CONGLOMERATE SUNWAY BHD (SWB MK,SGWM.KL) 14 November 2011

Bigger but lacking re-rating catalysts Company report HOLD

Nik Ikhwan Nik Mahmood (Initiation) [email protected] +603 2036 2299 Rationale for report: Initiation coverage

Investment Highlights Price RM2.20 Fair Value RM2.50 We initiate coverage on Sunway Bhd with a HOLD rating at a fair 52-week High/Low RM2.80/RM1.67  value of RM2.50 /share, based on a 20% discount to our sum-of- Key Changes parts valuation of RM3.13/share. While we see value in the Fair value Initiation coverage company, we believe our HOLD rating is justified given the lack of EPS Initiation coverage near- to mid-term catalysts.

YE to Dec FY10 FY11F FY12F FY13F  Sunway is an integrated property and construction company with exposure to all types of real estate assets. The bulk of its earnings Revenue (RMmil) 3,134.5 3,507.7 3,897.6 4,448.0 comes from property development ~40%-45%, followed by rental Core net profit (RMmil) 325.0 310.6 354.5 439.1 EPS (Sen) n/a 24.0 27.4 34.0 income from its property investments and dividends from 37%- EPS growth (%) 0.0 14.1 23.9 owned Sunway REIT – accounting for 20%-25%. Consensus EPS (Sen) 315.5 363.9 415.4 DPS (Sen) n/a 0.0 0.1 0.1  While Sunway has a reputable construction arm, it only PE (x) n/a 9.6 8.4 6.8 contributes about 15% to the group’s total net profit due to tight EV/EBITDA (x) n/a 8.8 7.4 5.4 margins. The unit will be busy for the next few years with a current Div yield (%) 0.0 2.1 2.4 3.0 order book of RM2.4bil, comprising mostly building jobs. ROE (%) 0.0 10.7 10.9 11.9 Net Gearing (%) 56.4 50.2 38.6 16.5  The advantage of Sunway’s integrated business model is obvious Stock and Financial Data whereby it is able to recycle its capital via the monetisation of the investment properties. The associate stake in Sunway REIT Shares Outstanding (million) 1292.5 provides a ready platform for this purpose. This is the primary Market Cap (RMmil) 2964.9 catalyst for any re-rating. Book value (RM/share) 2.3 P/BV (x) 1.0 ROE (%) 11.6  However, among the assets in its portfolio, we believe Sunway Net Gearing (%) 50.2 Giza is deemed to be the most attractive for monetisation in the immediate term. Other assets in the pipeline include VeloCity mall Major Shareholders Tan Sri Jeffrey Cheah Corp (47.7%) and Sunway Pyramid 3 (combined NLA of 1.1mil sq ft), which are GIC (12.2%) only expected to be completed in the next two to three years.

Free Float (%) 51.4 In any case, given the gestation period between the completion Avg Daily Value (RMmil) n/a  and the maturity of the said assets, the unlocking of the assets Price performance 3mth 6mth 12mth may not materialise so soon. As such, we believe there is limited upside to the stock. Absolute (%) n/a n/a n/a Relative (%) n/a n/a n/a  Plus, we are not too excited about the recent LRT job win given the ‘competitive’ margins due to the intense bids. However, we are upbeat that the group has been pre-qualified for the MRT packages despite having a limited rail job experience. MRT jobs should provide relatively better margins given the higher degree of set skills involved.

 Sunway’s annual order book target of RM1.5bil may be achievable given that a third of it is secured by jobs from its property unit. Apart from MRT, there are other major ETP and 10MP projects up for grabs, including highway jobs and integrated ‘iconic’ developments. Nonetheless, we expect Sunway to be selective in looking for new jobs as current contracts in hand will keep it occupied. But, its potential involvement in SCORE infrastructure may prove to be challenging.

 We estimate FY11F earnings at RM311mil with the property unit being the driver. We are expecting a growth of 14%-23% for FY12F-FY13F to RM355mil-RM439mil. While there is no clear dividend policy at this juncture, we assume a 20% payout ratio. PP 12247/06/2012 (030106)

Sunway Bhd 14 November 2011

CHART 1: MERGER DETAILS

Source: Sunway

INITIATE SUNWAY BHD WITH A HOLD there would be free warrants in Newco on the basis of 1 Newco warrant for every five Newco shares. We initiate coverage on Sunway Bhd with a HOLD rating at a fair value of RM2.50 /share, based on a 20% discount to our We believe the offer was attractive. Recall that in our sum-of-parts valuation of RM3.13/share. Our fair value is report dated 25 November 2010, we highlighted that the pricing the stock at FY11F PE of 10x and FY12F PE of 9x. offer represented a premium of 23% to our fair value of RM4.13/share for Sunway City. The stock has retraced by some 20% since its listing on 22 Augustt this year, largely due to the weak market sentiment. Taking up the offer was an opportunity for Sunway City While we see value in the company, we believe our HOLD shareholders to move to a larger entity and a more liquid rating is justified given the lack of near- to mid-term company where property development would be the main catalysts. contributor to earnings.

More importantly, the merger would see the Sunway brand strengthened whereby two property units are MERGER DETAILS housed under one brand thus aligning the group’s goals and objectives. Basically, this eliminates the previous  Just to recap... market perception that these two units were competing against each other. It was announced on Bursa Malaysia in November 2010 that Sunway Holdings and its sister company, Sunway Plus with a bigger balance sheet, the group would be able City, would be merged under one entity – Newco i.e. to take on bigger projects i.e. developing or acquiring Sunway Bhd. Sunway Bhd had offered to acquire all their bigger landbanks and construction jobs as well as assets and liabilities. enhancing its overseas aspirations.

Newco offered to acquire Sunway City shares at RM5.10/share and Sunway Holdings at RM2.60/share, for a total consideration of RM4.5bil.

Basically, 80% of the offer would be satisfied via an issuance of Newco shares at RM2.80/share and the remaining 20% would be done via cash. On top of that,

AmResearch Sdn Bhd 2 Sunway Bhd 14 November 2011

CHART 2: CORPORATE AND CORE BUSINESS

Source: Company/ AmResearch

INTEGRATED BUSINESS MODEL Sunway Giza is deemed to be the most attractive for monetisation in the immediate term. Other assets in the  Synergistic benefits from closer property and pipeline include VeloCity mall, The Pinnacle and Sunway construction relationship Pyramid 3 (combined NLA of 1.6mil sq ft), which are only expected to be completed in the next two to three years. Sunway Bhd is an integrated property and construction These assets may only be injected into the REIT once it company with exposure to all types of real estate assets. has gone through its first positive rental revision i.e. The bulk of its earnings will come from property development typically after three years in operations. ~40%-45%, followed by rental income from its property investments and dividends from 37%-owned Sunway REIT –  Massive portfolio of investment properties is an accounting for 20%-25%. advantage

While Sunway has a reputable construction arm, it only Currently, there are 10 properties parked under Sunway contributes about 15% to the group’s total net profit due to for rental income. These assets include:- (1) the recently- average margins. The unit will be busy for the next few years completed Sunway Giza in Kota Damansara; (2) two with a current order book of RM2.4bil, comprising mostly education buildings i.e. Sunway University College and building jobs. Monash University Sunway Campus; (3) a hotel each in Penang, Phnom Penh, Cambodia and Hanoi, Vietnam; (4) The advantage of Sunway’s integrated business model two theme parks i.e. Sunway Lagoon and Lost World of is obvious whereby it is able to recycle its capital via the Tambun, and (5) a hospital in Sunway. monetisation of investment properties. The associate stake in Sunway REIT provides a ready platform for this We believe with the exception of Sunway Giza, the purpose. We believe this is the primary catalyst for any assets are not too attractive for injection into its re-rating for Sunway at this juncture. associate Sunway REIT given the types of the assets; for e.g. the Sunway Medical Center and the two However, among the assets in its portfolio, we believe education buildings do not provide the opportunity for asset-enhancement exercises, given that they serve TABLE 1: PROPERTY INVESTMENTS specific purposes with only a single tenant – which Properties Stake (%) sf/ rooms Value (RM'mil) may not be yield-accretive for the REIT. This is in stark contrast to a shopping mall whereby the asset Sunw ay Giza 60 98000 44.2 manager has the power to play around with the tenant Monash Uni Campus 100 754000 200.0 mix to suit the ever-changing market demand. Sunw ay Uni College 100 615983 219.0 Sunw ay Medical Centre 78 755940 213.6 TABLE 2: PROPERTY INVESTMENTS IN THE PIPELINE Sunw ay Hotel Georgetow n 100 240 72.0 Sunw ay Hotel Phnom Penh 53 138 14.6 Property Type GDV (RM'mil) NLA (sf) Expected completion Sunw ay Hotel Hanoi 100 142 28.4 The Pinnacle Office 320 560k 2013/2014 Sunw ay VeloCity Mall Retail mall 1600 845k 2015/2016 Source: Company / AmResearch Sunw ay Py ramid 3 Mixed commercial 500 220k 2013/2014

AmResearch Sdn Bhd Source: Company / AmResearch 3 Sunway Bhd 14 November 2011

In any case, given the gestation period between the earnings despite providing 30% sales to the firm due to a completion and the maturity of the said assets, the tough margin environment. The remaining 15% of its unlocking of the assets may not materialise so soon. earnings would be contributed by the investment unit. Given that the monetisation of its assets may not happen in the immediate term, we believe there is limited upside to the stock. CHART 1: BREAKDOWN OF GDV BY LOCATIONS Others  Sunway REIT RM 0.6 bil Singapore 4% Sunway Bhd’s 36.7%-owned Sunway REIT manages the RM 0.6 bil 5% largest REIT in Malaysia with RM4.3bil in assets under management. Boasting a net lettable area of 6.9 million sq ft, the REIT has eight properties under its portfolio, comprising retail (66%), hospitality (24%) and office (10%) properties. The jewel in the crown, Sunway Pyramid, provides the bulk of the property income. China  Putra Place is now rightfully theirs RM 3.2 bil 23% After all the legal wrangling recently, Putra Place has been declared rightfully Sunway REIT’s. Recall that the building Malaysia RM 9.5 bil was acquired via an auction for RM514mil. Located 68% opposite the Putra World Trade Centre, Putra Place comprises a retail mall, a hotel and an office tower.

Understandably, Sunway intends to undertake a major renovation exercise at Putra Place to enhance the property. We understand the group intends to spend circa RM200mil over the next two years to revitalise the property. Source: Company / AmResearch

We would suspect the management may terminate the contract with the incumbent hotel operator, Legend, and take over the operations themselves, if not tying up with a PROPERTY DEVELOPMENT global operator. While Sunway REIT has a commendable track record, especially in managing retail assets, e.g.  Sunway brand to be strengthened Sunway Pyramid, it remains to be seen whether Sunway REIT would be able to turn Putra Place around. This merger would see the Sunway brand strengthened

whereby two property units are housed under one brand, Major refurbishments aside, the property needs a strong thus aligning their goals and objectives. Basically, this pull-factor to get decent visitor traffic, as the location while eliminates the previous market perception that these two central, is not too favourable. Thus, we believe the building units were competing against each other. may not be yield-accretive for the REIT in the immediate term. It has a combined landbank of 2,160 acres, largely in the Klang Valley (~40%), followed by Penang, China,

and Singapore. Altogether, these developments would keep Sunway busy over the next five to eight years. PROPERTY AND CONSTRUCTION TO DRIVE EARNINGS In total, Sunway boasts a remaining GDV of RM23bil but taking account its effective stake in all the projects i.e. Sunway Bhd would be operating under three core about 62%, the group’s effective remaining GDV would operating businesses: (1) Integrated property; (2) be about RM14bil. Construction & (3) Investments.

 On track to meet its RM1.4bil sales target Integrated property would comprise property development, property investment, hospitality and leisure. Sunway Bhd also owns 37% of Sunway REIT which was listed in the Sunway plans to launch RM2.7bil (effective interest) middle of last year. Basically investing into Sunway would worth of properties for 2011 and to generate an effective mean exposure to all types of real-estate assets. sales target of RM1.6bil.

Meanwhile, investment would comprise:- (i) Trading and The group is very much on track to achieve its sales manufacturing – trading of hoses & fittings, heavy target as it has generated new sales of RM1.3bil year to equipment parts, heavy equipment and building materials; date. (2) Quarry; and (3) Healthcare. While we have yet to be guided on the planned launches The new entity would see 40% of its earnings driven by and sales target for 2012, we expect Sunway to be on the property development and property investments while side of caution next year given the confidence crisis in associate profit from Sunway REIT would account for 30%. the global economy, attributed to the Europe debt crisis. Its construction arm would only contribute 15% to its

AmResearch Sdn Bhd 4 Sunway Bhd 14 November 2011

TABLE 3: SUM OF PARTS VALUATION Assets

Property Development Stake (%) GDV (RMmil) Mkt value (RM'mil)

Klang Valley Sunw ay Damansara 60 825.5 Sunw ay South Quay 60 3892.7 Sunw ay Kay angan 60 21.6 Sunw ay Semeny ih 70 728.6 Sunw ay Cheras 100 16.8 Sunw ay Duta 60 120.0 Sunw ay Melew ati 100 554.9 Sunw ay Alam Suria 100 60.1 Sunw ay IR 100 660.1 Casa Kiara 3 80 230.0 Sunw ay Velocity 59 3063.1 Sunw ay Tow er KL 1 100 240.0 Bangi 100 59 Melewati 2 100 43 Tmn Equine 100 250 Sg Long, Balakong 80 222 Mont Putra 100 156 Perak Sunw ay City Ipoh 65 285.8 Penang Sunw ay City Penang 100 173.7 Sunw ay Grand 100 37.6 Sg Ara 100 840.7 Bukit Mertajam 100 149.6 Johor Bukit Lenang 80 932.0 Singapore Tampines 30 1070 Sembaw ang 100 75 Yuan Ching Road 30 828 Pasir Ris 30 345 China Sunw ay Guanghao 65 66.8 Tianjin Eco City 60 5343.9 India Sunw ay OPUS Grand India 50 702.4 Sunw ay MAK Signature 60 181.2 Australia Wonderland Business Park 45 441.0

Unbilled sales 1700.0 24315.9 NPV of development profits@ 10% $2,252.50

Investment Properties Stake (%) Method sf RMpsf Cap rate (%) Mkt value (RM'mil)

Sunw ay Giza 60 Cap Rate 98000.0 451.2 7.5 44.2 Monash Uni Campus 100 754000.0 265.3 200.0 Sunw ay Uni College 100 615983.0 355.5 219.0 Sunw ay Medical Centre 78 755940.0 213.6 Sunw ay Hotel Georgetow n 100 RM300k/room@240 72 Sunw ay Hotel Phnom Penh 53 RM200k/room@138 14.628 Sunw ay Hotel Hanoi 100 RM200k/room@142 28.4 791.85 Other div isions 3-yr avg earnings PE (x) Construction 76.6 10 765.6 Trading 35.2 8 281.9 Building material 22.4 8 178.8 Stake (%) Mkt cap (RM'mil) Sunw ay REIT 36.7 3065.8 1125.1 $5,395.84

Warrants proceed (ex ercise price of RM2.80/share) 723.8

less: Net debt FY12F (1,258.0) $4,861.64

Outstanding shares (million) 1292.5 Outstanding w arrants (million) 258.5 Enlarged share base (million) 1551.0

SOP/share $3.13 Source: Company/ AmResearch AmResearch Sdn Bhd 5 Sunway Bhd 14 November 2011

TABLE 4: KEY DEVELOPMENTS Klang Valley Stake Remaining GDV (RM'mil) Development Period (years) Sunw ay Damansara 60% 825.5 5 to 7 Sunw ay South Quay 60% 3892.7 7 to 10 Sunw ay Semeny ih 70% 728.6 7 to 10 Sunw ay Duta 60% 120.0 2 to 3 Sunw ay Melew ati 100% 554.9 3 to 5 Sunw ay IR 100% 660.1 5 to 7 Casa Kiara 3 80% 230.0 2 to 3 Sunw ay Velocity 59% 3063.1 5 to 7 Tmn Equine 100% 250.0 2 to 3 Sg Long, Balakong 80% 222.0 2 to 3 Mont Putra 100% 156.0 2 Perak Sunw ay City Ipoh 65% 285.8 2 to 3 Penang Sunw ay City Penang 100% 173.7 2 Sg Ara 100% 840.7 7 to 10 Bukit Mertajam 100% 149.6 2 Johor Bukit Lenang 80% 932.0 7 to 10 Singapore Tampines 30% 1070.0 3 Sembaw ang 100% 75.0 3 Yuan Ching Road 30% 828.0 3 Pasir Ris 30% 345.0 3 China Sunw ay Guanghao 65% 66.8 2 to 3 Tianjin Eco City 60% 5343.9 5 to 7 India Sunw ay OPUS Grand India 50% 702.4 3 to 5 Sunw ay MAK Signature 60% 181.2 2 to 3 Australia Wonderland Business Park 45% 441.0 5 to 7 Source: Company/ AmResearch

Nonetheless, the fundamentals for the property market that the group is still familiarising itself with a new market. remain solid with interest rates already peaking, rapid Partnerships and JVs would certainly provide crucial local urbanisation, favourable demographics and high savings knowledge and reduce its risks at the same time. in the financial system.  To redevelop government prime land as well?  Learning the ropes in China Urban renewal is one of the key ongoing themes for At present, the group is involved in two developments in Malaysia’s property sector and Sunway could be in the China. The first is the 60:40 joint-venture with the Chinese mix as well. and Singaporean Consortium (SSTEC) in Tianjin, China. Recently, there was market talk of Sunway winning the Total gross land area for the development is 7,500 acres bid for the 20-25 acre site of the Jalan Duta government with a target population of 350,000 and 110,000 units. complex. The complex accommodates the Ministry of Apart from Sunway, other major Asian developers are also International Trade and Industry (Miti), Inland Revenue involved, such as CapitaLand from Singapore, Ayala Land Board (IRB) and the Royal Malaysian Customs. from the Philippines, Mitsui Fudosan from Japan and Fairglory from Taiwan. It is understood that Sunway will pay the government more than RM500mil for the site and construct new offices for Sunway’s portion is about 98 acres at an estimated GDV the IRB and Customs Department elsewhere. Taking the of RM5.3bil for a development period of five to seven RM500mil figure, essentially, Sunway would be paying years. We gather that the JVco is expected to build over between RM460psf-RM570psf for the prime land which 5,000 units of residential and commercial properties. The has easy access to and near the upmarket maiden launch would be in 1H2012 comprising 881 condo areas of Dutamas and . units with GDV of RM534mil.  Possible Iskandar involvement? Its second China venture (65:35) is in Jiangyin, a city It was recently reported in the papers that conglomerate located in the province of Jiangsu on the Yangtze River. Sime Darby and Sunway are likely to jointly develop This development has already been launched with a GDV townships in Iskandar Malaysia in Johor. The government of circa RM403mil for the maiden phase. Take-up has was allocating land for the joint development and the land been encouraging at about 80%. would be sold at a decent rate. It was also mentioned that both companies would sign a memorandum of China is very much a long-term story and we see minimal understanding soon. impact on its earnings in the near- to medium-term given

AmResearch Sdn Bhd 6 Sunway Bhd 14 November 2011

TABLE 5: SUNWAY’S CONSTRUCTION ORDERBOOK Current orderbook Outstanding @ Aug 11 Local RM'mil Ex pected completion date Precinct 4, Putrajay a (2 Gov t Office Buildings) 57 Nov -11 Precinct 1, Putrajay a (Hotel & Office) 105 Oct-12 Impiana Hotel 32 Nov -11 The Pinnacle (substructure) 8 Nov -11 Sunw ay Velocity (Shop Offices & Apartment) 173 Sep-12 PML Diaries (Factory ) 12 Oct-11 Putrajay a P7 & P8 Infra & GDC Plant 53 Feb-12 UiTM campus ex pansion & KLCC link bridge 202 Jan-13 Legoland 233 Jun-12 BioXcell - Central Facilities Utility 74 May -12 LRT Kelana Jay a 569 Feb-14 Pinew oord Studio Iskandar 309 May -13 Others 367 2194 Foreign Abu Dhabi - Rihan Heights (Ov erall) 170 Dec-11 Singapore - Precast 315 485

Current total orderbook 2679 Source: Company/ AmResearch

However, Sunway had categorically denied it had been potential involvement in SCORE infrastructure may prove talking to Sime Darby on the possible development of to be challenging. Iskandar. Nonetheless, it is actively pursuing landbanks all over Malaysia, including Iskandar. The latest Budget proposal (see Table 8) is very much a positive one for contractors. Public transportation CONSTRUCTION (including highways) and East Malaysia (rural development, SCORE) continue to be dominant themes Sunway construction arm’s strength lies in building jobs along with the inclusion of several new projects and the (in-house and external) and highways/road works projects. re-affirmation of other projects. Another positive surprise Some of the notable projects include KL Convention is the announcement of a special RM6bil stimulus Centre (RM549mil), Sunway Pyramid 2 (RM299mil), package for projects to be undertaken on a Private Package 3 of KL-Putrajaya Highway (RM165mil) and Finance Initiative (PFI) basis. Taken together, the ramp- South Klang Valley Expressway (SKVE) for RM210mil. up of both existing and new projects would anchor a

Sunway’s construction arm has an order book renewal doubling of the 2012 construction GDP target to 7%. target of RM1.5bil renewal every year and the group has done well, with year-to-date contracts won at about  Plenty of infra and road jobs to support SCORE RM1.3bil. The current order book is quite sizeable at RM2.7bil. About 80% of the figure comprises local jobs. We understand Sunway is eyeing road projects in (See Table 3 above) Sarawak to support the SCORE development. There are 21 packages with an average contract value/ job at about The recent merger of the two Sunway companies also RM100mil. Five packages have been awarded since last means that the property development and construction year. These were contracts under the Murum dam divisions can work closely together and there will be no access roads that were dished out in May last year. (See more corporate governance issues. Table 6)

Following the merger, we understand that the property arm There are few more road jobs up for grabs but the would provide building jobs worth circa RM500mil to the timeline would depend on the feasibility studies on the construction unit every year. remaining hydro dams of which the roads are needed to

 A lot of contracts still up for grabs TABLE 6: MAJOR INFRASTRUCTURE PROJECTS PROPOSED UNDER SCORE Sunway’s annual order book target of RM1.5bil may be 1) Access road to Murum HEP, Kapit achievable given that a third of it is secured by jobs from 2) Public Access Road from Sangan to Kapit v ia Nanga Merit Coal Mine, Kapit its property unit. 3) Access road to Baram HEP site, Miri 4) Access road to Baleh HEP site, Kapit Apart from the MRT, there are other major ETP and 5) Access road to Tunoh, Kapit 6) Access road to Limbang HEP, Limbang 10MP projects up for grabs, including several highway 7) Samalaju Water Supply jobs and integrated ‘iconic’ developments. Nonetheless, 8) New Mukah Airport, Mukah we expect Sunway to be selective in looking for new jobs 9) Samalaju Industrial Park as current contracts in-hand will keep it occupied. But, its Source: Company / AmResearch

AmResearch Sdn Bhd 7 Sunway Bhd 14 November 2011 support the respective dams. Studios for the proposed construction and completion of an integrated media studios facility. To be called the  But it will be tough... Pinewood Iskandar Malaysia Studios, the contract is worth RM308.9mil. The construction of the building is targeted But its potential involvement in SCORE infrastructure for completion by 10 March 2013 with a construction may prove to be challenging. The reason we are saying period of 19 months. this is that Sarawak’s construction and infrastructure scene is dominated by the local boys such as Hock Seng  Prequalified for MRT works packages Lee, KKB Engineering and Naim Holdings. There is also the possibility of the group being involved in Preference is given to the local contractors hence it may the Klang Valley MRT project with a total of 11 packages be tough for contractors from Peninsula Malaysia, (out of the total 18 packages) available for the open although IJM Corp and Loh & LohConstruction won three category. Sunway has been prequalified for three jobs i.e. road jobs packages between them last year worth about elevated civil works and construction of the stations and RM700mil. depots.

 LRT job We are positive on Sunway’s potential involvement given the better margins and it would provide a boost to its new Sunway’s construction arm had recently been given the construction order book. Nonetheless, bidding margins letter of award for a contract worth RM569mil from Syarikat may be more competitive than earlier expected, although it Prasarana Negara for the construction and completion of would still likely be healthier than the LRT works due to the facilities works (Package B) for the Kelana Jaya line MRT’s relatively higher degree of skill-sets involved. extension project. We understand three major tenders for the elevated The project consists of the construction and completion of portions are currently ongoing. Two of them involve works facilities all along the 8.1km project route from Persiaran packages for the elevated viaducts, while the other Kewajipan, Subang Jaya to Putra Heights. The work scope involves a supply package for Segmental Box Girders includes site clearance, earthworks, viaduct construction, (SBGs). roadworks, drainage works, traffic management, structural works and temporary works. We understand that this job The bulk of the remaining elevated packages (worth in the is expected to be completed within 29 months. region of RM12bil) are poised to be tendered out in batches from this month onwards until year-end. At the same time, MRCB also won a job worth RM1.3bil from SPNB. This job involves the construction and completion of facilities works that include the fabrication and delivery of segmental box girders (Package B) for the FINANCIALS Ampang line extension project. Construction period will be 30 months from the date of possession of site. We estimate FY11F earnings of RM311mil with the property development unit being the key driver, These two contracts would bring closure to the civil contributing about 40% to earnings. Key projects include packages contract under the Klang Valley LRT project. Sunway VeloCity, South Quay, and Damansara. We are TRC Synergy Bhd had earlier won the RM950mil facilities expecting a growth of 14%-23% for FY12F-FY13F to packages A for the Kelana Jaya line. Nominated sub- RM355mil-RM439mil. contracting works for the fabrication and delivery of segmental box girder (SBG) went to UEM Builders-Intria Our estimates are also based on an assumption of Bina Sdn Bhd JV for a contract value of RM93mil (21 RM1bil construction order book renewal for FY12F to months). FY13F with margins of 6% to 7%. Construction’s revenue for FY12F and FY13F will be driven mostly by UiTM For the Ampang line facilities Package A, the job went to campus expansion, LRT Kelana Jaya and Pinewood the Bina-Puri-Tim Sekata JV with a total contract value of Iskandar Studio. RM634mil. The JV was also picked by SPNB as the nominated sub-contractor for the SBG works (RM68mil We estimate Sunway’s balance sheet to continue to be with construction period of 19 months). healthy with a net gearing of 20% to 60% for FY11F- FY13F. While there is no clear dividend policy at this  But margins are not attractive for LRT works juncture, we have assumed a 20% payout ratio. This translates to a yield of 2%-3% for FY11F to FY13F. Nonetheless, we caution that the jobs under the Klang Valley LRT works could come with thinner mid-single digit margins at best, mostly due to the intense level of bids. On the other hand, margins should be better for MRT civil works given the higher degree of skill-sets involved.

 Pinewood Studios in Iskandar is the latest job won

It was announced recently that Sunway’s construction arm had been given the letter of award from Iskandar Malaysia

AmResearch Sdn Bhd 8 Sunway Bhd 14 November 2011

TABLE 7: 28 COMPANIES ELIGIBLE TO BID FOR MRT WORKS PACKAGES Elevated Civil Works (8 packages) Stations (8 packages) Depots (2 packages) Open Category (5 packages) Open Category (5 packages) Open Category (1 package) 1. Sunway Construction Sdn Bhd 1. Trans Resources Corp Sdn Bhd 1. Sunway Construction Sdn Bhd 2. Mudajaya Corp 2. Sunway Construction Sdn Bhd 2. Trans Resources Corp Sdn Bhd 3. Tran Resources Corp Sdn Bhd 3. Naim Engineering Sdn Bhd 3. Naim Engineering Sdn Bhd 4. Muhibbah Engineering (M) Sdn Bhd 4. Fajarbaru Builders Sdn Bhd 4. Muhibbah Engineering (M) Sdn Bhd 5. IJM Construction Sdn Bhd 5. IJM Construction Sdn Bhd 5. IJM Construction Sdn Bhd 6. Ahmad Zaki Sdn Bhd 6. Loh & Loh Construction Sdn Bhd 6. Fajarbaru Builders Sdn Bhd 7. MTD Construction Sdn Bhd 7. Muhibbah Engineering (M) Sdn Bhd 7. Loh & Loh Construction Sdn Bhd 8. MRCB Engineering Sdn Bhd 8. Gadang Engineering (M) Sdn Bhd 8. Gadang Engineering (M) Sdn Bhd 9. Gadang Engineering (M) Sdn Bhd 9. Pembinaan Mitrajaya Sdn Bhd 9. Kencana Torsco Sdn Bhd - Al Ambia JV 10. Loh & Loh Construction Sdn Bhd 10. WCT Bhd 11. Konsortium Putra Perdana Const & 11. Kencana Torsco Sdn Bhd - Al Ambia JV Worthy Builder JV Konsortium PPC - WB JV (Putra Perdana 12. Const. & Worthy Builders S/B)

Bumiputra Category (3 packages) Bumiputra Category (3 packages) Bumiputra Category (1 package) 1. Naim Engineering Sdn Bhd 1. Trans Resources Corp Sdn Bhd 1. Trans Resources Corp Sdn Bhd 2. Trans Resources Corp Sdn Bhd 2. Naim Engineering Sdn Bhd 2. Naim Engineering Sdn Bhd 3. TSR Bina Sdn Bhd 3. TSR Bina Sdn Bhd 3. Ahmad Zaki Sdn Bhd 4. Ahmad Zaki Sdn Bhd 4. Ahmad Zaki Sdn Bhd 4. TSR Bina Sdn Bhd 5. HRA Teguh Sdn Bhd 5. HRA Teguh Sdn Bhd 5. HRA Teguh Sdn Bhd 6. MTD Construction Sdn Bhd 6. SN Akmida Holdings Sdn Bhd 6. Perkasa Sutera Sdn Bhd Syarikat Muhibah Perniagaan & Syarikat Muhibah Perniagaan & 7. 7. Kembang Serantau Sdn Bhd 7. Pembinaan Sdn Bhd Pembinaan Sdn Bhd 8. Zecon Sdn Bhd 8. Apex Communication Sdn Bhd 8. Dekon Sdn Bhd 9. Cergas Murni Sdn Bhd 9. Pembinaan Bukit Timah Sdn Bhd 10. Tidal Marine Engineering Sdn Bhd 10. Perkasa Sutera Sdn Bhd 11. Dekon Sdn Bhd Syarikat Muhibah Perniagaan & 12. Pembinaan Sdn Bhd Source: Company/ AmResearch

AmResearch Sdn Bhd 9 Sunway Bhd 14 November 2011

TABLE 8: NEW AND REAFFIRMED PROJECTS DURING BUDGET 2012 Key snapshots :

(1) Sg.Buloh Kajang (SBK) MRT line - construction works to start in November 2011.

(2) Projects under the 10th Malaysia Plan (10MP) Rolling Plan 2 [RP2]: - Gemas Double Tracking project - (WCE), - East Coast Expressway Phase 2 (ECE 2: Jabor-Kuala ), - Lebuhraya Central Spine - -Tangkak Highway - Kota Marudu-Ranau road - Redevelopment of Sg.Besi Kuala Lumpur Air Base

(3) Integrated ‘iconic’ developments: 100-storey tower, KL International Financial District (KLIFD), RRIM Land.

(4) Building opportunities under the Program Perumahan Rakyat 1 Malaysia (PR1MA)

(5) RM978mil allocated for the five regional corridors: SCORE: - Various access roads, - Samalaju water supply, - Other basic rural infrastructure (e.g. electricity). Other corridor developments: - Johor Bahru-Nusa Jaya coastal highway (Iskandar Johor) - Heritage tourism development Taiping (Northern Corridor) - Agropolitan Scheme Besut (East Coast Economic Region) - Palm oil industrial cluster Lahad Datu (Sabah Development Corridor)

(7) RM6bil Special stimulus package under the Private Financing Initiative (PFI).

(8) RM5bil for rural basic infrastructure: - Rural road programme and village link (2,749 km) - RM1.8bil - Clean water supply for 200,000 households (RM2.1bil) - RM1.1bil for electricity supply to 39,000 households in rural areas, particularly in Sabah and Sarawak.

(9) Flood mitigation programmes (RM1bil): - Perlis (upgrading of Timah Tasoh Phase 2, widening/deepening of Sg.Arau) - Perak (Sg. Kerian, Sg. Kurau and Kolam Bukit Mewah) - Johor (Sg. Segamat)

(10) Construction and upgrading of new hospitals (RM1.8bil) - Hospital Kuala Lumpur (RM300mil) - Hospitals in Bera, Kuala Krai, Dungun, Sri Aman, Tuaran - Maternity block (Hospital Putrajaya) - Upgrading of 81 rural health clinics nationwide and launch of 50 new 1Malaysia clinics.

(11) Other notable projects: - Upgrading of airports in Sibu, Kota Baru and Ipoh. - Two more Integrated Transport Terminal (ITT) projects in Gombak and Sg.Buloh

Source: Company/ AmResearch

AmResearch Sdn Bhd 10 Sunway Bhd 14 November 2011

CHART 4: PROPERTY INVESTMENT PIPELINE

Source: Company/ AmResearch

AmResearch Sdn Bhd 11 Sunway Bhd 14 November 2011

TABLE 9: FINANCIAL DATA

Income Statement (RMmil, YE 31 Dec) 2009 2010 2011F 2012F 2013F

Revenue n/a 3134.5 3,507.7 3,897.6 4,448.0 EBITDA n/a - 502.8 568.0 658.7 Depreciation n/a - (74.8) (76.6) (78.2) Operating income (EBIT) n/a 592.1 428.0 491.4 580.5 Other income & associates n/a 199.3 131.8 146.8 149.1 Net interest n/a (74.2) (65.6) (85.5) (64.1) Exceptional items n/a (363.2) 0.0 0.0 0.0 Pretax profit n/a 354.1 494.1 552.6 665.5 Taxation n/a 280.2 (123.5) (138.2) (166.4) Minorities/pref dividends n/a (309.2) (60.0) (60.0) (60.0) Net profit n/a 325.0 310.6 354.5 439.1 Core net profit n/a 325.0 310.6 354.5 439.1

Balance Sheet (RMmil, YE 31 Dec) 2009 2010 2011F 2012F 2013F

Fixed assets n/a 968.7 993.9 1017.3 1039.1 Intangible assets n/a 2972.9 330.1 330.1 330.1 Other long-term assets n/a 72.5 2823.8 2882.6 2943.2 Total non-current assets n/a 4014.2 4147.8 4230.0 4312.4 Cash & equivalent n/a 868.5 1671.7 1373.8 1522.0 Stock n/a 301.5 336.4 352.4 487.4 Trade debtors n/a 1142.9 1249.3 1388.2 1584.2 Other current assets n/a 697.8 739.8 814.5 920.1 Total current assets n/a 3010.8 3997.1 3928.9 4513.7 Trade creditors n/a 1379.9 1383.8 1537.7 1754.8 Short-term borrowings n/a 505.5 405.5 305.5 205.5 Other current liabilities n/a 67.9 67.9 67.9 573.2 Total current liabilities n/a 1953.2 1857.2 1911.0 2533.5 Long-term borrowings n/a 1826.3 2726.3 2326.3 1926.3 Other long-term liabilities n/a 263.8 269.2 274.8 280.5 Total long-term liabilities n/a 2090.1 2995.5 2601.1 2206.9 Shareholders’ funds n/a 2595.8 2906.4 3260.9 3700.0 Minority interests n/a 385.8 385.8 385.8 385.8 BV/share (RM) n/a 2.01 2.25 2.52 2.86

Cash Flow (RMmil, YE 31 Dec) 2009 2010 2011F 2012F2013F

Pretax profit n/a n/a 494.1 552.6 665.5 Depreciation n/a n/a 74.8 76.6 78.2 Net change in working capital n/a n/a 668.3 (148.0) 254.2 Others n/a n/a (209.6) (208.2) (261.9) Cash flow from operations n/a 461.7 1,027.6 273.0 736.0 Capital expenditure n/a n/a (50.0) (100.0) (100.0) Net investments & sale of fixed assets n/a n/a 0.0 0.0 0.0 Others n/a n/a 0.0 0.0 0.0 Cash flow from investing n/a 2,035.0 (50.0) (100.0) (100.0) Debt raised/(repaid) n/a n/a (100.0) (400.0) (400.0) Equity raised/(repaid) n/a n/a 0.0 0.0 0.0 Dividends paid n/a n/a (62.1) (70.9) (87.8) Others n/a n/a 0.0 0.0 0.0 Cash flow from financing n/a (2,265.9) (162.1) (470.9) (487.8) Net cash flow n/a 230.9 815.5 (297.9) 148.2 Net cash/(debt) b/f n/a 641.6 856.2 1,671.7 1,373.8 Net cash/(debt) c/f n/a 856.2 1,671.7 1,373.8 1,522.0

Key Ratios (YE 31 Dec) 2009 2010 2011F 2012F 2013F

Revenue growth (%) n/a n/a 11.9 11.1 14.1 EBITDA growth (%) n/a n/a n/a 13.0 16.0 Pretax margins (%) n/a 11.3 14.1 14.2 15.0 Net profit margins (%) n/a 10.4 8.9 9.1 9.9 Interest cover (x) n/a 8.0 6.5 5.7 9.1 Effective tax rate (%) n/a (39.1) 25.0 25.0 25.0 Net dividend payout (%) n/a n/a 20.0 20.0 20.0 Debtors turnover (days) n/a 133.1 130.0 130.0 130.0 Stock turnover (days) n/a 35.1 35.0 33.0 40.0 Creditors turnover (days) n/a n/a 168.1 168.6 169.0

Source: Company, AmResearch estimates

AmResearch Sdn Bhd 12 Sunway Bhd 14 November 2011

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