Sunway has recovered well from the pandemic with 1H22 core earnings surpassing SPLY and pre-pandemic 1H19 levels. Looking ahead, we anticipate its earnings growth to be driven by (i) expanded capacity from its property investment; (ii) recovery in foreign visitations auguring well for its hotels, theme parks, malls and hospitals; as well as (iii) better contribution from property development as most of its local projects enter in to more advance development phases. Maintain BUY with an unchanged TP of RM2.65 based on SOP-derived valuation. Sunway remains our top pick given its synergistic business model and well-integrated property, construction and building material operations.

We Recently Hosted a Virtual Meeting With Management With Following Key Takeaways:

Recovering well from the pandemic. Sunway recorded 1H22 core earnings of RM270m (+1.5x compared to 1H21; +5.1% compared to 1H19). The group has rebounded strongly from the pandemic as its business segments benefitted from the economic reopening. When stacked against 1H19, earnings have surpassed pre pandemic level mainly driven by the strong growth from healthcare with PATAMI of RM63.5m (+84.6% from 1H19). Notably in 1H22, the group also recorded a non-core disposal gain of RM26.6m from the divestment of a start-up company the group invested 2-3 years ago, unlocking a gain of >200% from the initial invested capital. Looking ahead in 2H22, we anticipate further growth from the group driven by:

(i) Expanded Capacity From Its Property Investment Assets:
- Sunway Resort (under SunREIT) which will open its remaining room inventory by 4Q22. As at 30 June 2022, it has opened up 200 out of 460 rooms (43.5% of its room inventory). Notably, the average room rate post-refurbishment has increased by 40- 50% while occupancy rate has been very encouraging.
- Sunway Carnival Mall (under SunREIT) with its new wing expansion on 24 June 2022, which added 350k sqft NLA, bringing total NLA to 840k sqft. The occupancy rate upon opening was 80% with committed tenancy of >90%. Following the expansion with more brand offerings, management shared that the footfall to the mall has increased significantly as the mainland locals no longer need to travel to the island for shopping.

(ii) foreign visitations – In 1H22, since border reopened on 1 Apr, air flights had yet to recover to pre-pandemic level (with only <40% number of flights compared to pre pandemic). As such, with anticipated further recovery in foreign visitations in 2H22, this will drive the next leg of recovery for Sunway’s assets including hotels, theme parks, malls and hospitals (from foreign patients).

(iii) better profit recognition in property development as most of its local projects enter in to more advance development phases. The launches of its Singapore project Flynn Park (GDV: RM676m) and China project Sunway Gardens (GDV: RM276m) however, are likely to be deferred to 2023 due to delays in completion of land acquisition in Singapore and the weak property market in China. Nonetheless, management remained confident in achieving its full year sales target of RM2.2bn (1H22 sales: RM807m) supported by sales of current projects and upcoming launches (c.RM1.11bn GDV) in Klang Valley, Johor, Ipoh and Penang.

Sunway eMall. Another new area with growth potential was the development of an e commerce platform named ‘Sunway eMall’ which started in Oct 2021. Given the group’s vast experience and wide presence in the retail mall business (7 malls across 5 states), the development of the platform was a natural business expansion for the group. Currently the products and brands listed on the platform are mainly from the group’s mall tenants. The platform has a natural synergy with its physical malls as it provides its mall tenants an additional avenue to sell their goods and services to a wider audience as the goods are shipped nationwide. With this added avenue, this will strengthen Sunway’s competitive advantage and value proposition to its mall tenants compared to its peers. Conversely, through marketing incentives such as Sunway Pal Points and evouchers, the platform will also drive footfall traffic to its malls. In addition, the group also enjoyed warehousing cost savings compared to other e-commerce platforms as most of the products are shipped directly from the malls.

Healthcare. The group expects a stronger 2H22 performance for the segment on the back of the recovery in foreign patient visits. On the launch pipelines, the group remains on track to commence operations for SMC Seberang Jaya and SMC Sunway City Tower D by end of 2022 and early 2023. The addition of Tower D, E and F in SMC Sunway City are expected to add an additional 465 beds, bringing total to 1,081 beds. For SMC Velocity, Phase 2 expansion is expected to be completed in Q3 2023, adding 110 beds, bringing total to 350 beds. Also under construction are SMC Damansara (expected opening date: Q1 2024) and SMC Ipoh (expected opening date: Q4 2024), while in the launch pipelines are SMC Kota Bahru (expected opening date: Q4 2025) and Paya Terubong, Penang and Sunway City Iskandar Puteri, Johor (beyond 2025).

Construction. The segment is holding up well especially given the challenging landscape of labour shortage and hike in building material costs. The group expects a steady performance in 2H22 as it is poised to benefit from: (i) MRT3 jobs, (ii) sizable factory/data centre job and (iii) RM500m worth of in-house jobs.

Forecast. Unchanged.

Maintain BUY with an unchanged TP of RM2.65 based on SOP-derived valuation. With the group recovering well from the pandemic, the positive cash flow from the group can be ploughed back to expedite its multi levers of growth, including its fast expanding crown jewel, healthcare segment. Looking ahead, with expanded capacity from its property investment, recovery in foreign footfalls and better recognition from its property development, we anticipate further upside in its earnings growth. Sunway remains as our top pick given the group’s synergistic business model and well-integrated property, construction and building material operations.

Source: Hong Leong Investment Bank Research - 7 Sept 2022