What’s New

• Zhuhai visit. We have recently visited LBS Bina (LBS)’s 60% owned Zhuhai International Circuit (ZIC) and nearby property project named Lakewood Hills (the Lakewood golf course and development land were originally belonged to LBS and subsequently sold to China party in mid-2013). We also managed to meet up with the senior management of HK-listed Zhuhai Holdings Investment Group Limited (LBS now owns 9.7% stake in the company). Besides, we have been granted a private access to view the marvelous HK Zhuhai-Macau Bridge (HKZMB). Overall, the trip gave us a better gauge of how vibrant is Zhuhai’s economy and its property outlook.

Comment

• About HKZMB. The HKZMB, a Y-shaped span, is a complex sea-crossing project, which consists of a series of three-lane expressway bridges and one undersea tunnel spanning the Lingdingyang channel, that connects Hong Kong (an artificial island near Hong Kong International Airport) with Macau (another artificial island off the eastern shore) and Zhuhai (an artificial island off Gongbei), three major cities on the Pearl River Delta in China. The 42 kilometres link (the main bridge section is 22.9 kilometres long whilst the undersea tunnel is 6.7 kilometres) costs RMB120 billion. With its length, it would be among the world's longest and become one of the landmarks within the area. Construction formally began in December 2009 and the bridge is now targeted for public opening to vehicular traffic in Mar/Apr 2018.

• Positive spillover effects from HK and Macau. Currently, a journey by land from HK to Zhuhai will take 3 hours whilst 70 minutes by ferry. Upon completion of the HKZMB, the travel time between the two destinations will be shortened to 30 minutes with projected traffic volume of 15k vehicles/day. Thus, Zhuhai would benefit substantially from the mobility of human traffic, cross border trades and business establishments particularly in the areas of property sector, retail, logistics and services. With the prevailing stubbornly high property/land prices in HK and Macau, we believe Zhuhai property/land prices could play catch-up and appreciate upon the completion of the HKZMB. Having said that, we understand from Zhuhai Holdings Investment Group Limited, the developer of Lakewood Hills, that non citizens of Zhuhai are only allowed to own residential property in the district after they have paid government taxes or contributed to the social security fund for five years since the new ruling being introduced early this year. We have been told that average residential property price in Zhuhai is currently at RMB20k/sm with city centre and Hengqin (special economic zone) could command as high as RMB30-50k/sm and RMB50k/sm respectively against Macau’s property price of RMB80-100k/sm.
• About ZIC. During the visit, we have also been briefed by the management of ZIC on its progress of upgrading and transformation plan. To recap, the plan aims to revitalise the racing circuit into a three-pronged development plan which will encompass tourism (theme park, factory outlet, shopping mall, and convention centre), cultural related theme (Melaka-China culture centre/museum, exhibition centre) and motor sport (workshops, show rooms and its existing racing circuit). While ZIC is currently self-sustaining on cash flow basis, the racing circuit still incurs net loss to LBS mainly due to depreciation & amortization.
• Eyeing to unlock potential landbank values in ZIC. We understand that the guidelines on plot ratio and land usage have been issued and LBS is in the midst of submitting the detailed development plan to the committee of the council after its initial conceptual plan was open for public viewing without any protest. Besides, a new mayor of Zhuhai, Yao Yisheng was appointed in end September this year following the arrest of previous mayor, suspected of corruption during his tenure holding senior position in a state-owned enterprise. Hence, we shall expect speedier approval of the transformation plan especially with a key decision maker on board. LBS is currently exploring the best options to realize its potential landbank values in this 264-acre ZIC, which may include outright sales and/or JV with its China party to co develop the land, or even listing of ZIC in HK/China. We opine that the Group shall dispose the land in view of sizeable land premium to be incurred should the Group choose to embark on the development plan. Furthermore, LBS may require massive capital to develop the said project with its long gestation period. To recap, LBS sold its Lakewood golf course and development land for HKD117/sf (raw land) in 2013. Over the years, land prices in Zhuhai have been appreciating substantially with the land price in Jinding district could fetch as high as RMB30k/sm or equivalent to HKD3279/sf (close to 30% discount to RMB41,800/sm paid by Yanlord Group for a prime residential site in Tang Jia Wan district located near Zhuhai’s seafront in June this year) assuming development order is obtained and approved with same plot ratio as Lakewood Hills.

• Share split and bonus issue. Earlier, the Group announced a 2-for-1 share split and followed by a 1-for-10 bonus issue. The corporate exercise is viewed positively by the market as it will boost the stock liquidity and reward its existing shareholders. On the flip side, the Group’s share base will be increased to 1793m from existing 815m (assuming full conversions of ESOS, warrants A & B and RCPS in addition to current share base of 678.6m) upon completion of the proposed share split and bonus issue and hence, dilute the Group’s EPS by 54% for its 2018F.

Earnings Outlook/Revision

• No change to our earnings forecasts for 2017-18F.

Valuation & Recommendation

• Maintain BUY on LBS with an unchanged target price of RM2.27 based on 35% discount to its RNAV/share of RM3.49. We favour LBS for its: a) resilient sales and clear earnings visibility amid current property headwinds; b) diversified product offerings and geographical exposures (mid to high-end property across Klang Valley, Pahang, Johor, Perak, Sabah); c) focusing on affordable housing segment; d) decent annual dividend yield of over 5%; and e) unlocking potential landbank values in ZIC with current advocate of ‘One belt, One Road’ initiative amid stronger Malaysia-China ties.

Source: JF Apex Securities Research - 8 Nov 2017