May 25, 2011

Malaysia Propert Stocks Analysis May 2011 by HWDBS

Entering uncharted territories
•  US Roadshow: Malaysia starting to gain investors’ interest, good response to MRT property story
•  Sector seeing new benchmarks for price and volume, land grab for MRT sites has started 
•  Top picks: YTL Land, Selangor Properties, Guocoland Malaysia, Bolton, SP Setia


Gaining traction. We sense improved appetite for Malaysia after meeting 26 funds in 6 cities over 5 days during DBSV roadshow in the US. Few have heard of Malaysia’s
Economic Transformation Program (ETP), although most have yet to invest in Malaysia. Most also found our MRT property story fresh and agreed that the RM48b MRT will be a huge structural catalyst for KL real estate given the large multiplier effect (RM210b over 10 years) and 12-years of under-investment in KL. They concur that the major winners will be owners of large landbank near interchanges with potential for high density mixed developments (benefit from plot ratio expansion). While contractors and banks will also benefit, existing landowners will be direct winners and reap better margins. Malaysia is also seen as a safe haven with lower policy risk, a young population, strong commodity-led economy, and strengthening Ringgit. Key concerns include execution risks, political support, and funding, which we have addressed as non-show stoppers.

Look forward to approval of Circle Line. We understand the MRT Circle Line study is in the final stages and likely to be presented to the Cabinet next month. Land-grab for MRT sites have started, including a possible legal tussle for Johor Corp.’s commercial blocks at Pusat Bandar Damansara (interchange for MRT Blue Line & Circle Line; largest landowners in the area are Selangor Properties with 34 acres and Guocoland 8.5 acres). We expect more newsflow on the redevelopment of government land along MRT lines.

Scaling new heights. The sector is seeing new benchmarks for price and volume: (i) Binjai On The Park@KLCC luxury condos were recently transacted at RM3000psf (+15% yoy)while Mansions@Desa Park City link houses achieved 86% take-up at RM2.7m-7.5m/unit; (ii) SP Setia launched KL EcoCity condos last weekend to priority registrants at RM1,200psf (10% above RM1,100psf initial target), with 70-75% booked (loft units almost fully sold at RM1400-1500psf; public launch will be sometime this week). ASP is >40% above prices of adjacent properties - demonstrating SP Setia’s pricing power. At 708 units, this is one of the biggest launches at-one-go since ‘90s hey-days, following YTL Land’s Capers@Sentul East’s 466 units launched in Apr11 (sold out in a week). The attractiveness of KLEC’s location - opposite Mid Valley - is further boosted by a MRTstation (Circle Line) and SP Setia’s strong branding.

Key concerns of US-based fund managers
Q: Is it too early to invest now since the MRT will only be completed in 2016-2020? 
A: NO, as developers will already start pricing in MRT potential. For example, SP Setia’s KL Eco-City offices and condos were launched at 30-50% premium to adjacent properties. Developers will also start looking for land today for exposure to MRT sites given the long lead time to get development approvals and for construction work (5-6 years).  Hence, we expect land values to start appreciating as we speak – especially large landbank near potential interchanges with potential for high density development (benefit from plot ratio expansion). 

Q: How is execution risk being mitigated?
A: The involvement of the private sector via the appointment of Gamuda-MMC as project delivery partner, which main KPI is to ensure that MRT is completed on time and within budgt (or else a penalty will be imposed). Independent consultants have also been appointed, e.g. McKinsey as Value Management Study consultant and Halcrow to conduct feasibility study of the Circle Line.

Q: How will MRT be funded?
A: The RM48b MRT project will be fully funded by the
government. Malaysia will likely emulate Hong Kong’s Rail + Property development model, which could see private developers being roped in as joint venture partners. 2H11 could see the issue of US$10b Islamic bonds to fund the first phase – take-up should be strong as local funds are hungry for high-yielding papers, while the government can afford to tap into the international market given Malaysia’s current low
foreign debt levels. The MRT will go a long way in helping to reduce the government’s fuel subsidy (estimated to hit RM18b this year vs RM10b in 2010).

Q: Can MRT be derailed by political risk?
A: The MRT is supported by both the government and opposition since public interest is involved. We see the MRT as more of a need rather than a want given KL’s traffic congestion, poor connectivity of existing railway lines, and rising fuel subsidies. Prime Minister Datuk Seri Najib Razak is currently in New York for a 2-day Invest Malaysia conference to create awareness of the progress of the Economic Transformation Program (ETP) and attract foreign direct investments (~200 investors have signed up). We see Greater KL as the government’s key focus over the next 10 years, and taking up 60% of public funding under the ETP, with the MRT being the largest infrastructure development undertaken by Malaysia to-date.

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by HwangDbs Vickers 23/11/2011