Demand for IOIPG’s properties in China remains healthy and we do not foresee difficulties in the remaining launches worth of RMB3bn over the next 2-3 years. Notably, its recent launch of villas in Xiamen achieved a take -up rate of over 40% within weeks. The Group continues its efforts in expanding its investment property and hospitality portfolio over the next years. Maintain BUY with a higher TP of RM1.76 based on a lower discount at 60% to a RNAV of RM4.32

1QFY21 recap. IOIPG reported 1QFY21 core PATMI of RM175.2m (-0.4% QoQ, -0.2% YoY) which were above expectations largely due to higher-than-expected sales recognition from China and completed inventory sales. The results were very much commendable as IOIPG managed to maintain strong earnings both QoQ and YoY despite the ongoing pandemic.

China remains encouraging. We understand that demand for IOIPG’s properties in China remain healthy (supported by a pent-up demand) and we do not foresee difficulties in the remaining launches worth of RMB3bn over the next 2-3 years. Notably, its recent launch of villas in Xiamen achieved a take-up rate of over 40% within weeks. IOIPG remains open to land-banking opportunities in China whereby its efforts can be seen in its recent discussions to enter a preliminary MOU with the Qianhai Administration Bureau as an expression of interest to potential land-banking activities in Qianhai. We believe IOIPG will continue to do well in China given its successful track record in developing IOI Park Bay and IOI Palm City (Jimei), and IOI Palm International Parkhouse (Xiang An), all located in Xiamen.

Recurring income to grow. The investment property and hospitality portfolios provide for c.27% of its operating profits (pre-Covid). The Group will continue to expand its NLA of retail malls (+65%) and office spaces (+50%) both locally and abroad over the next 3-5 years with the ongoing construction of IOI City Mall Phase 2, Central Boulevard Towers in Singapore, and offices and a new mall in Xiamen, PRC. Furthermore, a 370- room 5-star hotel will be built in Xiamen and managed by Marriott International Inc. which brings the total number hotels to 5, offering over 1,600 keys.

Looking forward. Management has yet to officially announce FY21 sales and launch targets for now, but we expect it to be able to record similar levels YoY. For illustrative purposes, 1QFY21 saw sales and launches worth RM473m and RM640m, respectively , which forms c.25% of FY20 figures. Unbilled sales stood at RM562.8m as of 1QFY21 (cover ratio of 0.34x) but we note that the cover ratio has always been hovering below the 0.5x levels (over the past years). Despite this, earnings still manage to sustain as it is supported by the sale of completed inventory and projects in China which are launched once construction progress is at least 50%, which in turn, directly translates into earnings (upon conversion of bookings to sales). Earnings will also be supported by efforts to clear completed inventory which is worth just over RM2bn as of 1QFY21. Management notes that the incentives and promotion given for such properties are very much contained, as seen in its ability to consistently record net margins of 20-30% over the past years up until now.

Forecast. Unchanged.

Maintain BUY with a higher TP of RM1.76 (from RM1.10) based on a lower discount at 60% (from 75%) to a RNAV of RM4.32 as our previous estimates were too conservative. We remain confident on the Group’s outlook given the strong response in its products and potential land banking activities in China coupled ongoing efforts to increase its recurring income base. We also see value in the stock given its ability to heavily outperform its peers over the past two quarters during the ongoing pandemic alongside its ability to sustain strong net margins of 20-30%. At current prices, the stock trades at an undemanding 0.4x P/B (which is -1SD below its 5-year mean).

Source: Hong Leong Investment Bank Research - 10 Dec 2020