With the economy recovering and borders reopening, Sunway is ready to pull its levers to propel its business to the next phase of growth as all its business segments are expected to benefit from it. While the market may value the group as a conglomerate with holding discount, we reckon that there is a rerating opportunity for Sunway when the market fully appreciate the group’s integrated business model where each segment is well managed in its own regard while at the same time also complements with the overall group’s business model resulting in synergistic value larger than the sum-of-parts. Its efforts to expedite the expansion of its healthcare segment with its new strategic partner GIC, will culminate in the separate listing of healthcare unit to help unlock value in the group. Maintain BUY with an unchanged SOP-based TP of RM2.58.

We remain upbeat on the group's growth prospects post virtual meeting with management. Key takeaways:

Healthcare – hub and spoke model. The group has a hub and spoke model for the healthcare segment where SMC Sunway City is the centralized hub which houses the top surgeons, cutting edge equipment and well organised support services to provide specialized and sophisticated medical services. Sunway Medical Velocity and the new ones in the pipeline will expand its medical services across states in the nation. The outreach in the medical services is complemented by the recently acquired pharmacy chain (>100 outlets), renamed as Sunway Multi Care. Under this hub and spoke model, the group will be able to (i) generate cross-referrals to maximize utilization rate; (ii) refer tertiary care patients to SMC Sunway City; (iii) widen its patients reach through its large geographical presence (further enhanced by the pharmacy chains); and (iv) enjoy economies of scale as it capitalize on the group’s centralized planning and procurement efforts.

Expansion pipeline in FY22. Two new facilities are targeted to open this year:
(i) SMC Seberang Jaya, Penang aims to open in 4Q22 targeting the underserved industrial region. Management expects this new hospital to register similar performance to SMCV, i.e. a 2-2.5 years gestation period before turning profitable.
(ii) SMC Sunway City – Tower D – first 15 floors are medical suites (180 units) which will provide more capacity to the group as the other blocks are operating at full capacity; 16th to 30th floors are for assisted living patients (targeting upper and middle income markets). The facilities will open progressively. Management expects the strong 4Q21 performance of the healthcare segment to sustain into FY22. This is on account of (i) inflows of medical tourism with borders reopening; (ii) recovering patient footfalls from delayed elective procedures; and (iii) lower Covid-related operating expenses as restrictions ease as the country enters into the endemic phase.

Property development prospects. Despite the end of HOC campaign, management is seeing an encouraging pick up in sales after CNY in Feb 2022. Management remains positive on property development as the overall macro environment in 2022 remain supportive. This is on account of (i) high commodities prices (from CPO and crude oil) bolstering the economic recovery; (ii) well managed inflation compared to other regions (due to government subsidy on retail oil prices); (iii) interest rate hike cycle is slower in Malaysia (compared to other regions) as the country is in the early stages of economic recovery; (iv) healthy inflow of FDIs as Malaysia is a relatively geopolitically neutral country, making it an attractive investment destination. The group will continue to focus on land banking activities in the Klang Valley region, with a focus in the KL area due to (i) the less stringent regulatory / approval requirements in KL compared to Selangor; and (ii) faster time to market in KL.

Property development – Singapore. The two executive condominiums (Parc Canberra and Parc Central) achieved 100% take-up rate. Revenue recognition will be upon completion of construction, expected to be by end-2023. As for the private condominium (Ki Residences launched in Dec 2020), it has achieved 86% take-up rate. The selling price for Ki Residences is higher (by c.2% since Dec 2020), indicating robust demand despite the Singapore government's cooling measures in the property segment. Outlook in Singapore property market remains positive as it continues to attract high net worth buyers due to its strategic position as a regional financial hub. This trend will bolster for the demand for the group’s private condominium demand, i.e. Ki Residences and the two upcoming launches, slated to launch by end 2022/ early 2023.

Property development – China. The Sunway Garden development in Tianjin is at its last phase. Previously, the Covid outbreak in China had led to city wide lockdown in Tianjin. This had consequently dampened consumer sentiment. Nonetheless, China authorities have recently started easing property restrictions including reducing down payments, subsidising house purchases, cutting mortgage interest rates and giving financial support to developers to provide stability to the sector and economy post lockdown. These supportive measures should support the demand and recovery in its Tianjin project.

Property investment. On theme park, 1Q is a seasonally weaker quarter. Having said that, management expects 1Q22 will be stronger on a YoY basis. Hotel segment should continue to show gradual improvement moving forward, thus, operating losses should narrow. Sunway Resort, the group’s main hotel is currently under refurbishment and expect to open by phases from June 2022 onwards. The resumption of this hotel’s operations should benefit other facilities and segments such as malls and theme park within Sunway City as visitors extend their stay, thus, increasing the average spend per visitor.

Construction. SunCon’s 49% owned precast plant in Singapore will be operational by 2H22 representing an effective 29% increase to existing capacity. Demand for SunCon’s precast will remain robust supported by HDB’s plan to launch up to 23k BTO units in 2022 and 2023, a 35% increase from 2021 launch of 17k units (past 4 years have ranged between 15-17k units).

Others – trading and manufacturing, building materials, quarry. These businesses are the market leaders in their respective fields even though contributions from these segments are not in the same magnitude as the group's main business segments. These segments are expected to improve on a YoY basis following the pickup in economic activities.

Digitalisation. The group has embarked on group wide digitalisation to facilitate operations during the Covid lockdown period. These efforts will be sustained going forward. Separately, the group is a team leader in the consortium bidding for the digital financial license.

Forecast. Unchanged.

Maintain BUY call an unchanged TP of RM2.58 based on SOP-derived valuation pegged to FY22 horizon. The group has multi levers of growth, particularly with its fast expanding crown jewel, healthcare segment. With the economy recovering and borders reopening, the group is ready to pull its levers to propel its business to the next phase of growth as all of its business segments are expected to benefit from it. While the market may value the group as a conglomerate with holding discount, we reckon that there is a rerating opportunity for Sunway when the market fully appreciate the group’s integrated business model where each segment is well managed in its own regard while at the same time also complements the overall group’s business model resulting in synergistic value larger than the sum-of-parts. Its efforts to expedite the expansion of its healthcare segment with its new strategic partner GIC, will culminate in the separate listing of healthcare unit to help unlock value in the group. Sunway remains our top pick given its well-integrated property, construction and building material operations.

Source: Hong Leong Investment Bank Research - 6 Apr 2022