News

Sunway South Quay (SSQ) (Sunway/EPF/KFH 60:20:20% stake) has entered into an agreement with Mitsui Fudosan to jointly develop a 27,520 sq m (6.8 acres) land owned by SSQ itself (see Figure #1). The development (known as Sunway Geo Residences Development) comprises of 2 blocks of condominiums with 472 units and a GDV of RM319m.

The JV will see SSQ holding a 67% stake (40.2% effective stake for Sunway) while Mitsui Fudosan will hold a 33% stake (see Figure #2).

Highlights

About Mitsui… Mitsui is a leading property developer in Japan, and this JV will allow Sunway to access Mitsui’s database of ~300k Japanese customers and expand the international community within its flagship township – Sunway Resort City.

Positive JV… More importantly it will allow quicker monetisation of Sunway’s new launches. This is evidenced by the soft launch last week which has already achieved 70% bookings for its first tower block as compared to the slower take-up rates for Bayrocks (80% take-up), A’Marine (92% take-up) and LaCosta (83% take-up) which was launched a few years ago. Hence, we welcome this positive strategy in terms of quicker development turnaround period. Going forward, this fruitful collaboration may also prove useful in attracting foreign investors for its new Sunway Iskandar township as well as other developments.

RM1.1bn target… As of 1HFY13, Sunway has secured RM491m in new property sales, making up 44.6% of its RM1.1bn new sales target for FY13. We believe that the latest collaboration coupled with other new launches, Sunway will have no problem in achieving their target. Meanwhile, its unbilled property sales (as of 1HFY13) stood at RM1.8bn, translating to 2.0x FY12’s property revenue.

Transaction details… Land cost for Mitsui works out to RM59.2m, which translates to RM200/sq ft. We believe that this value is at the lower end of RM200-220/sq ft based on mid-2012’s land valuation report. The ASP (Average Selling Price) works out to RM676k/unit or RM850/sq ft, which is within the ASP of RM800-RM1,000/sq ft in the vicinity.

Risks

Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; and Unexpected downturn in the construction and property cycle.

Forecasts

Unchanged as the potential new property sales is already part of our forecasts.

Rating

BUY

Despite the potential headwinds from property tightening measures and slower contract flows, its recapitalised balance sheet and large order book will be able to sustain earnings growth. Hence, we maintain our BUY call on Sunway.

Valuation

TP maintained at RM3.35 based on SOP valuation (see Figure #3).

Source:Hong Leong Investment Bank Research - 25 Oct 2013