• Maintain BUY and MYR2.06 TP, 26% upside and c.2% yield. Given the market headwinds, we believe Sunway’s solid fundamentals and diversified business model should help it to ride through this challenging period. Better earnings recovery in its three core divisions this year is likely to offset the weakness in smaller business divisions. The progressive opening of new investment properties will likely boost the performance of the property investment and healthcare divisions.

• All divisions, except the smaller divisions, should perform better. We recently hosted a virtual meeting with Sunway’s CFO Chong Chang Choong and the investor relations (IR) team. Management guided that the key divisions ie property development, property investment, and construction should see better earnings this year, but trading & manufacturing, quarry, and building materials may remain weak due to slower demand recovery, cost pressure, as well as disruption in supply due to the lockdown in China. Nevertheless, profit contribution from these three divisions has been small, accounting for only 10-12% of PBT pre-pandemic.

• The opening of Sunway Carnival’s new phase should be well-received. The recent opening of the new phase doubled the mall’s NLA to 1m sqf. The new wing has already achieved an 80% occupancy upon opening, and the committed tenancy is 95%. As many of the retail brands are new in the Penang market, and given the lack of malls of this scale in the vicinity, we think Sunway Carnival will be well received. The upcoming opening of Sunway Medical Centre Seberang Perai (next to the mall) in 4Q22 should further boost retail and commercial activities in the area.

• Downside risk to MYR2.2bn sales target is possible. While the company already achieved MYR447m new sales in 1Q22, demand for property may turn weaker given the expectation of an interest rate hike. Sunway Gardens in Tianjin China is now held back due to weak market sentiment and slower economic growth as a result of China’s zero-COVID policy. Flynn Park in Singapore may be launched only in late 2022, or early 2023.

• Cost increase in the construction of hospitals. The construction of new hospitals saw some cost increase due to rising building material prices and the purchase of new medical equipment, which is getting more expensive due to the weaker MYR. However, management guided that as Sunway Construction (SCGB MK, BUY, TP: MYR1.93) is the contractor undertaking all the construction works, the cost increase should still be under control given better cost management and timing of bulk procurement.

• ESG. Our SOP-based TP includes an 8% ESG premium given our ESG score of 3.40 for Sunway, derived using our in-house proprietary methodology.

Source: RHB Research - 8 Jul 2022