicted by management. Thus, we expect rental reversion rates to remain positive and continue growing in the near future. The Free float (MYR m) diversity in tenant mix and positive rental reversion rates all indicate an organic growth within the company that is likely to continue in the near future. KLCC Staples…

IGB REIT Sized up on several fronts Since its listing in the main market on 8 July 2010, SunREIT has grown to be PAV REIT the second largest REIT in Malaysia in terms of its property value of RM 5.18 SunREIT billion (refer Graph 2), only second to KLCC Staples REIT. This is further Quill Capita supported by strong pipeline of potential asset injection from its sponsor, complementing its size and serve as a potential for future growth. CMMT

Axis REIT It is evident that SunREIT offers one of the highest free float among 0 1000 2000 3000 Malaysian REITs in terms of share liquidity, with a free float of 42.6%. The free float takes into consideration its sponsor and the cornerstone investors of Source: Bloomberg, Malaysia KE 34.5% and 36.9% each (refer Table 4). SunREIT’s free float of RM 1.99 billion is equivalent to 22% the sum of other M-REIT’s free float of RM 8.956 billion (refer to Graph 3). This proves to be an attractive feature, as interest for M- REITs has been low in the past, partially due to the size of free float.

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Picture 1: SunREIT’s Assets Township synergistic benefits Of the 12 assets that SunREIT holds as at 31 December 2013, 5 assets are located within Sunway Resort City (SRC) in Bandar Sunway (refer Picture 1), a vibrant and comprehensive township. These assets account for 77% of SunREIT’s total asset value. With this township and a substantial property ownership of SunREIT in SRC, these 5 assets are projected to contribute 81.3% of total revenue in FY2014.

Bandar Sunway’s integrated resort city concept, which include theme parks, medical, retail and tertiary education (refer Picture 2) will have positive spill- over effects. Residents from Bandar Sunway and Sunway South Quay in the future will draw activity to Sunway Pyramid Shopping Mall. Education institutions within the vicinity of Sunway Pyramid Shopping Mall such as Source: Company data Sunway University and Monash University are also likely to benefit the mall. The mall and hotels under SunREIT will also attract spill-over tourism from Picture 2: Sunway Township Theme Park and Sunway Medical Cenre. These activities result in a synergistic benefit to SunREIT and as a whole.

Investment Summary Sustainable organic growth SunREIT has 3 main segments with total property value of RM5.18 billion which helped to spread risks of investment. These properties are geographically spread across the Valley, and Ipoh; some of the

Source: Company data developing townships in Malaysia, thus providing further opportunities for growth. Graph 4: Projected tenancy expiry According to 1Q2014 results, tenant expiry schedule was well spread out; 20.8% expiring in FY2014, 10.4% expiring in FY2015, 9% expiring in FY2016 and a majority (56%) expiring after FY2016 (refer Graph 4). Projected tenancy expiry schedule was calculated using NLA for the retail and office properties. NLA of was excluded as it was closed due to refurbishments. Therefore, volatility of rental income is reduced by the fact that not all leases will expire in the same year.

Positive rental reversion exercise for every 3 years was one of the AMIs of SunREIT to ensure rental rates to be in line with market rates. Sunway Pyramid is in a position to demand high rental increases even after several new malls had opened in Klang Valley, proving a point that tenants trust the ability of SunREIT to help realize their business objectives. Only retail and office properties were subjected to rental reversion as hotel and others were bound by Source: Company data master leases. Sunway Pyramid Shopping Mall and Sunway Carnival Shopping Mall achieved a new high in rental reversion since listing three years ago which Picture 3: Artist’s impression of was 18.1% and 21.0% respectively. These factors allow SunREIT to secure its SPP future earnings, indicating a sustainable organic growth, increasing investors’ confidence.

Completion of refurbishment of Sunway Putra Place Sunway Putra Place (SPP) is an integrated 3-in-1 mixed-use development comprising a mall, a hotel and an office block. Refurbishment of SPP is an asset turnaround exercise, one of the growth drivers of SunREIT (refer Picture 3). Estimated completion is projected to be around early CY2015. Source: Company data Stabilized ROI forecasted by management is 7.5-8.5% where the stabilized year for the mall and office is 2 years while the hotel is 3 years. After the refurbishment, Sunway Putra Mall will be repositioned as a lifestyle urban-chic mall that caters to mid and mid-upper income group shoppers which will enhance the competitiveness of SPP. Management expects occupancy rate of above 90% when the mall reopens in 1Q2015 which provides extra assurance for the achievement of targeted double NPI post refurbishment.

SPP is situated at a strategic location (opposite PWTC) where there is high degree of connectivity to public transportation which provides immediate

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catchment. Easy access to KTM and LRT station encourage flow of visitors to Picture 4: Strategic Location of SPP (refer Picture 4). SPP Strong financial position With an optimal gearing of 31% maintained by SunREIT, returns to unitholders will not be affected by the cost of financing. The gearing level also allows further borrowings if necessary. SunREIT’s unencumbered assets of RM315 million will enable SunREIT to secure future borrowings if necessary. To mitigate the interest rates fluctuation risks, SunREIT maintains an 80:20 of

Source: Company data fixed to floating rate interest borrowings.

Effective mitigation of investment risks SunREIT is faced with several investment risks. Through management initiatives, SunREIT has effectively mitigated a majority of their risks. For example, the completion of chiller retrofit in Sunway Pyramid Shopping Mall will enable cost savings, reducing the impact in cost hikes.

Valuation Target Price RM 1.56. We adopted three methods of valuation in our report, which is the discounted cash flow model, dividend discount model and the dividend yield model. The discounted cash flow model is used as a fundamental basis for the dividend discount model and dividend yield model. However, we favour the dividend yield model as it is more practical and takes into consideration the macro- factors of the industry. This brings about a valuation of SunREIT at RM 1.56 per share.

Discounted Cash Flows Valuation (DCF) The DCF model had valued SunREIT based on the following assumptions: (i) A cash flow projection of 3 years into the future. (ii) Weighted Average Cost of Capital of 8%

Key Assumptions used in the Discounted Cash Flow model: Revenue – Revenue is broken down into segments to provide a more accurate forecast as different segments in the REIT yields revenue at different rates. Both retail and office sector has a similar basis for revenue forecasting, based on expected rental reversion, average occupancy rate, and average rent rate per square feet of NLA, obtained from past trends and the latest financial results. The hotel sector and others (only Sunway Medical Centre) is forecasted based on the hospital master lease agreement.

Residual Cash Flow – The perpetual growth rate of 5% is used as it is in line with our FY2014 to FY2016 forecast and growth is also expected to at least exceed the Malaysian inflation rate of 3.5%. Table 5 WACC Assumptions Cost - Forecasted based on past trends and adjusted for any known event that will affect cost in the future such as refurbishment of Sunway Putra Place and Risk free rate of return 4.11% cost saving measures. Market risk premium 6.80% Beta 0.85 Weighted Average Cost of Capital (WACC) – Assumed a WACC of 8.0% Cost of equity 9.85% (refer Table 5). This was calculated using Capital Asset Pricing Model (CAPM) to arrive at the cost of equity of 9.85% and the cost of debt of 3.85% was Average Cost of debt 3.85% arrived at using company data from its quarter presentation as at 31 December Equity value 0.7 2013. The beta of 0.85 was sourced from market estimates. The risk free rate of Debt value 0.3 return was translated from the yield of 10-year Malaysian government WACC 8% securities as at 31 December 2013. The market premium arrived at based on A. Damodaran’s estimates of 6.80%. Source: Team’s Estimates, Company data, Market data Dividend Discount Model (DDM) SunREIT’s distribution of income to its unitholders is steady and transparent; hence, the DDM offers a decent valuation. Our DDM model uses a dividend

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forecast for the next 3 years and assume the same cost of equity in our DCF model of 9.85%. We also assume a perpetual growth of 5%. We use a 100% distributable income payout and derive a share price value of RM 1.61 (Appendix 10). This share price of RM 1.61 is used as a reference only.

Dividend Yield Model While we have derived a valuation of RM1.81 per unit for SunREIT from the DCF model and RM 1.61 per unit from DDM, we feel that applying a discount on the price derived from the DCF model may be appropriate given the various macro factors affecting the investment appetite for REITs in Malaysia. Key factors are the continued outflow of foreign investment funds from Malaysia due to US tapering of quantitative easing and the consequential increasing interest rate environment which adversely affects the attractiveness of REITs.

Our view is that REITs need to offer a minimum yield of 5%-6% to be attractive for REIT investors. We further opine that Sunway REIT, due to its solid growth prospects and bigger size and liquidity may trade at the lower end of the yield. We have therefore assumed a yield of 5.4% in valuing Sunway REIT based on the past dividend yield achieved by the trust as per the latest annual report. Taking that into account and applying our forecasted DPS of 8.4 sen per unit, we believe the fair value of Sunway REIT will be RM 1.56 (refer Appendix 11). We therefore initiate coverage of Sunway REIT with a buy call on Sunway REIT, as there is a potential 20% upside based on its market price today of RM 1.30.

Risk towards Intrinsic Share Price Table 6: Sensitivity Analysis Changes to the intrinsic share price of the company would impact the target share price of the company as it would affect the investors’ perspective of the company. As the intrinsic share price is calculated using the DCF model, the model is subject to a sensitivity analysis. Three key variables were included in the sensitivity analysis to analyse the impact on intrinsic share price.

Growth rate was a major factor which will influence the changes in share price. Source: Team’s Estimates Share price changes adversely by 39% when growth rate decreases 1%, and spikes to a favourable increase of 77% when growth rate increases a mere 1%. The original growth rate of 5% was based on our FY2014 to FY2016 forecast. However, there are many uncertainties which cannot be forecasted. Market may be depressed in the future and our assumptions will no longer hold. On the other hand, SunREIT may acquire more yield accretive properties from sponsor or third parties in the future and growth rate may surpass management . assumptions.

If revenue stream increase by 5% due to strong rental reversion achieved by SunREIT or due to positive AEIs, share price is expected to increase to RM2.08. However, if revenue is expected to decrease by 5% due to slow down of the overall market or oversupply condition in office sector, competitive environment in retail and hotel sector, share price is expected to decrease to RM1.54. Overall, share price react moderately to changes in revenue (15%). Table 7: Peer Group Share price was less sensitive to property operating costs as it only changes for Comparison 2-4% when the costs decrease or increase by 5%. EPU DPU Div Yield (annualised) Peer Comparison Sun- 7.88 8.31 6.80* Peer comparison was done with CMMT, Pavilion REIT and IGB REIT which REIT are retail focused REITs, providing us with the nearest comparison with IGB 8.84 5.26 6.23 SunREIT, a diversified yet retail focused REIT (refer Table 7). It is difficult to REIT make a fair comparison that SunREIT’s year end is different from its CMMT 12.98 8.85 5.98 competitors, having a June year end when its peers are having a December year Pavilion 10.88 7.36 5.75 end. REIT *forecasted as at Q2FY2014 Earnings per unit (EPU) of SunREIT were the lowest among all. However Source: Company data, Team’s SunREIT had the second highest distribution per unit (DPU), (only 0.54 sen Estimates

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lower than CMMT), indicating that even with lower earnings, SunREIT was able to make higher distribution to unitholders. This can be seen as an incentive to attract more investors to invest in SunREIT compared to other REITs mentioned, despite all having almost a similar asset portfolio.

In terms of dividend yield which is the key measure for investor returns, SunREIT has the highest dividend yield indicating that the returns shareholder gained in contrast to their investment is the highest if they choose SunREIT. This also indicates that the share price SunREIT is trading at allows the investors to maximise their returns and as a result indicates that SunREIT would be the preferred investments to investors, in line with our BUY decision.

Financial Analysis

Earnings Graph 6: Earnings per Unit SunREIT enjoys steady earnings per unit growth of 4.71% based on our Trend forecasted earnings from the year 2013 to 2016E, with a slight drop to 7.5 cents per unit in FY2014 due to closure of SPP for refurbishment, which caused a loss in revenue and earnings (Graph 6).

Strong Rental Increase in Retail sector Based on past trends, SunREIT has recorded a healthy increase in rental reversion of 15-20% in the retail sector alone, despite depressed economic conditions in Malaysia. This is probably due to SunREIT’s retail income Source: Company data, Team’s derived primarily from Sunway Pyramid Shopping Mall, which is located in a estimates vibrant township that attracts customers from the middle to upper income group. Further, Sunway Pyramid Shopping Mall is also a centre of tourist attractions. We assume that the trend of rental rate increase in the retail sector, to remain in the foreseeable future, which will translate into steady earnings growth.

Asset Enhancement Initiatives We had assumed that refurbishment of SPP will double the increase in rental income as compared to pre-refurbishment. These initiatives will bring in extra revenue which translates into earnings in the future. Other AEI initiatives are likely to increase the rental income of SunREIT’s properties as well such as the chillers retrofit at Sunway Pyramid Shopping Mall, the expansion of Menara Sunway and the refurbishment of Sunway Hotel Seberang Jaya.

Active Acquisition Strategy To date, management has actively acquired various assets, including SPP and Sunway Medical Centre. Should management continues to acquire assets with the help of the sponsor, more assets will translate into higher EPU and DPU in the future. Table 8: Cash Flow Position 2013 2014 2015 2016 Cash Position Net cash Having analysed historical figures, cash generated from operations shows a flow from/(in) 297,469 333,523 373,497 417,799 positive position. It will be assumed that this pattern will continue in the future operating with gradual increase, given that the newly refurbished SPP will bring in more activities Net cash income in future. flow from/(in) (371,618) (61,796) (61,896) (61,996) Cash from investing activities has been showing negative figures with a huge investing activities increase to RM 372 million from RM 26 million in FY2013, which is mainly Net cash due to expenditure incurred for the refurbishment and it can be assumed to be flow infrequent. We assumed that the trend for cash from investing activities will from/(in) 106,869 (285,688) (306,639) (321,971) financing maintain at around negative RM 26 million in the near future after the activities refurbishment to take into account frequent maintenance and repairs needed for Net upkeep of the assets. increase in cash 32,720 (13,961) 4,961 33,832 and cash Cash from financing activities shows a negative figure in FY2012, mainly due equivalent to repayment of term loans and commercial papers. In FY2013, cash from s Source: Team Estimates financing activities shows a positive figure, also due to SunREIT taking up

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additional loans and commercial papers. It was assumed that SunREIT will be committed to interest payments in the future of the new loans taken up in 2013, causing the cash flow from financing in future will continue to be negative.

REITs are committed to pay at least 90% of their distributable income. SunREIT has confirmed that they are expected to distribute 100% of their distributable income as dividends in the future. Such distributions will further decrease cash from financing activities.

Overall, the company has shown strong net cash position in previous years despite adverse figures reported and it was assumed that the company will have the flexibility and capacity to raise further finance via debt in the future.

Stable financial position In Malaysia, REITs are subjected to a gearing limit of 50% of the total asset value of the fund. SunREIT has a gearing of 31%, with debt headroom of RM 0.8-1.0 billion as at 30 June 2013. This safe margin allows SunREIT to fund its capital expenditure plans and future acquisitions before reaching comfortable level of 40-42%. By maintaining gearing at this level, SunREIT retains flexibility to undertake more borrowings and refinance matured borrowings. Diagram 4: Fixed:Floating Debt SunREIT has unencumbered assets worth RM315 million (6.1% of total ratio assets) as at 30 June 2013, which can be used to secure future borrowings.

20% SunREIT is committed to maintain 80:20 of fixed to floating rate interest borrowings in view of rising interest rates (refer Diagram 4). This way, risk Fixed exposure to high interest expense caused by hikes in interest rates will be 80% Floating significantly reduced. Conversion of the floating rate borrowings into fixed rate via interest rate swaps or other medium term note programs is an on-going process.

Source: Company data Corporate Responsibility Sunway Resort City (SRC) was recognized as Malaysia’s first green township in 2012. SRC was awarded the Silver Rating by Malaysia’s Green Building Index (GBI). To be recognized as a sustainable township, GBI requires that a minimum 15% of the township to be green. SRC has doubled that requirement with approximately 30% of the development being green. Some of the green features achieved by SRC include a lower ambient temperature to surrounding environment, reducing travel by car by providing proper transport systems and pedestrian walkways, and providing handicap friendly infrastructure.

SunREIT’s concern with the environment had resulted in the participation of

the Earth Hour event for 5 consecutive years since 2009. Sunway Pyramid

Shopping Mall and Sunway Carnival Shopping Mall both joined this event by

switching off non-essential lights. Furthermore, SunREIT had joined the

initiative of the sponsor to transform SRC into the first 100% smoke free

township by 2018 has resulted in SunREIT’s assets, namely Sunway Pyramid

Shopping Mall, Menara Sunway and Sunway Medical Centre being gazetted as

smoke free-establishment. This indicates SunREIT’s commitment to ensuring a

healthy environment for the community.

Investment Risks

Operational risks

Renovation, asset enhancement works or physical damage to assets may

disrupt the business and operations and collection of rental income or

otherwise adversely impact SunREIT’s financial condition.

SPP is currently undergoing a refurbishment exercise. During the period of

such renovation works, the business and operations of the properties may be

disrupted and it may not be possible for SunREIT to collect rental income on

premises affected by such renovation works. Any disruption to the businesses

or operations of the properties could limit SunREIT’s ability to collect rental

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income, reduce occupancy and visitor traffic or impose unbudgeted costs on SunREIT which could result in an adverse impact on SunREIT’s financial condition and results of operations.

Due to the closure of Sunway Putra Mall, performance of both Sunway Putra Hotel and Tower were affected so the refurbishment plans had been accelerated to mitigate the adverse effect. However, there was no major adverse impact on the dividend distribution showing SunREIT commitment to have the unitholders’ interest in mind.

Rising costs impacts profitability. One major factor impacting the future costs of SunREIT is the electricity tariff hike starting 1 January 2014. The average electricity tariff in Peninsular Malaysia will be up 4.99 sen per kWh or 14.89% from the current average rate of 33.54 sen/kWh to 38.53 sen/kWh. Furthermore, assessment hikes in Kuala Lumpur, which affected a total of 507,800 properties with 56% being commercial structures, are likely to drive up costs of various REITs as well. These assessments are expected to affect properties in other regions as well, leading to a rise in cost all round.

Thus, in light of these matters, SunREIT would have to carefully control its cost in order to maintain its income, allowing for distribution to unitholders to remain at an acceptable level. Furthermore, there are incremental growth opportunities for retail sector as plans were put in place to increase NLA through development of Sunway Pyramid phase 3 which is expected to bring in more visitors in that area.

Related party transactions risk There is also a risk that SunREIT’s acquisitions from its sponsor are related party transactions. However, such acquisitions require extensive disclosure given Bursa Malaysia stock exchange’s regulations on related party transactions. Despite a comprehensive list of rules, it could be subjected to abuse.

Acquisition & Investment risk Risk that assets are not yield accretive and distort existing portfolio which is retail focused or difficulty in acquiring quality assets. SunREIT remains very selective and manages such risk by evaluating potential acquisitions against an approved investment criteria. SunREIT has maintained that they will only acquire assets that projects a minimum 6.5% yield.

Financing & Refinancing risk The risk that funding will not be available to meet related requirements when due. To mitigate such risks, the Manager has established a 7-year commercial paper and is fully underwritten by a financial institution. The programmes with different maturity profile will enable a more manageable refinancing when due. The average maturity period of SunREIT’s borrowings is 2.6 years as at 31 December 2013. In addition, the amount of unutilized facility available to fund capital expenditure and acquisition under the CP Programme is RM1.285 billion as at 30 June 2013. Graph 7: Increasing BLR Interest rate risk Base Lending Rate The risk that adverse movements in floating interest rates will affect financial 7 performance adversely. As at 31 December 2013, approximately 78% of the

6.5 6.6 total outstanding borrowings of SunREIT is on a fixed rate basis whilst the 6.3 balance 22% is on floating rate basis. SunREIT plans to convert more floating 6 6.05 5.8 rate borrowings to fixed rate via interest rate swaps when the situation warrants 5.5 5.55 or other medium term note programme. SunREIT has successfully mitigated the 5 impending adverse conditions, judging from the increases in base lending rate

in Malaysia (refer Graph 7). Source: Bank Negara Malaysia

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.

Appendix 1: Statement of Financial Position

2011 2012 2013 2014F 2015F 2016F Asset Non-current assets Plant and equipment 122 437 1,283 2,099 2,915 3,731 Investment properties 4,379,000 4,630,000 5,184,000 5,246,080 5,308,160 5,370,240

Current assets Trade receivables 9,383 11,650 13,238 12,196 13,473 14,547 Other receivables 5,068 7,035 4,962 4,962 4,962 4,962 Cash and bank balances 58,606 25,799 58,519 44,558 49,519 83,351

Total assets 4,452,895 4,683,376 5,269,532 5,309,895 5,379,029 5,476,831

Equity and liabilities Unitholders' funds Unitholders' capital 2,350,437 2,361,487 2,690,002 2,696,352 2,696,352 2,696,352 Undistributed income 420,613 646,844 816,467 868,745 954,132 1,065,607

Non-current Liabilities Borrowings 1,502,025 318,085 1,317,850 1,317,850 1,317,850 1,317,850 Long term liabilities 52,029 53,920 41,956 44,054 44,054 44,054

Current Liabilities Trade payables 815 3,067 3,383 2,407 2,818 2,950 Other payables 67,626 54,934 85,105 65,718 49,054 35,250 Borrowings 59,350 1,245,039 314,769 314,769 314,769 314,769 4,452,895 4,683,376 5,269,532 5,309,895 5,379,029 5,476,831

Units in circulation 2686898 2696462 2919423 2923685 2923685 2923685 ('000)

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Appendix 2: Statement of Comprehensive Income

2011 2012 2013 2014F 2015F 2016F Gross revenue 327,416 406,426 415,946 410,289 453,225 489,385 Property operating (83,401) (107,728) (106,750) (103,005) (120,566) (126,213) expenses Net property Income 244,015 299,198 309,196 307,284 332,659 363,172

Manager's fee (19,003) (22,601) (24,271) (27,683) (30,557) (33,740) Trustee's fee (783) (846) (991) (1,116) (1,256) (1,415) Auditor's remuneration: Statutory audits (158) (157) (153) (156) (156) (156) Overprovision in prior - 40 - - - - year Other services (65) (132) (80) (80) (80) (80) Tax agent's fee (97) (21) (25) (23) (23) (23) Valuation fees (250) (380) (825) (825) (825) (825) Other trust expenses (2,410) (4,913) (1,814) (1,814) (1,814) (1,814) Finance costs (55,190) (81,196) (63,604) (73,858) (73,858) (73,858) Total expenses (77,956) (110,206) (91,763) (105,555) (108,569) (111,911)

Income before taxation 166,059 188,992 217,433 201,729 224,090 251,261 Income tax expense - - - Profit for the year/period 166,059 188,992 217,433 201,729 224,090 251,261

Appendix 3: Statement of Cash Flow

2011 2012 2013 2014F 2015F 2016F Operating Activities Cash receipts 338,755 414,688 423,601 465,961 512,557 563,813 from customers Refundable 72,383 10,811 7,801 8,191 8,601 9,031 security deposits from customers Cash paid for (109,210) (141,621) (133,933) (140,630) (147,661) (155,044) operating expenses Net cash flow 301,928 283,878 297,469 333,523 373,497 417,799 from/(in) operating activities

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Investing activities Capital (3052756.0 (27716.00) (372896.00) (62896.00) (62896.00) (62896.00) Expenditure 0) Interest received 1,093 1,537 1,278 1,100 1,000 900 Net cash flow (3,051,663) (26,179) (371,618) (61,796) (61,896) (61,996) from/(in) investing activities

Financing activities Proceeds from 1,486,792 320,000 6,350 issuance of new units Proceeds from 1,168,544 7,077,000 328,100 issuance of long term loans Drawdown of 1,514,000 1,391,600 term loan Drawdown of 254,086 862,100 3,325,000 366,000 366,000 366,000 revolving credits Repayment of (3,219,800) (6,312,000) (328,100) long term loans Repayment of (189,000) (221,450) (4,025,000) (366,000) (366,000) (366,000) revolving loans/credits Interest paid (47,209) (72,928) (51,877) (54,471) (57,194) (60,054) Gain on 316 termination of derivative financial instrument Payment of unit (77,278) (4,351) (3,370) (3,539) (3,715) (3,901) issuance and financing expenses Distribution paid (133,050) (194,537) (222,884) (234,028) (245,730) (258,016) Net cash flow 2,808,341 (290,506) 106,869 (285,688) (306,639) (321,971) from/(in) financing activities

Net increase in 58,606 (32,807) 32,720 (13,961) 4,961 33,832 cash and cash equivalents Cash and cash 58,606 25,799 58,519 44,558 49,519 equivalents at beginning of period Cash and cash 58,606 25,799 58,519 44,558 49,519 83,351 equivalents at end of period

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Appendix 4: Forecast of FCF

2011 2012 2013 2014E 2015E 2016E RM'000 RM'000 RM'000 RM'000 RM'000 RM'000 GROSS REVENUE RETAIL: Sunway Pyramid Shopping 208,181 228,509 239,055 249,584 269,082 285,166 Mall Sunway Carnival 24,632 28,197 32,896 35,572 38,554 38,626 SunCity Hypermart 4,120 4,552 4,546 4,782 4,926 5,182 Sunway Putra Mall 634 31,010 19,649 - 20,469 40,939 237,567 292,268 296,146 289,938 333,031 369,913

HOTEL: Sunway Resort Hotel&Spa 30557 35119 31689 27176 23643 20806 Pyramid Tower Hotel 20034 22758 21802 20494 19264 18108 Sunway Hotel Seberang Jaya 5069 4611 3409 4750 5225 5748 Sunway Putra Hotel - 9067 12089 6,500 10,094 10,290 55660 71555 68989 58920 58,226 54,952

OFFICE: Menara Sunway 15,561 16,213 16,975 17,048 17,584 17,810 Sunway Tower 16,962 16,828 15,765 15,287 15,292 15,940 Sunway Putra Tower 1,666 9,562 8,520 9,814 9,083 9,336 34,189 42,603 41,260 42,149 41,959 43,086

OTHER: Sunway Medical Centre - - 9,551 19,282 20,009 21,434

TOTAL GROSS REVENUE 327416 406426 415946 410,289 453,225 489385

Costs Property Operating Expenses 81,621 103,973 107,052 103,005 120,566 126,213

NET PROPERTY INCOME 245795 302453 308894 307,284 332,659 363,172

Manager's Fees 19003 22601 24271 27683 30557 33740 Trustee's Fees 783 846 991 1116 1256 1415 TOTAL EXPENSE 19786 23447 25262 28799 31813 35155

OPERATING CASH FLOW 226009 279006 283632 278485 300,846 328017

CAPEX 2027 26179 61618 62896 62896 62896

NET CASH FLOW 223982 252827 222014 215589 237950 265121 9279235

WACC at 8% 0.9259 0.8573 PV of FCF 215589 220318 227288 7955088 NPV 8618283

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Assumptions: (1) According to management assumption, DPU CAGR of 5%, we assume the growth rate is 5% p.a. Target Share Price 1.81

Appendix 5: Assumptions for retail segment

Retail Segments Net Lettable Average NLA Average Avg Area (2013) Occupancy Occupied Income @ Inc/Sq.ft @ (Sq Ft) Rate (%) (Sq Ft) 2013 (RM’000) 2013 (RM) Sunway Pyramid Shopping 1,713,055 98.52 1,687,702 239,055 139.55 Mall Sunway Carnival 493,677 92.92 458,725 32,896 66.63 SunCity Hypermart 181,216 100 181,216 4,546 25.09 Sunway Putra Mall 507,171 - - 10,235 38.74 2,895,119 296,146

Forecasts(Revenue) (RM’000) 2011 2012 2013 2014E 2015E 2016E Sunway Pyramid Shopping Mall 208,181 228,509 239,055 249,583 269,082 285,166 Sunway Carnival 24,632 28,197 32,896 35, 572 38,554 38626 SunCity Hypermart 4,120 4,552 4,546 4,782 4,926 5,182 Sunway Putra Mall 634 31,010 19,649 20,469 40,939 237,567 292,268 296,146 289,938 333,031 369,912 *represents ROI, which is effectively the NPI

Sunway Pyramid Shopping Mall 1) In year 2013, 410355 Sq.ft of Pyramid secured a rental reversion of 18.1%, which affects the revenue for pyramid for 2014. Calculation: 410355 Sq.ft 410355 Sq.ft X 141.65 X 118.1% 68,647,733.97 1277347 Sq.ft 1277347 Sq.ft X 141.65 180,936,202.55 Total income for 2014 249,583,936.52

2) 55.8% of NLA in PYRAMID in due for renewal in the Year 2014, which means affecting the income for 2015E. From the rental reversion of 2014 Q1, it can be estimated that the rental reversion will yield an increase of 14.4% for PYRAMID. Calculation : 55.8% Income 2015 1713055 Sq.ft X 55.8% X 141.65 X 114.4% 154,898,819.89 Income @ 2014 68,647,733.97 Remaining NLA of 321462 X 141.65 45,535,092.30 Total income 2015 269,081,646.16

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3) 15.1% of NLA is due for renewal in FY 2015, which affects revenue of 2016. From past pattern, rental reversion of 2013 and 2014 achieved an increase of 18.1% and 14.4%, which averages 16.25%. Calculations: 15.1% Income 2016 1713055 Sq.ft X 15.1% X 141.65 X 116.25% 42,594,918.79 Income @ 2015 154,898,819.89 Income @ 2014 68,647,733.97 Remaining NLA of 62791 X 141.65 8,919,842.15 Total income 2016 275,061,314.80

4) Pyramid phase 3 will be expected to be ready at the FY 2015. Therefore, it can be forecasted that extra revenue will be generated by Phase 3 of Pyramid at the FY 2016.

NLA of Phase 3 = 62000 Sq Ft. Assuming that the rent rate/Sq.ft is to follow the original yield from Pyramid at 2016, which is 275061315 / 1687702 = RM 162.98/Sq.ft

Therefore, the extra revenue generated by the Phase 3 for the FY 2016 will be RM 162.98 X 62000 = 10,104,760.00

Sunway Carnival 1) Carnival - 36% of NLA is due for renewal in the FY 2013, which affects rental income in 2014. Rental reversion increase is 21% in the year of 2013. Calculation :

36% NLA 2014 493677 Sq.ft X 36% X 71.71 X121% 15,420,927.23 Remaining NLA 2014 281001 Sq. ft X 71.71 20,150,581.71 Total income for 2014 35,571,508.94

2) Rental reversion at 2014 is 55.8% of NLA, which affects revenue of 2015. According to the presentation deck, the increase will be 15.1% Calculation :

55.8% Income 493677 Sq.ft X 55.8% X 71.71 X115.1% 22,736,946.47 36% Income@2014 15,420,927.23 Remaining NLA 5530 X 71.71 396,556.30 Total income for 2015 38,554,430.00

3) Rental reversion at 2015 is expected to be the remaining NLA 5530 Sq ft. This will translate into revenue for 2016 at an increase of average 18% (Average of 21% and 15.1%) Calculation: 55.8% NLA Income B/F 22,736,946.47 36% NLA Income B/F 15,420,927.23 5530 Sq ft NLA 5530 Sq.ft X 71.71 X 118% 467,936.43 Total income for 2016 38,625,8180.14

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SunCity Hypermart There is only one tenant at SunCity Hypermart which is Giant, and is due for renewal at 2014, which means the rental reversion will only affect the forecast for the year 2015. Therefore the forecast for the year 2014 is rather straightforward. Growth rate will be adjusted at an average of 5.2% ( Avg of 10.5% and -0.1% )

2014 Income: 4546000 X 105.2% = 4,782,392.00

The rental reversion of Giant Hypermart can be forecasted as the growth yield by the Hypermart over the previous 2 years, which is 5.2%. However, there was a decrease in revenue in the FY 2013 compared to FY 2012, which indicates that the rental reversion should be a bit more conservative. The forecasted increase in rental reversion will be 3%, after adjusted for such a decrease in revenue.

2015 Income: 4546000 X 103% X 105.2% = 4,925,863.76 2016 Income: Adjusted for growth rate 5.2% = 5,182,008.68

Sunway Putra Mall Sunway Putra Mall is expected to reopen at January 2015, it is expected that the refurbishment of the mall will create additional lettable space of 76000 Sq.ft, so total NLA 507171+76000 = 583171 Sq.ft. The expected rent rate per Sq.ft post- refurbishment is expected to be RM6.5 Per Sq.ft Per Month, which translate into RM 78 Per sq.ft Per annum. The occupancy rate post refurbishment is expected to be 90% as per the management assumption.

Forecasted revenue for the FY 2015 583171 X 90% X 78 X 6/12 months 20,469,302.00

Forecasted revenue for FY 2016 583171 X 90% X 78 40,938,604.20 (will be accounted for as one full FY)

Appendix 6: Assumptions for hotel segment

Forecast (RM’000) 2011 2012 2013 2014E 2015E 2016E Sunway Resort Hotel & Spa 30,557 35,119 31,689 30,738 29,816 28,922 Pyramid Tower Hotel 20,034 22,758 21,802 21,148 20,514 19,898 50,591 57,877 53,491 51,886 50,330 48,820

Sunway Hotel Seberang Jaya 5,069 4,611 3,409 4,750 5,225 5,748 Sunway Putra Hotel 9,067 12,089 6,500 9,571 9,571

Total rent

All hotels are bound by master leases where the total rent will be the higher of variable rent or guaranteed rent.

To calculate variable rent, detailed information on base rent, gross operating profit and master lease expenses will be needed, in the absence of such information, average growth rate over the past 3 years ( YA2011-YA2013) together with the management’s assumptions were used to calculate the variable rent. Meanwhile, guaranteed rent will be different for each hotel as they are under different master leases.

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Sunway Resort Hotel &Spa and Pyramid Tower Hotel

Guaranteed rent in respect of Sunway Resort Hotel & Spa and Pyramid Tower Hotel consists of RM42.0 million for FY2011 and FY2012 and RM31.6 million for each of the financial years for the remaining 10-year term.

For Sunway Resort Hotel&Spa, YA2014 revenue was forecasted to be decrease of 14% based on 1Q2014 results released. As for YA2015 and 2016, revenue was forecasted to be dropping by 13% and 12% respectively, a lower decrease by 1% as compared to YA2014. This is because despite the fall in revenue in YA2014, occupancy rate was increasing, showing signs of improvement, but management expect hotel segment to be soft so the forecast remain to be conservative.

From YA2014-YA2016, variable rent is higher than guaranteed rent so variable rent is used as total rent.

Sunway Hotel Seberang Jaya

Guaranteed rent in respect of Sunway Hotel Seberang Jaya consists of RM4.5 million for FY2011 and FY2012 and RM3.4 million for each of the financial years for the remaining 10-year term.

Refurbishments completed on May2013 and subsequently occupancy rate increased to 71.3% for the remaining one month (June2013) as compared to average occupancy rate of 49.9% for last 11months, so revenue is expected to increase in following financial years. As supported by 1Q2014 results, forecast was done by increase of 1% for every following year based on YA2012 revenue.

Sunway Putra Hotel

Guaranteed rent in respect of Sunway Putra Hotel consists of RM9.1 million for FY2012, RM12.1 million for FY2013, RM9.8 million for FY2014, RM9.1 million for FY2015 to FY2021 and RM2.3 million for FY2022.

However, there was a variation to Master Lease, for YA2014 (“3rd Fiscal Year”) applicable amount of the Guaranteed Rent shall not apply. The Lessee forecasts that the differential sum between variable rent and guaranteed rent is approximately RM3.3 million which shall be adjusted in equal proportions from FY 2016 (5th Fiscal Year) until the 11th Fiscal Year and added to the Guaranteed Rent from the 5th Fiscal Year until the 11th Fiscal Year.

Differential sum per annum: RM 3.3 million / 7 years = RM 471,000 per year Therefore, new guaranteed rent for FY2016 will be RM 9,571(9,100 + 471)

Due to disruptions in the refurbishment in Sunway Putra place, we expect the revenue for FY2014 to be at guaranteed rent of RM 9.8 million.

We expect that upon the completion of refurbishment in 1QCY2015 (3QFY2015), revenue attributable to Sunway Putra Hotel will increase beyond guaranteed rent for each of the attributed years of forecast.

We assume that it will be a growth from the variable rent in FY2013 (RM 12.1 million – RM 2.3 million = RM 9.8 million), that is 3% in FY 2015 and 5% growth in FY 2016, in line with a doubling of NPI expected by management.

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Revenue (RM’000) FY 2015 9,800 X 1.03 10,094 Fy 2016 9,800 X 1.05 10,290

Appendix 7: Assumptions for office segment

Office Sector NLA (2013) Avg Occ. NLA Average Avg Inc/Sq.ft (Sq Ft) Rate Occupied Income @ 2013 @ 2013 (RM) (RM)

Menara Sunway 290805 99.03% 287984 16,975,000 58.94

Suway Tower 268306 83.72% 224626 15,765,000 70.18

Sunway Putra Tower 317051 77.90% 246983 8,520,000 34.5

876162 41,260,000

Menara Sunway

Despite the oversupply situation, demand for space in Menara Sunway remains strong as 71.4% is occupied by the Sunway Group. Occupancy rates have consistently remained above 98%. Expansion of the net lettable area (NLA) by 14,193 sq.ft. have been fully occupied as well. All these factors indicate that revenue is likely to increase steadily in the immediate future. This is further supported by a lease expiry of 62.5% of NLA in FY2014, which would result in an increase in rental rates as shown by the positive rental reversion rate so far. It is possible due to the refurbishment that rental rates for Menara Sunway had increased as evidenced from the rental reversion rates.

1) In year 2013, 18357 Sq.ft of Menara Sunway secured a rental reversion of 6.9%, which affects the revenue of Menara Sunway for 2014. Calculation: 18357 Sq. ft 18357 Sq.ft X 58.94 X 106.9% 1156616.93 269627 Sq. ft 269627 Sq.ft X 58.94 15891815.38 Total income for 2014 17048432.31

2) 62.5% of NLA in Menara Sunway is due for renewal in the Year 2014, which would affect the income for 2015E. From the rental reversion of 2014 Q1, it can be estimated that the rental reversion will yield an increase of 5%. Calculation 62.5% Renewal 290805 Sq.ft X 62.5% X 58.94 X 105% 11248155.65 Income B/F @ 2014 1156616.93 Remaining NLA (287984 - 18357 - (290805 X 62.5%))X 5,179,286.19 58.94 Total income for 2015 17584058.77

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3) 16% of NLA is due for renewal in FY 2015, which affects revenue of 2016. From past pattern, rental reversion fro 2011 to 2013 shows an average of 6.73%.

Calculations: 19.6% Income 2016 290805 Sq.ft X 19.6% X 58.94 X 3,585,540.08 106.73% Income B/F @ 2014 1,156,616.93 Income B/F @ 2015 11,248,155.65 Remaining NLA (287984 - 18357 - (290805 X 62.5%) - 18,19,837.04 (290805 X 19.6%))X 58.94 Total Income for 2016 17,810,149.70

Sunway Tower

The challenging over-supply market condition had resulted in a decline in occupancy rates in Sunway Tower. Furthermore, it did not achieve a 100% renewal rate due to downsizing by its tenants. Due to the high drop in occupancy rate, revenue for Sunway Tower had also decreased by 6%. However, revenue is expected to remain stable the next year with only 0.5% of lease expiry. This may not be the case for 2015 with 85.2% of lease up for renewal. Thus, it is possible that revenue will drop starting the year 2015.

1) In year 2013, 7.1% of Sunway Tower secured a rental reversion of 2.6%, which affects the revenue of Sunway Tower for 2014. Calculation: 19017 Sq. ft Renewal 19017 Sq. ft X 70.18 X 102.6% 1,369,313.00 205608 Sq. ft 205608 Sq. ft X 70.18 X 96.45% 13,917,319.72 Total income for 2014 15,286,632.72

2) 0.5% of NLA in Sunway Tower is due for renewal in the Year 2014, which would affect the income for 2015E. It is thus unlikely that the revenue for Sunway Tower to differ much from the existing revenue. Calculation 0.5% Renewal 268306 Sq.ft X 0.5% X 70.18 X 102% 96,031.55 Income B/F @ 2014 1,369,313.00 Remaining NLA (224626 - 19017 - (268306 X 0.5%) X 70.18 X 96.45% 13,826,581.11 Total income for 2015 15,291,925.66

3) 85.2% of NLA is due for renewal in FY 2015, which affects revenue of 2016. From past pattern, rental reversion from 2011 to 2013 shows a declining rate and thus it is predicted to be 1.5%. Calculations: 85.2% Income 268306 Sq.ft X (85.2% X 80%) X 70.18 X 101.5% 13,026,848.81 Income B/F @ 2014 1,369,313.00 Income B/F @ 2015 96,031.55 Remaining NLA (224626 -19017 - (268306 X 0.5%) - (268306 X(85.2% X 1,447,866.16 80%))) X 70.18 X 96.45% Total Income for 2016 15,940,059.52

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Sunway Putra Tower

As with Sunway Tower, it is also evident that the over-supply had resulted in a significant decrease in revenue of Sunway Putra Tower. Plans are made to refurbish the Sunway Putra Place, including Sunway Putra Mall, which are to be completed in 2015. It is possible the refurbishment had resulted in work disruption, leading to a lower renewal rate by tenants. However, this is all expected to improve in 2015 when the project is revealed, with Sunway REIT projecting a double NPI once completed.

1) In year 2013, 23.9% of Sunway Putra Tower secured a rental reversion of 26.4%, which affects the revenue of Sunway Putra Tower for 2014. Calculation: 170819 Renewal 170819 Sq.ft X 34.50 X 126.4% 7,449,074.95 Remaining NLA (246983 - 170819) X 34.50 X 90% 2,364,892.20 Total revenue for 2014 9,813,967.15

2) In year 2015, in anticipation of the refurbishment being complete in the middle of the year rental reversion is expected to maintained at the rate it is. Calculation 71.40% Renewal 246983 Sq.ft X 71.40% X 34.50 X 127% X 6/12 3,863,296.97 Remaining NLA (246983 - (246983 X 71.4%)) X 34.5 X 6/12 1,218,490.63 Remaining NLA 90% X 246983 X RM3 X 12 X 6/12 4,001,124.60 Total revenue for 2015 9,082,912.20

3) 1.80% of NLA is due for renewal in FY 2015, which affects revenue of 2016. Reversion is expected to be the same as past trends in line with the refurbishment. Calculations: Total revenue for 2016 90% X 246983 X RM3.5 X 12 9,335,957.40

Appendix 8: Assumptions for others segment

Sunway Medical Center

Sunway Medical Center was acquired on 31 December 2012. Thus, it only generated revenue from 1 January 2013, which was reported as RM 9,551,000 for 6 month to 30 June 2013. Revenue of Sunway Medical Center was generated from its rental, which according to the terms of the master lease starts from RM 19 million per annum for the first year. Subsequently it will increase 3.5% per annum for each subsequent year for initial 10-year term.

This is the basis used for the estimation of the revenue generated from the property.

2013 2014 2015 2016 2017 2018 Sunway Medical Center 19,000 19,665 20,353 21,066 21,803 22,566 2014E 9,449 9,833 2015E 9,833 10,177 2016E 10,177 10,533 2017E 10,533 10,901 2018E 10,901 11,283

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Appendix 9: Assumptions for costs

Property Operating Expenses (RM’000) Analysis of increase / (decrease) of property operating expenses based on quarter, year on year (%) Quarter 1 2 3 4 FY 2012 - 42.3 11.1 19.7 FY 2013 8.5 13.5 (12.8) (4.9) FY 2014 (14.2) (6.5) - - Average increase/ (decrease) per quarter (2.85) 16.43 (0.85) 7.40 Average increase per annum 5.03%

Forecast 2011 2012 2013 2014E 2015E 2016E Total 83,401 107,228 106,750 Less Depreciation 10 54 152 Less Impairment of Receivables/(Reversal) 1,770 3,117 (464) Less Bad debts written off - 84 10 Revised total 81,621 103,973 107,052 112,405 118,025 123,926 Less costs reduction (1) - - - 9,400 - - Incremental costs from Putra Place (2) - - - - 2,541 2,287 Forecasted property operating expenses 81,621 103,973 107,052 103,005 120,566 126,213

Manager's Fees 2011 2012 2013 2014E 2015E 2016E Base fee (0.3% of Total Asset Value) 11670 13604 14993 17207 18729 20386 Performance fee (3% of Net Property 7333 8997 9278 10476 11828 13354 Income before deduction of fees to the Manager) Total 19003 22601 24271 27683 30557 33740

2011 2012 2013 2014E 2015E 2016E Total Asset Value (RM’000) 4,453 4,683 5,270 5,736 6,243 6,795 Percentage increase/(decrease) 5% 13% Average rate 9%

Net Property Income (RM’000) 244,015 299,198 309,196 349,106 394,167 445,044 Net property income before deduction to 244,433 299,900 309,267 349,186 394,257 445,146 fees to the manager Percentage increase/(decrease) 23% 3% Average rate 13%

Trustee's Fees 2011 2012 2013 2014E 2015E 2016E 0.03% of Net Asset Value 783 846 991 1115 1256 1413

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Net Asset Value (RM’million) 2,771 3,008 3,506 Percentage increase/(decrease) 9% 17% Average rate 13%

1) RM 9.4 million is the direct costs attributable to Sunway Putra Mall that was closed for the entire FY 2014. Costs are estimated according to FY2013’s property operating expenses attributable to Sunway Putra Place.

2) We assume that there will be increases in costs, following the doubling of the NPI of Sunway Putra Place.

However, there will be an aggregate increase in costs attributable to Putra Place of 10% in FY2015 due to the opening of the newly refurbished Sunway Putra Place. It is not foreseeable that management will be able to implement any cost cutting measures in the Putra Place in the first year of re-opening.

As for future years, it can be expected that management will be able to implement cost cutting measures for Putra Place, and we estimate that incremental costs will be 9% of the total costs pre- refurbishment of Putra Place.

Costs estimates are taken from FY 2012 because it consists of a full financial year without any disruptions from the refurbishment exercise.

For FY2015, the costs included are

RM Sunway Putra Mall (31,010 -10,194) 20,816 Sunway Putra Hotel (9,067 - 8,151) 916 Sunway Putra Tower (9,562 - 5,887) 3,675 Total costs attributable to Putra Place 25,407 Total incremental costs attributable to Putra Place (10%) 2,541

For FY2016, the costs included are

RM Sunway Putra Mall (31,010 – 10,194) X 125% 20,816 Sunway Putra Hotel (9,067 – 8,252) X 83.3% 916 Sunway Putra Tower (9,562 – 5,887) X 125% 3,675 Total costs attributable to Putra Place 25,407 Total incremental costs attributable to Putra Place (9%) 2,287

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CFA INSTITUTE RESEARCH CHALLENGE

Appendix 10: DDM valuation model

DDM valuation model

Market risk premium (MRP) = 6.8%

Beta (B) = 0.85

Risk free rate (Rf) = 4.11%

CAGR DPU (g) = 5%

Cost of equity (r) = Rf+(B×MRP) = 9.85%

Equity value per share (RM) = Present value of future dividend + Terminal value

= ⌊ ⌋

= [ ]

=1.61

Appendix 11: Discounting target share price (Dividend yield model)

(1)

(2)

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CFA INSTITUTE RESEARCH CHALLENGE

Appendix 12: Ratios and analysis from FY 2011-2016 (RM '000)

2011 2012 2013 2014E 2015E 2016E Gross Revenue 327416 406426 415946 410289 453225 489385 Net Property Income 244015 299198 309196 307284 332659 363172 Finance Cost 55190 81196 63604 73858 73858 73858 Trade Receivables 9393 11650 13238 12196 13473 14547 Trade Payables 815 3067 3383 2407 2818 2950 Property Operating Expenses 83401 107228 106750 103005 120566 126213 Total Assets 4379122 4683376 5269532 5309895 5379029 5476831 Current Assets 73773 44484 76709 61716 67954 102860 Current Liabilities 127791 1303040 403257 382894 366641 352969 Non-current Liabilities 1554054 372005 1359806 1361904 1361904 1361904 Unitholders' funds 2771050 3008331 3506469 3565097 3650484 3761959

Gross Profit Margin (Net Property Income / Gross Revenue) 74.53 73.62 74.34 74.89 73.40 74.21 Net Profit Margin (Profit for the year (total) / Gross Revenue) 169.1 103.45 94.33 49 49 51 Interest Cover [(Profit for the year (total) + Finance Cost) /Finance cost) 11.03 6.18 7.17 3.73 4.03 4.40 Trade Receivables days (Trade Receivables / Gross Revenue) 10.47 10.46 11.62 10.85 10.85 10.85 Trade Payables days (Trade Payables / Property Operating Expenses 3.57 10.44 11.57 8.53 8.53 8.53 Asset Turnover (Gross Revenue / Total Assets) 0.075 0.087 0.079 0.077 0.084 0.089 Current Ratio (Current Assets / Current Liabilities) 0.58 0.03 0.19 0.16 0.19 0.29 Gearing (Total Gross Borrowings / Total Asset Value of the Group) 35.3 33.5 31 31 30 30 Return on Capital Employed [(Profit for the year (total) + Finance Cost) / (Unitholders' funds + Non-current Liabilities) 14.08 14.84 9.37 6.79 7.34 8.01

Appendix 13: WACC Assumptions

Assumptions: Using the Capital Asset Pricing Model (CAPM) Risk free rate of return (as at 31 December 2013) 4.11% Market risk premium (A. Damodaran’s estimates) 6.80% Beta (as at 7 January 2014) 0.85 Cost of equity 9.85% Average Cost of debt (as at 31 December 2013) 3.85% Equity value 0.7 Debt value 0.3

WACC 9.85*0.7 + 3.86*0.3 8%

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Disclosures: Ownership and material conflicts of interest: The author(s), or a member of their household, of this report does not hold a financial interest in the securities of this company. The author(s), or a member of their household, of this report does not know of the existence of any conflicts of interest that might bias the content or publication of this report. Receipt of compensation: Compensation of the author(s) of this report is not based on investment banking revenue. Position as a officer or director: The author(s), or a member of their household, does not serve as an officer, director or advisory board member of the subject company. Market making: The author(s) does not act as a market maker in the subject company’s securities. Disclaimer: The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with CFA Society Malaysia, CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock.

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