Yi-Lai would soon become an alternative Batu Kawan property play. The potential injection of landbank and property projects by Aspen should transform Yi-Lai substantially. Earnings profile is likely to enter into a new growth trajectory with the Batu Kawan growth story, tie-up with IKEA, and lucrative property development margin being the key catalysts. We estimate a valuation range of MYR1.28-1.45 – a potential 52-73% upside.

Making a total change. Yi-Lai, which is largely off the radar of many investors, would see an exciting transformation ahead. It has signed a heads of agreement with Aspen Vision (Aspen) in February. A total of MYR100m in cash and MYR450m worth of new shares would be issued to Aspen with the injection of Aspen’s assets into the company. Currently, Aspen owns 245 acres of freehold land in Batu Kawan, as well as a total of 21.6 acres of land in Penang Island and Subang. It has also tied up with IKEA to set up the first IKEA store in the northern region. Key risk to our investment thesis: The deal falling through.An immediate Batu Kawan play. Unlike other players which have not launched any projects at Batu Kawan, Aspen is taking the lead, and already sold 451 units of shop offices last year, and just rolled out five blocks of residences early this year. The total GDV for this 245-acre Aspen Vision City,

Batu Kawan is a whopping MYR8bn, anchoring the next 10 years’ earnings.Lofty margin despite selling affordable housing. Although Aspen has not shown any earnings track record, we expect gross margin for the property projects to be around 30-35%, which is above the industry average of 20-25%. The lucrative margin can be attributed to the simple design of the properties, with packaged deal offers to buyers to upgrade the interior furnishing. Given the tie up with IKEA, Aspen is likely to bulk purchase furniture & fittings from IKEA for most of its residential projects, making its products more sellable.

Rapid P/E compression. Aspen achieved MYR900m sales in 2015. With unbilled sales of over MYR1bn, earnings should kick in immediately after the completion of the asset injection exercise. Based on our estimate, we believethe P/E multiple can be compressed to <5x in FY17.Formula to follow the IKEA blue cube in future ventures. Aspen’s future growth potential should not be underestimated. The company is currently exploring further joint ventures with IKEA for expansion in Bangkok and Philippines. Aspen would then likely undertake the commercial development adjacent to IKEA’s new stores. We like this viable business model.Indicative valuation estimation range of MYR1.28-1.45. Based on a 40% discount to RNAV, our range suggests an attractive upside of 52-73%. We believe the stock would be re-rated more significantly once all the necessary approvals are obtained and the details of asset injections are announced over the next few months.

From Yi-Lai to Aspen The asset injection exercise In February, Yi-Lai signed a heads of agreement with Aspen and would issue MYR450m worth of new shares and pay MYR100m to Aspen’s shareholders for the injection of Aspen’s assets into the company. Upon completion of the deal, Aspen shareholders wouldhold a 74% stake in Yi-Lai. Currently, Aspen has five projects that carry a total GDV of MYR10.05bn on 267-acre landbank. Out of which, 245 acres are located at Batu Kawan, the mainland connection of Penang’s second bridge to the island.

Yi-Lai is primarily in the tile business, and registered as the proprietor of the “Alpha Tiles” trademark. In May 2014, Singapore-based Hampton Capital emerged as a substantial shareholder after acquiring a 31.12% stake from the former major shareholder and managing director Mr Lim Oon Kok and his family. The company has a clean balance sheet with net cash as at FY15. We think Aspen would likely keep the tile business, given the potential synergies together with the new property development segment.

Aspen is currently run by Dato’ Seri Nazir Ariff, who is the co-founder and executive director of the company. Prior to establishing Aspen, he was the deputy chairman and executive director of Ivory Properties Group (IVORY MK, NR). Another instrumental key officer is Dato’ M. Murly, who is also the founder and CEO of Aspen. Dato’ Murly was previously the executive director and CEO of Ivory Properties. Currently, he is mainly responsible for the company’s overall business strategy and ventures, as well as day-today operations.

An immediate Batu Kawan play Recall, in Jan 2014, Aspen and IKEA were awarded 245 acres of freehold land in Batu Kawan for a total purchase consideration of MYR483m (about MYR45 psf). A new IKEA store as well as an integrated shopping mall, in which Aspen owns a 30% stake, wouldoccupy 75 acres of land, and the remaining 170 acres is planned for a mixed development, which IKEA has an effective interest of 20%. We like the location, which is strategically off the end of the Penang Second Bridge and near Batu Kawan Industral Park. This is highly accessible from Penang Island and the North-South Highway. While the IKEA store is already the key selling point for the project, other catalytic investments at Batu Kawan include the proposed Hull University, KDU University, Penang Design Village, Business Process Outsourcing (BPO) hub – a joint venture (JV) between state-run Penang Development Corp (PDC) and Temasek. We understand that IKEA, KDU, BPOand Penang Design Village have already started their earthworks / construction.

Total GDV for this Aspen Vision City is MYR8bn, over a development period of 10 years. The whole plan is taking shape piece by piece now. Aside from the main commercial components ie the IKEA store and integrated shopping mall (with indicative NLA of 1.2-1.8m sqf), in Jun 2015, Columbia Asia Hospital has also announced that it would invest MYR185m to set up a new hospital there. Upcoming developments are likely to include a new hotel chain and international school that would serve the new urban community.

There are not many land owners at Batu Kawan. Apart from PDC and Savills Malaysia, other listed players that have exposure to Batu Kawan include Eco World Development (ECW MK, NR), Paramount Corp (PAR MK, BUY, TP: MYR2.32) and Global Oriental (GOB MK, NR). However, many of these players (excluding PDC) have not launched any projects there. Aspen, on the other hand, is taking the lead to first capture the demand for properties in Batu Kawan. The company has already fully sold its first launched Vervea last year, which comprises 451 units of shop offices (GDV: MYR776m). It has also recently previewed Vertu Resort (GDV: MYR620m), which is the first residential phase in Aspen Vision City. It comprises five high-rise blocks, with 1,200 units of apartments, pricing at MYR350-380 psf. Given unit size of 1,030 – 1,290 sqf, absolute unit pricing appears fairly affordable at MYR380k – 490k. Given the overwhelming response for the commercial shops, we believe the residences ought to be similarly well received.

Other affordable housing projects Apart from Aspen Vision City that would anchor the company’s earnings, Aspen has also sold Tri-Pinnacle project in Tanjung Tokong last year. The project has a GDV of MYR470m, and it has almost been fully taken up. Again, the positive response was largely due to the value-for-money concept, whereby the fully-furnished 800sqf units were attractively priced at MYR300-500k (MYR380 – 600 psf). Over the next two years, projects in the pipeline include HH Residence in Tanjung Bungah (GDV: MYR800m) and Beacon executive suites (GDV: MYR130m). Similar concepts would apply, and hence we believe this would likely buck the trend as sales for most high-rise projects in Penang are typically slow given their expensive price point of >MYR700 psf.

The company also has one project in the Klang Valley. Nouvelle Residence (GDV: MYR700m, which is located in Subang and next to Tropicana Metropark, is slated for launch in 2017. We believe Aspen would likely expand its presence in the Klang Valley area further.

Formula to follow the blue cubes Aspen’s long-term growth should not be underestimated, in our view. Tying up with retailers and/or education institutions is now becoming a trend in the property industry. For example, many developers typically follow where AEON sets up its shopping mall, and Paramount’s concept to develop mixed development that integrates with its KDU campus has made its products more marketable. Similarly, Aspen is now exploring further joint ventures with IKEA for expansion in Bangkok and Manila. While IKEA would still likely look for a local partner to ease its bureaucratic and legal steps, Aspen’s role is likely to be the developer that undertakes the commercial development adjacent to IKEA’s new stores, a concept similar to the existing Aspen Vision City. In our view, IKEA is an established and popular household brand in the ASEAN region. If the deals materialise, the long-term growth story of Aspen should excite the market further.

Lucrative margin despite selling affordable products Although Aspen has not shown any earnings track record since it is still a private company, we expect gross margin for the property projects to be around 30-35%, even though its bread-and-butter is affordable housing. According to The Star on 8 Jan, Dato’ Murly indicated that Aspen has targeted to achieve MYR90m net profit in FY16 on the back of MYR400-500m revenue. This implies a net margin of 18-22%, which is higher than the industry average, and comparable to the other affordable housing players such as Matrix Concepts (MCH MK, BUY, TP: MYR2.73) and Tambun Indah (TILB MK, BUY, TP: MYR1.66).

In our view, the lucrative margin can be attributed to the simple design of the properties, with packaged deal offers to buyers to upgrade the interior furnishing. Given the tie-up with IKEA, Aspen ought to bulk purchase furniture & fittings from IKEA for most of its residential projects, which would even make the products more sellable. In addition, we also noticed that Aspen is not too aggressive in its marketing, whi ch means its marketing cost is lean, as its projects can sell them selves.

Expect rapid P/E compression According to media reports also, Aspen has achieved MYR900m sales in 2015. With its unbilled sales of over MYR1bn, we believe earnings will kick in immediately once the asset injection exercise is completed (likely in 4Q). Given the pipeline launches and the type of products, our earnings growth projection of around 40% for FY17-18 (according toDato’ Muly’s net profit guidance of MYR90m in FY16 in The Star report) is not unreasonable. Based on our estimate, the company’s P/E multiple can potentially be compressed to below 5x in FY17 based on our FY17 net profit forecast of MYR133m. This is considered very fast compared to other reverse take-over (RTO) exercise examples such as Eco World and Sunsuria (SSR MK, NR), which typically took two years for the P/E to revert to a more meaningful level.

For the balance sheet, we expect Yi-Lai to take on some borrowings. For a start, the company would likely borrow MYR100m for the cash consideration to Aspen. Over the next two years, further debt is likely to be used to fund land acquisitions as the company expands. Our forecast assumes <20% net gearing.

Valuations Our indicative valuation estimate range for Yi-Lai is MYR1.28-1.45, based on a 40% discoun to RNAV. This is roughly in line with our valuations for another Penang mainland developer, Tambun Indah. Our RNAV estimates take into account a scenario where the company may call for a rights issue to raise about MYR150m after the asset injection to fund its future landbank acquisitions.

Yi-Lai would likely be re-rated soon, as it is likely to become an alternative Batu Kawan property play. Batu Kawan / Penang mainland is now a new property hotspot given the housing affordability issue on the island, and the completion of Penang Second Bridge. YiLai’s share price has not reacted much after the announcement of the heads of agreement last month, which we think could be because the det ails of the assets/landbank were not disclosed as yet. However, we believe once all the necessary approvals are obtained and details of asset injections are announced over the next few months, Yi-Lai ought to garner more investors’ interest.