UOB Economic-Treasury Research Company Reg No. 193500026Z

Jimmy Koh [email protected] Lena Tan [email protected] Tuesday, 17 June 2014 Flash Notes Iskandar : Treading The Extensive Journey

ƒƒ Investments have been steadily streaming into Iskandar with total cumulative investments reaching MYR131.6bn by end-2013, a strong increase of 24% from the previous year.

ƒƒ The JB- RTS link will serve the needs of increasing demand from individuals traveling between the two countries for work, especially with the continued growth of . Indeed, this will help to ease up the traffic along the causeway and potentially reduce traveling time.

ƒƒ New supply is huge, representing more than 20% of existing residential stocks in Iskandar. We believe these residential units will be completed before the occupancy rate in Iskandar reaches its potential.

ƒƒ We expect more Singaporeans, especially the lower-to-middle income group, seeking medical help in Malaysia as medical costs in Singapore continue trending higher.

ƒƒ We believe the region will continue to grow as more catalytic projects are being unveiled gradually. Time is of the essence for Iskandar to bear fruits while the successful collaboration between the two countries is also critical.

Background It has been more than seven years since Iskandar Malaysia (IM) was incepted in November 2006. A myriad of developments have since sprung across the 2,217 sq km land. A Comprehensive Development Plan (CDP) was developed to steer the overall development framework with special focus on five flagship zones: .

Flagship A: Bahru City Centre ƒƒ Central Business District and State Capital of Johor ƒƒ Key Economic Activities: financial services, commerce and retail, arts and culture, hospitality, urban tourism, electrical and electronics and food processing ƒƒ Key Landmarks: ƒƒ Key Players: Citigroup, HSBC, Kuwait Finance House, YKK, Lion Group, Sumitomo, Mah Sing and Crescendo

Flagship B: Nusajaya ƒƒ Projected population growth of 75,000 in 2010 to 500,000 by 2025 ƒƒ Key Economic Activities: mixed property development, state & federal administration and logistics ƒƒ Key Landmarks: (Johor New State Admin Centre), Puteri Harbour, EduCity, LegoLand Malaysia, SiLC, Medini and Afiat Healthpark ƒƒ Key Players: UEM Land, Iskandar Investment Berhad, Mulpha International Bhd and SP Setia

Flagship C: Western Gate Development ƒƒ Free-Trade Zone ƒƒ Key Economic Activities: port and marine services, warehousing, logistics, hi-tech manufacturing, petrochemical industry and food production ƒƒ Key Landmarks: (PTP), ƒƒ Key Players: MMC Corp Bhd

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 2

Flagship D: Eastern Gate Development ƒƒ Key industrial and manufacturing hub in Southern Region ƒƒ Key Economic Activities: chemical, oleochemical, food products, engineering-based industries, ports and logistics, warehousing and research and development ƒƒ Key Landmarks: Asia Pacific Trade & Expo City, Industrial Park, Pasir Gudang Circuit and ƒƒ Key Players: Panasonic, Titan, Western Digital and IOI Loders

Flagship E: - ƒƒ Airport City ƒƒ Key Economic Activities: airport services, engineering, electrical and electronics and education ƒƒ Key Landmarks: Senai International Airport, Senai Aerospace Park, MSC Malaysia Cyberport and ƒƒ Key Players: Lee Rubber, Boustead, Genting Property, IOI Properties and

The Five Flagships In Iskandar Malaysia

At A Glance Indicators 2005 2025F GDP (PPP) 20.0 93.3 USD bn GDP per capita (PPP) 14,790 31,100 USD Population Size 1.4 3.0 Million Employment 0.6 1.4 Million Source: IRDA

Source: IRDA

Investments Growing Well Investments have been steadily streaming into Iskandar with total cumulative investments reaching MYR131.6bn by end- 2013, a strong increase of 24% from the previous year. Growing local participations overtook the foreigners in 2009 and have since dominated investments in Iskandar at 64% of total cumulative investment. There was also strong interest from neighbouring Singaporeans, which accounted for the largest foreign investor group with investments of MYR11.0bn or 23.5% of total foreign investments as at end-2013. This is not surprising with the Singapore’s government throwing its weight behind the initiative. Outside of the region, USA grew in importance with investments surging five-folds from MYR0.77bn in 2012 to MYR3.98bn (mainly in the manufacturing sector) in 2013. The country is now ranked the third largest foreign investor in Iskandar Malaysia, after Singapore and Spain. Notable investors include Hersheys, which invested MYR816mn (the company single-largest investment in Asia) in building a state-of-the-art confectionery plant in Iskandar-Senai. The 700,000 sq ft chocolate factory, is expected to employ more than 400 locals in various capacities including management roles when it is completed in 2015.

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 3

Total Cumulative Committed Investments (MYR bn) Total Cumulative Committed Investments (MYR bn)

Government Foreign Properties Local Others 140 Manufacturing Committed Investments 131.6 120 140 47.02 8.3 100 120 CAGR: 42% 106.3 38.53 84.8 100 7.3 33.3 80 69.5 80 34.14

35.1 60 55.6 28.78 60 41.8 43.3 40 25.48 84.62

25.8 28.8 40 22.83 67.78 11.3 50.64 20 20 40.70 46.8

35.1 30.08 18.92 0 0 2006 2007 2008 2009 2010 2011 2012 2013 2008 2009 2010 2011 2012 2013

Source: IRDA, UOB Economic-Treasury Research Source: IRDA, UOB Economic-Treasury Research

Foreign Investments Into Iskandar (MYR bn) Country Dec 2012 Dec 2013 % Share of Total Foreign Investments (2013) Singapore 6.32 11.04 23.5 Spain 4.18 4.18 8.9 USA 0.77 3.98 8.5 Japan 3.74 3.93 8.4 Netherlands 2.84 2.84 6.0 Others 20.68 21.05 44.8 Total 38.53 47.02 100 Source: IRDA, News Reports

The Influential G-G Collaboration What sets the Iskandar Malaysia apart from other development initiatives in Malaysia (e.g. Multimedia Super Corridor) was the involvement of the Singapore’s government. The G-G collaboration is encouraging and has been ushering in investments from Singapore into Iskandar Malaysia. [see earlier section on ‘Investments Growing Well on Influential G-G Collaboration]

The landmark announcement of the Points of Agreement (POA) breakthrough by the prime ministers of both countries in 2010, marked an end to the long-standing land disputes between the two countries. Under the land swap arrangement, Malaysia was given four parcels of land in Marina South and two more in Ophir-Rochor in exchange for giving up Malayan railway land in Singapore. A 60-40 joint venture company, called M+S Private Limited, owned by Malaysia’s Khazanah and Singapore’s Temasek will undertake the development of the land parcels in Singapore. Another 50-50 joint venture company will be set up to develop two iconic wellness projects, Avira and Afiniti, in Iskandar Malaysia. Further collaboration between the two countries includes the JB-Singapore Rapid Transit System (RTS) and the Singapore-KL High Speed Rail (HSR).

JB-Singapore Rapid Transit System (RTS) Link At their Retreat in May 2010, Prime Minister Lee Hsien Loong and Prime Minister Dato’ Sri Mohd Najib Tun Abdul Razak agreed to jointly develop a Rapid Transit System (RTS) Link aimed at enhancing connectivity between Iskandar Malaysia and Singapore. The terminating stations of the RTS link will be in the vicinity of JB Sentral and around Republic Polytechnic in Singapore. Plan is to integrate the RTS that should be operational by 2019, with the Singapore’s Thomson Line, likely the Woodlands North Station (Phase 1), targeted to be ready in the same year as well. The RTS link will have CIQ facility co-located at both Singapore and in so that commuters only need to clear immigration at a single location for each way of travel.

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 4

At A Glance According to Singapore’s Transport Minister, the preliminary engineering study with Malaysia has Project Name JB-Singapore Rapid Transit System (RTS) been completed. Both countries are working to Progress Joint Engineering Study Phase 1 completed. finalise the alignment and station location in Time Line To identify a preferred and agreed option for the Johor as well as to commence the second part of RTS link by end 2014 the study that focus on the detailed design of the Distance 4km in total system. The joint engineering study will be co- Terminal Locations In the vicinity of JB Central in Malaysia and funded by both countries. Republic Polytechnic in Singapore Customs Immigra- Co-located at both ends (ie person departing High Speed Rail (HSR) Link tion Quarantine (CIQ) from Singapore will go through CIQ at Singa- In February 2013, Singapore and Malaysia had pore only. There will be no CIQ on entry into Ma- agreed to build a high speed rail link between laysia. Same applies when departing Malaysia. and Singapore, in a move that both Target Operations 2019 governments called a “game changer”. A pre- Source: IRDA, News Reports feasibility study has been done on the economic viability of the high speed rail. For Malaysia, the Proposed RTS Link Between Singapore And JB terminal will be located in Bandar Malaysia, at the current site of its air force base in Sungei Besi. While in Singapore, the possible terminus stations are West, Jurong East or the city centre, as announced by Prime Minister Lee when he was in Kuala Lumpur for the fifth Malaysia-Singapore Leaders’ Retreat in April this year. The Singapore government will make its decision within the next year. The two terminus stations are Kuala Lumpur and Singapore with five proposed transit stations – Seremban in , Ayer Keroh in , Muar, Batu Pahat and Iskandar Region.

Currently, the Land Transport Authority (LTA) is to conduct an engineering feasibility study to develop feasible corridors for the Singapore leg of the KL-Singapore High Speed Rail (HSR) link. The study will develop options and assess the Source: LTA technical feasibility of the possible HSR corridors, including the transportation connectivity for the At A Glance three possible HSR terminal station locations at the vicinity of Tuas West, Jurong East and the city Project Name High Speed Rail (HSR) centre. The study is expected to be completed in Feasibility Study To develop options and assess the technical 1Q 2015. feasibility of the possible HSR corridors. Expected to be completed by 1Q 2015 Implications For Businesses Distance 320-350km Both the HSR and RTS are designed to provide Travel Time: Express 90 minutes seamless travel between Singapore and Malaysia, Travel Time: Transit 120 minutes be it for businesses or individuals. The JB-Singapore Average Speed 350-450kmph RTS link will serve the needs of increasing demand from individuals traveling between the two Cost Estimate MYR30-40bn countries for work, especially with the continued Terminal Location Singapore & Kuala Lumpur growth of Iskandar Malaysia. Indeed, this will help Target Operation 2020 to ease up the traffic along the causeway and Source: IRDA, News Reports potentially reduce traveling time. While the exact location of the station has yet to be identified, the RTS link will be significant for companies and workers already in or have plans to relocate to the Iskandar region. Similarly, the HSR link will also improve the accessibility between both countries and enhance businesses integration.

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 5

The Residential Space Breakdown of Residential Units by Types in Iskandar Malaysia Iskandar Malaysia has a total of 420,631 residential units as of 1Q 2014. A whopping 78% is landed properties, and the lion’s Existing Supply (1Q 2014) share of 227,730 units terrace houses. Low cost flat at 42,377 2-3 Storey Terrace 124,050 units accounted for the largest part of the 22% non-landed Single Storey Terrace 103,680 properties. Low Cost House 56,544 Lost Cost Flat 42,377 The incoming supply (units commenced construction Condominium/Apartment 27,733 work but yet to obtain certificates of fitness) of residential Detached 21,963 Flat units in Iskandar Malaysia stood at 89,084 units as of 1Q 19,783 2-3 Storey Semi-Detach 10,350 2014 with terrace houses leading 26,645 units followed by Single Storey Semi-Detach 6,438 service apartments and condominiums at 21,084 and 11,085 Service Apartment 3,349 respectively. More than 90% of the 89,084 units are under Cluster 3,151 construction and we believe these units will be available to Town House 1,213 the markets from 2014-2017. New supply is huge, representing - 60,000 120,000 more than 20% of existing residential stocks in Iskandar. We believe these residential units will be completed before the Source: NAPIC, UOB Economic-Treasury Research occupancy rate in Iskandar reaches its potential. Note: Data includes Johor Bahru and Kulaijaya districts

Real Property Gains Tax (RPGT) In Malaysia From From From Oct 95 - Mar 07 Apr 07-Dec 09 From Jan 14 Jan 10 Jan 12 Jan 13 Disposal Individuals Individuals Individuals Individuals Companies - - - - Companies (Citizens & PR) (Non-Citizens) (Citizens & PR) (Non-Citizens) Within 2 years 30% 30% 30% 5% 10% 15% - - - Within 3 years ------30% 30% 30% In the 3rd year 20% 20% 30% 5% 5% 10% - - - In the 4th year 15% 15% 30% 5% 5% 10% 20% 20% 30%

In the 5th year 5% 5% 30% Exempted 5% 5% 10% 15% 15% 30% From the 6th year onwards 5% 0% 5% 0% 0% 0% 5% 0% 5% Source: Malaysian Institute of Accountants, Budget 2014, HSR

Activities in the property sector in Iskandar Malaysia have been muted since the start of the year due to the cooling measures announced in the Budget in October last year. The measures effective 1 January 2014 include: 1. higher Real Property Gain Tax (RPGT) – refer to the table above; 2. Raising property floor prices for foreigners from MYR500,000 to MYR1 million with the exemption of Medini and 3. property developers are prohibited from implementing projects bearing features of Developer Interest Bearing Scheme (DIBS). The measures were introduced to curb the excessive speculations in properties purchase especially with the influx of foreign investments. We believe the Malaysian government also took into account the current high household debt level at 86.8% of GDP and we expect the measures to be in place for at least the next 12 months in an attempt to stabilize prices.

Health Matters The healthcare segment in Iskandar Malaysia is taking shape as more private hospitals/medical centres unveiled gradually. In 2013, we saw the opening of Econ Medical Centre in Taman (Flagship A) and Pasir Gudang Specialist Hospital in Pasir Gudang (Flagship D).

From March 2010, Singaporeans are allowed to pay for medical procedures using their Medisave in selected hospitals/medical centres in Malaysia. Patients who opt for Malaysian hospitals must first be referred by the Singapore groups’ centres. The use of Medisave is solely for day surgery or in-hospital admissions, and subject to the same withdrawal limits as in Singapore. The two Medisave- Source: HMI, MOH, ST

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 6

Projects In The Healthcare Sector Project Location Target Operations Project Type Columbia Asia Hospital Flagship B: Opened in 2010 80-Beds Community Hospital Afiat Healthpark Dato Onn Int'l Specialist Hospital Flagship A: 2015 390-Beds Private Hospital Johor Bahru Econ Medicare Centre & Nursing Home Flagship A: Opened in Apr 2013 199-Beds Medicare Centre & Nursing Home Taman Perling Gleneagles Medini Hospital Flagship B: 300-Beds Private Hospital, Nursing Home Phase 1 by End 2014 Medini and a Rehabilitation Centre Pasir Gudang Specialist Hospital Flagship D: Opened in May 2013 130-Beds Private Hospital Pasir Gudang Regency Specialist Hospital Flagship A: Opened in Nov 2009 218-Beds Tertiary Care Hospital Masai Thomson Medical Centre Flagship A: Phase 1 by End 2016 300-Beds Tertiary Hospital Johor Bahru Afiniti Medini & Avira Flagship B: In phases over the next Urban & Resort Wellness Medini 4 years from 2013 Source: IRDA, Company Websites, News Reports accredited referral groups are Health Management International (HMI) – referral centre is its clinic in Balestier and Parkway Holdings – referral centre is East Shore Hospital. We expect more Singaporeans, especially the lower-to-middle income group, seeking medical help in Malaysia as medical costs in Singapore continue trending higher. Day surgery in Malaysia will become even more viable when the high speed rail commence operation in 2020.

The Education Hub EduCity, is a 600-acre education hub set up by Iskandar Investment Berhad, jointly owned by the government’s investment arm Berhad, the Employees Provident Fund (EPF) and Johor-owned Kumpulan Prasarana Rakyat Johor Berhad (KPRJ).

Britain’s Newcastle University Medicine (NUMed) is the first foreign university to set up its branch campus in Iskandar Malaysia, which is also the university’s first international branch campus. To allow the programmes to be set up at a lower cost, most of the universities in EduCity will only offer one specialized faculty each. For instance, NUMed will focus on medicine, University of Southampton Malaysia campus on engineering, and University of Reading on English language. However, not

Projects In EduCIty Institutions Target Operations Target No of Students Excelsior International School Opened in Sep 2013 - Johan Cruyff Institute Malaysia (JCIM) 2014 - Management Development Institute of Singapore(MDIS) 2015 2,000 Marlborough College Malaysia (MCM) Opened in Aug 2012 1,347 Multimedia University (MMU) Jun 2014 504 Netherlands Maritime Institute of Technology (NMIT) Opened in May 2013 1,620 Newcastle University Medicine Malaysia (NUMed) Opened in Nov 2011 1,050 Primary Trust School (Medini) 2013 600 Raffles American School (RAS) Aug 2014 - Raffles University Iskandar (RUI) Dec 2014 3,000 Secondary Trust School (EduCity) 2012 700 University of Reading Malaysia (UoRM) Mar 2015 1,263 University of Southampton Malaysia Campus (USMC) Opened in Sep 2012 1,150 Source: News Reports, Company Websites, IRDA

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 7

every campus offers equivalent degrees and transferable credits with their parent campus. As such, some NUMed students cannot transfer between other Newcastle campuses due to British and EU quotas on foreign medical students.

Singapore-Iskandar Akin To Hong Kong-Shenzhen? All this while, Singapore and Iskandar Malaysia conurbation has been likened to that of Hong Kong and Shenzhen. Indeed, the Malaysian’s government hopes that Iskandar Malaysia will emulate the success of Shenzhen in China, which was singled out as one of the five special economic zones in 1979. We believe the Singapore-Iskandar is a tad similar to the Hong Kong-Shenzhen model, with the huge differential in costs of living and property prices. Iskandar Malaysia has yet to reach its critical mass due to a lack of commercial activities in the area. Similar to Shenzhen, Iskandar will also require a long gestation period to bloom.

Timeline - Shenzhen, China July 1979 ƒƒ CPC Central Committee passed resolution to designate Shenzhen as a Special Economic Zone (SEZs) 1980 - 1991 ƒƒ July 1981: Development work started in Shenzhen (area: 327.6 sq km; population: 314k with 83% rural population) ƒƒ Infrastructure developments: power, roads, port, water ƒƒ Favourable tax (15% tax vs. 33% going rate), land costs (30% - 50% cheaper vs HK) ƒƒ Number of enterprises: 244 in 1979 vs. 4,000 in 1991 ƒƒ Population rose 7x: 2.3mn by end-1991 ƒƒ GDP rose 89x: RMB270mn to RMB24bn 1992 - 2002 ƒƒ Deng Xiao Peng revisited in 1992 – further push for developments ƒƒ Aiming to match Singapore/HK size in two decades ƒƒ July 1992: Shenzhen given more legislative autonomy, serving as a model for rest of China ƒƒ By end-2002: GDP rose to RMB297bn, and population at 7.2mn 2003 - Now ƒƒ Newly installed President Hu Jintao visited in 2003 to reaffirm the model ƒƒ Moving towards high tech industries and products: “high tech” products accounting for more than 50% of industrial output ƒƒ Economic convergence and further integration with HK ƒƒ By end-2012: GDP RMB1.3tn or USD209bn vs. Singapore (USD268bn) and HK (USD263bn) Source: CEIC, Bloomberg, News Reports, UOB Economic-Treasury Research

Comparative Statistics Indicators Hong Kong – Shenzhen Singapore – Iskandar Area 3,566 sq km 2,927 sq km Hong Kong – 1,104 sq km Singapore – 710 km Shenzhen – 2,462 sq km Iskandar – 2,217 km Population 17 million 7 million Hong Kong – 7 million Singapore – 5.3 million Shenzhen – 10 million Iskandar – 1.6 million Daily Commuters 500,000 100,000 GDP per capita (USD) Hong Kong – 36,667 (2012) Singapore – 51,160 (2012) Shenzhen – 17,096 (2010) Iskandar – 14,790 (2006) Major Industries Hong Kong – Financial Services, Trading, Logis- Singapore – Financial Services, Logistics, Educa- tics, Tourism tion, Tourism, Healthcare

Shenzhen – Manufacturing, IT, Financial Services, Iskandar – Manufacturing, Education, Tourism, Logistics Healthcare Source: CEIC, Various websites, UOB Economic-Treasury Research

A Matter Of Time From the beginning, Iskandar Malaysia’s fate has always been uncertain and dubious. Nevertheless, the key breakthrough occurred with the signing of POA between the two countries. The G-G collaboration started and brought on countless changes in Iskandar. Catalytic projects in various sectors are springing up. Investments have exceeded expectations and locals are gaining confidence and began to dominate investments in Iskandar since 2009. We believe the region will continue to grow as more catalytic projects are being unveiled gradually. Time is of the essence for Iskandar to bear fruits while the successful collaboration between the two countries is also critical.

URL: www.uobgroup.com/research Email: [email protected] Flash Notes Tuesday, 17 June 2014 Page 8

Appendix

Projects In Tourism Sector Project Location Target Operation Description Johor Premium Outlets - Phase 1 Johor, Opened in Dec 2011 80 Outlet stores Johor Premium Outlets - Phase 2 Johor, Indahpura Opened in Nov 2013 40 Outlet stores Legoland Nusajaya Opened in Sep 2012 Theme park Legoland Water Park Nusajaya Opened in Oct 2013 Theme park Legoland Hotel Nusajaya Opened in Jan 2014 249 LEGO themed rooms Sanrio Hello Kitty Town and The Little Big Club Puteri Harbour Opened in Oct 2012 Theme park Traders Hotel Puteri Harbour Opened in Apr 2013 283 Rooms Source: IRDA, Company Websites

Disclaimer: This analysis is based on information available to the public. Although the information contained herein is believed to be reliable, UOB Group makes no representation as to the accuracy or completeness. Also, opinions and predictions contained herein reflect our opinion as of date of the analysis and are subject to change without notice. UOB Group may have positions in, and may effect transactions in, currencies and financial products mentioned herein. Prior to entering into any proposed transaction, without reliance upon UOB Group or its affiliates, the reader should determine, the economic risks and merits, as well as the legal, tax and accounting characterizations and consequences, of the transaction and that the reader is able to assume these risks. This document and its contents are proprietary information and products of UOB Group and may not be reproduced or otherwise. URL: www.uobgroup.com/research Email: [email protected]