We project a multi-fold rise in net profit as Yong Tai’s business focusswitches to property development. This would be underpinned by theImpression City project, which would see a potential total GDV rise toMYR6.1bn from MYR164m currently. This ought to keep the group busyfor the next 8-10 years. Impression Melaka offers a further upside to bothearnings and valuations. We estimate a valuation range of MYR1.03-1.18.Taking the next leap. In line with the group’s overall expansion plan into theproperty sector, Yong Tai has announced several proposals, key of which are: i. MYR37m acquisition of a 17 acre land plot in Melaka (Impression Land)for the development of a theatre to produce the Impression Melaka aswell as the acquisition of PTS Impression (to hold a 30-year license tostage the show) for MYR3m; ii. A joint venture (JV) agreement for the development of 100 acres of landadjacent to the Impression Land; iii. A fund-raising exercise to raise >MYR300m.

The proposals are expected to be completed/take effect by 1HFY17 (Jun).Impression Melaka – first of its kind outside China. Impression Melaka is alive cinematography show that utilises the latest light and sound technologies,modern art concepts and cultural performers. This is to be the first live largescale Impression Series outside of China and is one of the “entry point project”within the National Key Economic Area (NKEA) initiative for the tourism sector.The performing arts centre is estimated to cost c.MYR300m, with completiontargeted for end-2017. Management expects Impression Melaka to contributeMYR50m-60m pa in bottomline thereafter.

Impression City to contribute MYR5.4bn to total GDV. Concurrent with theconstruction of the theatre for Impression Melaka, Yong Tai is to develop theland adjacent to it (the development collectively known as Impression City). Themixed development project includes residential, commercial and retail units.The total GDV over an 8-10 year period is estimated to be c.MYR5.4bn.Management believes the Impression Melaka project would spur the growth oftourism and related industries such as real estate, hotels and eateries, iecatalysts for Impression City.

Forecasts. We project for Yong Tai to turn around and post a net profit ofMYR14m in FY17, accelerating to MYR64m in FY18. This is underpinned bythe progress of its property projects. Our forecasts do not factor in thecontribution from Impression Melaka, which we have pushed to FY19.

Investment case. We derive an indicative valuation estimate range ofMYR1.03-1.18 (fully diluted) based on SOP. The low end of our valuation rangeexcludes Impression Melaka while, for its property development business, wehave ascribed a 40% discount to its RNAV. The top end of our valuation range incorporates the show, where we estimate the business to be worth MYR107mbased on DCF. We see upside to our valuation for Impression Melaka asexecution risks ease. Our indicative valuation estimate range implies an FY18FP/E of 7-8x (10.6-12x, fully diluted).

Banking On Property Background Established in 1971, Yong Tai was a garment manufacturer whose businesses include the manufacturing and dyeing of fabrics, as well as trading and retailing of textile and garment products and related fashion accessories. However, the operating environment has turned increasingly challenging and since FY06, Yong Tai has generall y been incurring annual losses.

In 2014, the group decided to embark on its diversification pla n into property development. Its maiden project was a JV with Melaka-based PTS Properties SB to build a 29-storey luxury condominium hotel known as The Pines, wh ich was fully sold. The Pines is located at the gateway of Melaka City’s town centre at Jalan Tun Sri Lanang and within close distance to the main tourist attractions and heritage spots.

Currently, the group is developing its second project with PTS Properties, The Apple. This encompasses a 16-storey four-star hotel (managed by The Courtyard by Marriott) and a 32-storey service apartment in Melaka. With a total GDV of MYR234m, The Apple wouldincorporate the first dual-key system small office/home office (SOHO) in the state and is expected to be completed by end-2017.

Mr Wong Liew Lin, the founder of Yong Tai, stepped down from his position as managing director back in March. Mr Boo Kuang Loon is currently the key management person. He was appointed to the Board as an Executive Director in Oct 2015 and subsequently, redesignated as CEO on 12 Apr 2016. Mr Boo has a vast exposure in the property sector, having served in various property companies such as Malton (MALT MK, NR) and Jaya 33Sdn Bhd. Subsequently, he established the PTS Properties group of companies in 2007. At present, Mr Boo is the largest shareholder of Yong Tai, with a 9.4% stake. The proposals

The group took another step further towards its ambition to become a major property developer with the announcement of several memorandums of understanding (MOUs) and proposals since Aug 2015. The key MOUs and proposals are: i. The acquisition of the entire equity interest in PTS Impression SB (PTSI) for MYR3m in cash, as well as the proposed capitalisation of MYR44m owed by PTSI to its creditors via the issuance of 54.8m new Yong Tai shares (issued at MYR0.80 per share). PTSI had secured a license in 2013 from China’s Impression Wonders Art Development to produce and stage a live scale tourism stage performance known as Impression Melaka for a 30-year period; ii. Proposed acquisition of 17 acres of seafront land (Impression Land) located in Melaka for MYR37m. In Oct 2015, IVPS Property Consultant SB has appraised the land as having a market value of MYR39m. Impression Land is meant for the development of a theatre to stage Impression Melaka; iii. Proposed JV agreement with Admiral City SB for the master development of 100 acres of leasehold land located adjacent to Impression Land; iv. Two separate MOUs for the acquisition of two parcels of freehold land each located in Puchong (Selangor) and Johor Bahru (Johor); v. Proposed special issue for the subscription by Impression Culture Asia Ltd (Impression Culture) of 150m new Yong Tai shares at an issue price of MYR0.80per share and 200m new irredeemable convertible preference shares ( ICPS) at an issue price of MYR0.80. In total, the company is likely to raise MYR280m from the special issue; vi. Proposed placement of up to 70m new Yong Tai shares; vii. Proposed 1:10 bonus issue of ICPS to existing Yong Tai shareholders.

Impression Melaka – first of its kind outside China Established in 1998, the Impression Series in China was co-founded by Ms Wang Chaowei, Mr Fan Yue and Mr Zhang Yimou – the trio behind the opening and closing ceremonies of the Beijing Olympic Games in 2008. This series is a new concept of performing arts, where the natural environment of real mountains, water and life is weaved in as its backdrop. Local culture and customs are also incorporated into the performance, along with lights, shadow and dance to complement the show. Impression Melaka wouldbe the brand’s 10thseries and the first Impression Series outside of China. It would be staged indoors, integrating Melaka’s history and modern day culture with characteristic music, while presenting lights, shadows, dance and fine arts. Impression Melaka has received endorsement of the Ministry of Tourism and Culture Malaysia as one of the “entry point projects” within the tourism sector’s NKEA.

As mentioned above, Impression Melaka would be performed indoors in a theatre with a 360-degree revolving seating platform for 2,000 people. The show is expected to include a cast of 400-500 employees and local performers. The theatre is estimated to cost MYR300m (inclusive of land costs) and is expected to be completed by end-2017. Management expects the project to attract 1.1m people from the 15m tourists expected to visit Melaka annually (implies c.75% utilisation, assuming two daily shows). Yong Tai targets tourists from China to account for 40% of the visitors. This is followed by: i. South-East Asia (30%); ii. Other parts of Asia (eg Hong Kong, Taiwan and Japan) (20%); iii. The US, Europe and the Middle East accounting for the remaining 10%. While it is still early days, management has guided for ticket prices to average between MYR120 and MYR130. We note this would be cheaper relative to ticket prices of the series in China. For instance, ticket prices for Impression Liu Sanjie are in the range of CNY198-580 (MYR120-360). Main operating costs are royalty fees, personnel, as well as utilities and maintenance.

Yong Tai would enjoy investment tax allowances, giving rise to tax-free profits for the first five years. Management estimates a profit contribution of MYR50m-60m pa from 2018.

Impression City – riding on the pulling power of Impression Melaka Yong Tai believes Impression Melaka would help spur the growth of tourism and related industries such as real estate, hotels, eateries, transportation and arts education in the state. Thus, concurrent with the construction of the theatre, Yong Tai intends to develop 100 acres of land adjacent to the Impression Land. This development is collectively known as Impression City. Phase 1 of the project would include retail shops, a cultural village, a do-it-yourself (DIY) workshop, an orchard farm and a resort. The second and third phases are likely to unveil the development of commercial lots and high-rise residential units. Phase 4, meanwhile, would focus on building a public institution. This is followed by a one of-a-kind, eco-friendly retirement village. More residential homes are to be built to complete the final phase of Impression City. Overall, the master development is expected to take place over a period of 8-10 years and give rise to an estimated GDV of MYR5.4bn,with a gross development cost of MYR3.8bn. Such costs includes Admiral City’s entitlement to the JV (21% of GDV).

Other projects Apart from The Apple and its Impression City projects, Yong Tai has also entered into two separate MOUs for the acquisition of two parcels of freehold land each located in Puchong(Selangor) and Johor Bahru (Johor). The land in Puchong measures 1.5 acres in total and Yong Tai is eyeing a mixed development project involving one tower block of small office/versatile office (SOVO) units, one hotel tower, and a common podium housing offices and commercial retail units. The total GDV for the project is expected to be MYR173m (excluding the hotel block). As for the Johor land, this is approximately 1.77 acres in size, and the group intends to carry out a mixed development project comprising SOVO units, a hotel and office suites. The estimated GDV of the project is around MYR363m.

Source: RHB Research - 19 Apr 2016