What’s New

• LBS Bina (LBS) announced that the Group has entered into a Heads of Agreement (HOA) with NWP Holdings Berhad (NWP) to jointly develop its 60% interests in 264-acre Zhuhai International Circuit (ZIC) land in China.

• Also, LBS will subscribe 1,100m of NWP Shares or representing 73.7% of the enlarged shares of NWP for RM93.5m, or 8.5 sen/share. Upon completion of the share subscription, LBS is required to make a MGO to NWP.

• Both parties shall enter into Definitive Agreements (DA) within 60 days from the date of this HOA. The DA shall include some condition precedents which are to be satisfied within 6 months from the date of the DA.

Comment

• Opt for development on ZIC. We are not overly surprised with the management’s decision of developing the land in Zhuhai, China instead of outright sales of the land or listing of ZIC in HK, as the Group views the land more valuable over the long run in respect of ROI and period of payback. This is judging from the experience when LBS disposed its Lakewood golf course and the nearby development land in mid-2013.

• Acquiring NWP for ZIC project funding purposes. At a first glance, we are surprised with this latest development as we do not see the Group would benefit much or reaping any working synergy from this tie-up. NWP is principally involved in wood-based industry which is manufacturing of wood moulding, priming, timber and laminated timber, trading of sawn timber, plywood and veener, provision of kiln drying services, sawmilling service and trading of agricultural products and without any prior property experience either in Malaysia or China. We understand that the objective of the corporate exercise is for the funding purpose (as NWP would be the funding vehicle for the ZIC project upon completion of share subscription) and to retain control of the project (via NWP). Thus, this is to ensure that the anticipated massive funding (with estimated total investment of RMB3.5b or RM2.2b) for ZIC project would not put pressure on LBS’ balance sheet (NWP has zero borrowings) or any future cash call on the Group. Meanwhile, the price consideration of 8.5 sen/share for NWP shares represents 14% discount to NWP’s adjusted NTA/share of 9.9 sen and 34.6% discount to current share price of 13.0 sen.

• Planning for a JV with a local Chinese partner for the development project. Once the Group has established its framework of funding structures (either debt or equity or mixture of both), we understand that LBS would start to

team up with a local Chinese party to co-develop the ZIC land in China under its 60% stake at a later stage. In order to ensure the success of ZIC development, the Group realised that strong execution is critical and hence opting for JV in its maiden overseas project. The Group does not rule out the possibility of paring down its 60% stake to the interested party for the land development. Operational wise, LBS’ next course of action is to obtain the relevant approvals from the local authorities such as Water Resources Department, Environmental Department, Land and Resources Department, etc latest by November 2019 for the West Land and November 2020 for the East Land, prior to commencement of work.

• Some flashback. To recall, the Group obtained an approval obtained for ZIC transformation plan in November last year. Under the approval, ZIC is divided into two plots, i.e. East Land and West Land. West Land will encompass China-Malaysia Cultural Center, racing circuit amenities (inclusive of race car servicing center, exhibition hall, R&D center, petrol kiosk, first aid center, etc), theme park, commercial area and tourist visiting tower, whilst East Land will be used for additional developments encompassing Malaysia Cultural Village, China-Malaysia Cultural Museum, Cheng-Ho Cultural Hall, Malaysia economic and trade building, themed business area, hotel block, shopping arcade and daily amenities.

Earnings Outlook/Revision

• No change to our earnings forecasts for 2018-19F.

Valuation & Recommendation

• Maintain BUY on LBS with an unchanged target price of RM1.30, which is based on 20% discount to its RNAV/share of RM1.63. We favour LBS for its: a) strong earnings visibility with the Group’s sound business strategy of concentrating in selling affordable landed housings for this year especially in Klang Valley; and b) 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 - 6 Mar 2018