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PublicInvest Research Sector Note Thursday, March 28, 2013 KDN PP17686/03/2013(032117) Property Outperform

FBM PROPERTY INDEX Iskandar … House Of Brick?

(m) Volume (m) KLPRP Index 200 1,400 One sold out project after another. Recent land deal flows and brisk sales of

1,200 property launches reignited investors’ interest on . While we 150 1,000 share the same optimism, we try to look at the sustainability of the demand and

800 hence, determine if the run in the property counters with exposure in Iskandar 100 600 Malaysia is warranted.

400 50 200 One word, Singapore. The key drivers of recent interests were attributed to:

0 0 1) Completion of attractions such as Legoland, Premium Outlet, Puteri Mar-12 May-12 Jun-12 Aug-12 Sep-12 Nov-12 Dec-12 Feb-13 Mar-13 Harbor Family Indoor Theme Park, universities and other upcoming big profile

projects such as Pinewood Studios, etc. 2) Warmer Malaysia-Singapore SECTOR PERFORMANCE government tie that leads to possible collaboration, especially high-impact infrastructure projects such high-speed rail linking KL-Singapore, MRT 1M 3M 6M connectivity (JB-Singapore Rapit Transit System, RTS) and highway projects Absolute Returns +8.11 +12.27 +15.76 3) Land deals that saw well-established names from Singapore such as Relative Returns +6.35 +13.39 +13.69 Temasek (Afinity Medini, GDV RM3bn), CapitaLand (, GDV RM8.1bn), Ascendas Land (, GDV RM3.7bn), etc. RECOMMENDATION TABLE Ultimately, we believe the key is still tapping the demand from Singapore.

Current Target Upside Sustainability of demand. With a bulk of the purchasers consisting of Call (RM) (RM) (%) Singaporeans or Malaysians working in Singapore, we look at the sales trend of property both in Singapore and Johor. Notwithstanding Iskandar Malaysia’s UEM Land 2.68 2.80 5 N SP Setia 3.30 4.40 33 OP potential, we are of the view the sheer size of Iskandar Malaysia (measuring E&O 1.58 2.20 39 OP 2,217 sqm or three times the size of Singapore) would mean demand should MK Land 0.315 0.80 154 OP normalize despite the recent brisk sales. We note that currently for properties above RM500k per unit, Johor is selling c.1000 units (from 300 units in 2008)

as compared to 18,000 units in Selangor and 10,000 in Kuala Lumpur. Recent cooling measures in Singapore, in our view sparked the interest on Iskandar Malaysia and based on our estimate, the demand in Iskandar might take longer than expected to come near the sales in KL/Selangor.

The hotspots to watch. For hotspots, we like Nusajaya (UEM Land) and

Medini (E&O) for being the location for most of the catalytic projects, Danga Bay for having the longest coastline, Leisure Farm for its well-designed master plan with equestrian, golf courses and multi–tiered security, among others in the short run but the rise of the these hotspots should ripple to other areas in the long run. After the recent price run in UEM Land, we downgrade UEM Land Tan Siang Hing from Overweight to Neutral but still like SP Setia and E&O for exposure in T 603 2031 3011 Johor. F 603 2272 3704 E [email protected] FINANCIAL SUMMARY Price EPS Growth Dividend (RM) @ Mkt Cap EPS (sen) (%) P/E (x) P/B (x) ROE (%) Yield (%)

Company 27 Mar (RMm) 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F 2013F 2014F UEM Land 2.68 11,603.4 11.0 11.4 15.8 3.6 24.3 23.5 1.9 1.8 8.9 8.4 1.1 1.1 SP Setia 3.30 8,113.8 21.6 30.6 16.3 41.7 15.2 7.9 1.8 1.7 11.0 11.7 3.9 5.6 E&O 1.58 1,747.8 11.4 12.5 4.4 9.5 14.2 13.0 1.3 1.2 9.1 9.2 3.8 4.1 MK Land 0.315 379.4 2.9 4.6 45.0 56.4 11.8 7.6 0.4 0.3 3.1 4.5 - - Source: PublicInvest Research estimates

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Launched in 2006, Iskandar Malaysia (“Iskandar”), which is divided into 5 flagships, is envisioned to be a metropolis of 3m people by 2025, driven by strategic initiatives to transform the area by adding privately funded industries, theme parks, hotels, hospitals and universities. Despite a slow start, we understand that investments have since picked up substantially with cumulative Iskandar Malaysia, a brief…… investments totaling RM105bn as of end-2012. Apart from the cheap land, key policy changes such as a 10-year corporate tax holiday and the waiver of affirmative action preferences in the special zone of Medini also attracted the investors.

Figure 1: Five Flagships of Iskandar Malaysia

Iskandar’s Land Area = 2,217sqm

3x Singapore’s land mass

Source: IRDA

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When the road is through, the money will

flow

Following the rail tracks. As per ancient Chinese adage, “when the road is through, the money will flow”, we believe certain areas such as Nusajaya (incl. Medini), Danga Bay, Leisure Farm, among others might be the early hotspots based on the proposed public transportation system. Rail connectivity, in our view will be vastly improved and add more appeal of Iskandar Malaysia should the proposed KL-Singapore High Speed Rail and JB-Singapore Rapid Transit System take off. Preliminary completion targets for these high-impact projects are by 2020. All told, the real long-term outcome of these projects could be warmer relations between Malaysia and Singapore.

Figure 2: Proposed Comprehensive Public Transportation System

Source: IRDA

Figure 3: Transportation Map

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Prefer developments in Flagship A and B. We believe these two flagships will be the leading addresses, based on the connectivity and catalytic projects located in these two nodes. Presently, Singapore and Malaysia are linked by the two bridges (Causeway and Tuas Second Link). To improve connectivity, the Rapid Transit System was mooted in 2012 and targeted to be completed by 2018, with the last-stop station proposed at JB Sentral (located at Flagship A). We also understand that the proposed High-Speed Rail (HSR) connecting KL and Singapore will have Nusajaya (located at Flagship B) earmarked as one of the three stop stations in Johor. As such, we believe these two nodes will attract the most interest in the near term.

The Key Projects. Projects that we like in Flagship A include Nusajaya (Puteri Harbor, Medini, Gerbang Nusajaya etc) and Leisure Farm. Meanwhile, the projects that piqued our interest in Flagship B are Danga Bay, KSL City and Senibong Cove, among others. The companies under our coverage i.e. UEM Land is currently the largest landowner in Nusajaya with 7,166 acres and E&O through its joint venture with Temasek and Khazanah which will develop a 210- acre land in Medini.

Figure 4: Economic Clusters of Iskandar Malaysia

Source: IRDA

Nusajaya, which is zoned as the hubs for education & medical, tourism, entertainment & recreation, state administration and finance, will be the premier community in our view due to the location, transportation network (potential site for HSR last stop, ferry to Marina Bay) and well-designed master plan that include theme park, universities, hospitals, etc. Over the near term, we believe most activities will evolve around these few projects i.e. Puteri Harbor, Medini and Leisure Farm.

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Puteri Harbor, which is located near the state administrative centre, is a 688-acre development that has 10.8km water front and a marina. Most of the recent launches and land deals done recently involved Puteri Harbor which demonstrated the appeal of Puteri Harbor. Among the projects launched so far include Somerset (UM Land), Encorp Marina (Encorp) and Imperia &Teega (UEM Land) which were almost fully taken up and sold at average selling price as high as RM1000 psf. As for land deal, the recent 44-acre land sold to a consortium owned by several tycoons also for RM401m also caught investors’ attention.

Figure 5 : Puteri Harbour

Source: Company

Medini, is a 2,200-acre development that will be developed into four hubs to house six zones with distinctive themes. The selling point of Medini is the waiver of affirmative action preferences and other incentives such as 1) exemption from Foreign Investment Committee rules, 2) freedom to source capital globally, 3) the ability to employ foreigners freely, 4) exemption from income taxes for 10 years from commencement of business, and 5) exemption from withholding tax on royalty and technical fee payments to non-residents for 10 years from commencement of operations. These incentives are available only for the creative, education, financial advisory and consulting, healthcare, logistics and tourism industries.

Figure 6 : Medini

Source: Company

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Leisure Farm, which has a land size measuring 1,765 acres, is a development situated in or 15-minute drive from Tuas, Singapore via second link. The development comprises 7 themed precincts (bungalow plots ranging between 0.25-1.0 acre and 4 precincts of strata-titled properties). Apart from the multi-tiered security which is the selling point of the project, we believe that the completion of the new highway interchange leading to the Malaysia-Singapore Second Crossing will add more appeal to the development. We understand the Group has taken a strategic decision to delay the launches while waiting for the new interchange.

Figure 7 : Leisure Farm

Source: Company

Demand push and pull. In addition to the recent changes to improve transportation network (i.e. LRT, MRT, HSR), efforts to improve the security, etc, we believe that the demand pull is obviously the relatively cheap prices of our properties as compared to Singapore and other countries in the region (Figure 8). That’s a relatively simple value proposition but we believe the recent spike in demand is more related to repeated property cooling measures (introduced seventh round of cooling measures which increased stamp duty to as high as 18% currently i.e. additional stamp duty on top of the 3% stamp duty) that ignited the demand push. We believe that the recent increase in stamp duty has all but made it difficult to invest in properties in the island state due to the high transaction cost. Hence, this has pushed these investors to relook at Johor, among other countries as a new place to invest. All told, it is important to study the sustainability of the demand and decide if the properties in Johor can in fact maintain the price momentum considering the present paltry rental yields.

Figure 8 : Asia, Square Meter Prices 25000 20371 20000 16350 15122 15000

10000 6932 7112

3204 5000 2099 2182 2913 2996

0

Source: Global Property Guide

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Figure 9: Additional Buyer's Stamp Duty (ABSD) in Singapore

3rd & subsequent Citizenship 1st Purchase 2nd Purchase purchase

Citizens Exisiting: NA Exisiting: NA Exisitng: 3%

Revised: NA Revised:7% Revised: 10%

Permanent Residents Exisiting: NA Exisiting:3% Existing: 3%

Revised: 5% Revised:10% Revised: 10%

Foreigners & corporate Exisiting:10% Existing:10% Existing:10%

Revised:15% Revised:15% Revised:15%

Source: Various

Property demand in Johor and Singapore

Units transacted on the uptrend. Granted, the trend of units sold in Johor is registering a healthy growth, with sales picking up since 2009 in tandem with the emergence of Iskandar Malaysia, especially in the RM500k to RM1m segment. But, the bulk of property sales especially for the properties valued at RM500k and above is still driven by the market in Selangor and Kuala Lumpur (Figure 10). Hence, we believe the property demand despite showing encouraging uptrend, the sheer size of Iskandar Malaysia would mean that any meaningful sales growth going forward depends on the acceleration of foreign interests largely from Singapore to absorb the incoming supply.

Figure 10: Property Demand in Malausia (Units)

Total Units sold Johor Selangor KL RM500k to RM500k to RM500k to Year RM1m > RM1m RM1m > RM1m RM1m > RM1m

2002 222 27 2,252 1,044 1,066 707 2003 213 27 2,673 1,358 1,290 863

2004 302 39 3,773 2,064 1,708 1,299

2005 215 35 3,974 2,055 1,777 1,308

2006 226 32 4,712 2,258 2,090 1,352

2007 291 48 5,809 2,992 2,700 2,188 2008 249 63 6,115 3,448 3,149 2,987

2009 435 52 6,697 3,734 3,059 2,645 2010 557 129 8,920 5,271 4,314 3,609

2011 775 148 11,289 6,898 5,289 4,187 2012(9m) 828 145 9,496 5,702 3,904 3,192

Source: CEIC

Property demand in Singapore. To understand the potential property demand

in Johor, it is imperative to study the Singapore property market. Obviously, it is

still difficult to gauge the demand potential of Iskandar Malaysia but we will try to

measure the demand objectively based on the available data. We understand

that foreign buying constitutes mainly buyers from Malaysia, Indonesia, India and

China - with Malaysia the most with c.25% of foreign buying and the rest ranging

15%-20%. The recent cooling measures to cap speculative buying caused the

percentage of foreign buying as a total of all property sales in Singapore to

slump from 18% in 2011 to 6% this year.

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One's loss is another's gain. The recent measures obviously managed to deter the overheated property market in Singapore, and hence expediting the spillover across the straits to Iskandar Malaysia in our view. While we view the recent interest in Johor properties is positive, we maintain our view that the demand in Johor is still far from reaching the Selangor/KL level despite the positive developments.

Potential spillover demand from Singapore. Purchasers from Singapore are making the bulk of the sales growth in Iskandar Malaysia and hence we look at the property demand in Singapore to estimate the spillover demand. We understand that the average units sold in Singapore is averaging 35,634 units for the past six years. Hence, the units sold to foreigners are ranging from 2,138 to 6,414 (i.e. c. 6% to 18% registered in 2011 and 2012), with c. 25% sold to Malaysian purchasers. Hence, we estimate potential spillover sales from Singapore could be as many as 4200 units if all demand lost in Singapore moves to Johor. A more reasonable but still aggressive estimate nevertheless, in our view is by assuming Malaysian purchasers (i.e. 25% of total foreign buyers) to return home, the potential new demand for Malaysian properties is as high as 1000 units per year. Admittedly, this assumption might be oversimplified as we only assume the demand is for own use (i.e. considering units sold per year and not purchasing power) as the speculative demand is difficult to measure. All told, we believe at best, over the near term, the property demand will potentially double from c. 1000 units p.a. (>RM500k per unit), which is good but still not as good as KL/Selangor.

Figure 11: Private Residential Units Sold In Singapore Private Residential sold

Year (Units) 2002 15,838

2003 10,699

2004 12,052

2005 17,851

2006 25,042

2007 40,654

2008 13,642

2009 33,663

2010 38,900

2011 32,639

2012 37,333

Source: CEIC

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Figure 12: Foreign Buying In Singapore

50% 45% 45% CCR RCR OCR 40% 37% Averaging 6%(2012) from 18%(2011) 35% 30% 30% 25% 19% 19% 20% 16% 16% 16% 17% 14% 15% 15% 11% 11% 10% 10% 10% 9% 9% 10% 6% 8% 7% 7% 6%6% 6% 4% 5% 5% 4% 5% 5% 5% 5% 4%5% 5% 3% 0%

* Core Central Region (CCR), Rest of Central Region (RCR) and Outside Central Region (OCR)

Source: URA

Stock picks for Iskandar Malaysia

Maintain Outperform. Notwithstanding the 13th general election jitters, we still like Malaysian property developers with the high-impact infrastructure spending i.e. MRT, HSR, RTS, etc that will improve connectivity and thus, add appeal to our real assets in the long run. Looking at our analysis, we do believe in the short-run, demand will increase due to cooling measures introduced by other countries. However, the demand in Iskandar Malaysia might take a long time to reach KL/Selangor levels in the near term in our view. Our stance is despite the benchmark prices recorded in recent launches, if rental yield fails to catch up, eventually the fundamentals might prevail in the long run and hence, the strong price momentum might struggle to continue.

Land value rises faster than home price increases. Recent launches revealed benchmark property prices nearing those sold in KL. The price uptrend obviously bodes well with land owners as land value rises faster than home price increase. Using land residual method, we estimate that land price will increase by more than 2.5x if the property price rises by only 30% (Figure 13, Assumption 1 with no cost inflation).

Figure 13: Residual Value estimates Year (Base) Assumption 1 Assumption 2 30% Price 100% price increase increase No Cost 60% cost increase increase House Price 250 325 500 Development margin (25%) -62.5 -81.25 -125 Construction Cost -150 -149 -240

Residual Land value(4x plot ratio, 70% efficiency) 105 265.3 378

Source: Company, PublicInvest Research estimates

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Our picks for Iskandar Malaysia play are UEML, SP Setia and E&O, the three stocks under our coverage. UEM Land has the largest and in our view, the best landbank in Iskandar for being the master developer for Nusajaya which has many catalytic projects planned in the area. The catalytic developments in Nusajaya include the Kota Iskandar administrative centre, Puteri Harbour, a thematic industrial park (SiLC), a medical park, EduCity and Medini. SP Setia, meanwhile has over 1000 acres left for development with flagships such as , , Setia Tropika, Setia Eco Garden and Setia Eco Cascadia. Currently, SP Setia is generating c. RM500-600m in new sales from Johor and we expect the sales to grow with recent interest and strong property prices. Meanwhile, E&O is expected to unveil the first phase of the Group’s 210-acre development (JV with Khazanah and Temasek) soon. The project i.e. Avira is estimated to have RM3bn GDV.

Another landowner that is not getting enough attention in our view is Mulpha International, the master developer for Leisure Farm, an award-winning project in Johor measuring 1,765 acres, which was launched in 1991. It boasts a 36-hole golf course with 7 themed precincts of bungalow plots ranged between 0.25-1.0 acre and 4 precincts of strata-titled properties. Average selling prices for bungalow lots are now at RM100 -120psf compared to RM6 psf when the project was first launched. We understand that the Group is taking a strategic decision to slow down its launches to wait for the new interchange that will improve accessibility to Leisure Farm, and should improve the attractiveness of the development. Mulpha still has c.1000 acres left for development in Leisure Farm with a book value of RM7.30 psf.

As for recommendations, we maintain our Outperform calls on SP Setia (RM4.30 TP, c.10% discount to RM4.80 RNAV) and E&O (RM2.20 TP, c.30% discount to RM3.10 RNAV) but downgrade UEM Land (RM2.80 TP, c.10% discount to RM3.10 RNAV) from Outperform to Neutral after the recent price run-up.

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RATING CLASSIFICATION

STOCKS

OUTPERFORM The stock return is expected to exceed a relevant benchmark’s total of 10% or higher over the next 12months.

NEUTRAL The stock return is expected to be within +/- 10% of a relevant benchmark’s return over the next 12 months.

UNDERPERFORM The stock return is expected to be below a relevant benchmark’s return by -10% over the next 12 months.

TRADING BUY The stock return is expected to exceed a relevant benchmark’s return by 5% or higher over the next 3 months but the underlying fundamentals are not strong enough to warrant an Outperform call.

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

NOT RATED The stock is not within regular research coverage.

SECTOR

OVERWEIGHT The sector is expected to outperform a relevant benchmark over the next 12 months.

NEUTRAL The sector is expected to perform in line with a relevant benchmark over the next 12 months.

UNDERWEIGHT The sector is expected to underperform a relevant benchmark over the next 12 months.

DISCLAIMER

This document has been prepared solely for information and private circulation only. It is for distribution under such circumstances as may be permitted by applicable law. The information contained herein is prepared from data and sources believed to be reliable at the time of issue of this document. The views/opinions expressed herein are subject to change without notice and solely reflects the personal views of the analyst(s) acting in his/her capacity as employee of Public Investment Bank Berhad (“PIVB”). PIVB does not make any guarantee, representations or warranty neither expressed or implied nor accepts any responsibility or liability as to its fairness liability adequacy, completeness or correctness of any such information and opinion contained herein. No reliance upon such statement or usage by the addressee/anyone shall give rise to any claim/liability for loss of damage against PIVB, Public Bank Berhad, its affiliates and related companies, directors, officers, connected persons/employees, associates or agents.

This document is not and should not be construed or considered as an offer, recommendation, invitation or a solicitation of an offer to purchase or subscribe or sell any securities, related investments or financial instruments. Any recommendation in this document does not have regards to the specific investment objectives, financial situation, risk profile and particular needs of any specific persons who receive it. We encourage the addressee of this document to independently evaluate the merits of the information contained herein, consider their own investment objectives, financial situation, particular needs, risks and legal profiles, seek the advice of their, amongst others, tax, accounting, legal, business professionals and financial advisers before participating in any transaction in respect of any of the securities of the company(ies) covered in this document.

PIVB, Public Bank Berhad, our affiliates and related companies, directors, officers, connected persons/employees, associates or agents may own or have positions in the securities of the company(ies) covered in this document or any securities related thereto and may from time to time add or dispose of, or may be materially interested in, any such securities. Further PIVB, Public Bank Berhad, our affiliates and related companies, associates or agents do and/or seek to do business with the company(ies) covered in this document and may from time to time act as market maker or have assumed an underwriting commitment in the securities of such company(ies), may sell them or buy them from customers on a principal basis, may have or intend to accommodate credit facilities or other banking services and may also perform or seek to perform investment banking, advisory or underwriting services for or relating to such company(ies) as well as solicit such investment advisory or other services from any entity mentioned in this document. The analyst(s) and associate analyst(s) principally responsible for the preparation of this document may participate in the solicitation of businesses described aforesaid and would receive compensation based upon various factors, including the quality of research, investor client feedback, stock pickings and performance of his/her recommendation and competitive factors. Hence, the addressee or any persons reviewing this document should be aware of the foregoing, amongst others, may give rise to real or potential conflicts of interest.

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