PP 7767/09/2011(028730)

20 October 2010

Malaysia
RHB Research
Corporate Highlights Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

Se cto r Updat e 20 October 2010

MARKET DATELINE

Property Recom : Overweight

(Maintained)
Going From Strength To Strength

Table 1 : Property Sector Valuations

EPS # EPS growth PER P/NTA P/CF GDY
FYE Price (sen) (%) (x) (x) (x) (%) Rec
(RM/s) FY10 FY11 FY10 FY11 FY10 FY11 FY10 FY10 FY10
SP Setia Oct 4.74 19.9 22.8 24.1 14.6 23.8 20.8 2.27 32.2 3.0 OP(↑)
IJM Land Mar 2.67 12.1 17.3 32.1 43.2 22.1 15.4 2.05 7.0 0.8 OP
Suncity Dec 4.05 34.8 41.3 9.0 18.6 11.6 9.8 0.82 3.3 8.9 OP
Mah Sing Dec 1.92 14.0 17.2 23.6 22.8 13.7 11.2 1.74 36.2 3.0 OP
Sunrise Jun 2.24 29.9 33.2 10.6 11.1 7.5 6.7 0.91 10.8 2.2 OP
YNH Dec 1.82 15.8 17.6 22.6 11.6 11.5 10.3 0.99 18.1 2.2 TB(↑)
Paramount Dec 4.87 57.7 63.1 9.0 9.4 8.4 7.7 1.07 8.7 6.0 OP
Glomac Apr 1.58 19.7 24.3 44.0 23.3 8.0 6.5 0.82 20.3 7.5 OP
Hunza Jun 1.46 27.6 20.9 3.4 -24.2 5.3 7.0 0.62 5.1 3.8 MP(↓)
Sector simple Avg 12.4 10.6 1.25 15.7
* price at 1 Oct 10 # Normalised

♦ Upgrade valuations. We upgrade our valuations for the property stocks under
our coverage, as many have almost hit our target price recently. We still see Table 2. Fair values
(RM/share)
values in the sector led by sustained property prices and demand, and valuations Company Price FV
of many property stocks are still attractive, currently trading at or slightly below SP Setia 4.74 5.94
their +1 stdev of 6-year P/B mean. Our expectation that ARPP will continue to hold IJM Land 2.67 3.50
Suncity 4.05 5.80
well until 2012/2013 suggests that the property sector will remain robust next year. Mah Sing 1.92 2.33
Sunrise 2.24 3.30
♦ Budget 2011 in favour to mid-end housing. No bad news on the sector in YNH 1.82 2.17
Paramount 4.87 5.80
Budget 2011. We believe the Government or BNM will announce new measures
Glomac 1.58 2.09
seperately to clamp down speculative buying activities. We reiterate our view that, Hunza 1.46 1.58
even a 70-80% cap on loan-to-value ratio is to be implemented, property sales
momentum will continue as long as incentives offered by developers are continued.

♦ Liquidity to boost physical property and equity market. We believe the influx
of liquidity led by low interest rate will continue to drive both the physical property
sales and property stocks. Although BNM is expected to raise OPR next year, the
timing of rate hike will depend on the growth stage of the global economy. The
potential delay in rate hike will be a good news to the property sector, as the
resulting cheap financing will continue to support property buying momentum.

♦ Margin expansion to kick in next year. With liquidity-led asset reflation coming
into play, we expect margin expansion to kick in as property prices continue to
head north. This will especially be evident for big developers, such as SP Setia and
IJMLD, with big parcels of landbank in hand. We note that, land cost for SP Setia’s
Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the
effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost,
margins for subsequent launches will be higher as any price increase will flow to
the bottom-line directly, given steady building material prices. Already, SP Setia
has indicated that it has managed to restore margins to normalised levels due to
significant price increases after the expiration of its 5/95 campaign.

♦ Risks. Key risks are: 1) regulatory risks; and 2) country risks.

♦ Overweight. We expect the liquidity play and margin expansion will first flow to Loong Kok Wen, CFA
(603) 92802237
the big caps. Our favourite fours are: SPSB (OP, FV = RM5.94); IJMLD (OP, FV
loong.kok.wen@rhb.com.my
= RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33).

Page 1 of 8
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 20 October 2010

Going From Strength To Strength

♦ Property Index has outperformed. After a lacklustre performance in 1H2010, the KLPRP (Kuala Lumpur
Property Index) has increased by an impressive 16.7% vs KLCI’s 13.2% (from 3Q10). Apart from the banks,
construction and consumer sectors, property sector is also one of the outperformers in the market. Although the
share price of many property stocks under our coverage has approached our target prices, we further upgrade
our valuations as we still see values in the property sector. We think it is too early to take profit as current
valuations of many property stocks are still compelling, trading at or slightly below +1 stdev above their average
P/B. In addition, in our sector report dated 4th Oct 2010, we expect ARPP (Average Residential Property Price) to
continue to hold well until 2012/2013. This suggests that the property market will remain robust going into 2011.

Chart 1: Indexed performance of KLPRP versus other sub-indexes

140

130

120

110

100

90
Jan-10 Mar-10 May-10 Jul-10 Sep-10

KLC I KLPRP KLFIN KLPLN KLC SU KLTEC KLC ON

Source: Bloomberg

♦ Budget 2011 in favour of affordable housing developers. The much-speculated tightening measures to
clamp down speculative property buying activities were not mentioned in Budget 2011. However, the Budget
2011 is in favour of mid-end affordable housing developers, as now the Government provides guarantee on 10%
downpayment for houses below RM220k for first-time home buyers who earn less than RM3k per month, as well
as the 50% exemption on stamp duty for first time home buyers for a house priced below RM350k. That said, we
believe the Government is still keeping its agenda to target the “overheating” property market, to be in line with
the tightening measures implemented in the regional markets. We believe LTV ratio will eventually be capped.
However, we reiterate our view that, even if a 70% or 80% cap on LTV ratio is implemented, property sales
momentum is likely to continue as we believe developers will continue to offer their aggressive scheme and
rebates to lure buyers. Upfront “entry cost” will still be affordable.
However, the situation would be different if (i) The Government is to stop developers from having innovative
scheme in addition to a 70% or 80% cap on LTV ratio; or (ii) The commercial banks are instructed to adjust the
house price for the rebates offered by developers as the “real” house price for the application of mortgage loan.
In any case, buying momentum will be adversely affected, as the discontinuation of incentives will significantly
raise the effective “entry cost” for a property and buyers/investors can no longer enjoy the benefit of high
leverage.

♦ Six key drivers for the sector. We continue to think that the Government will unlikely penalise the property
sector with over-stringent measures, as the resulting impact will be rather severe, affecting other property
related sectors. We still see several strong growth potentials to underpin the property sector and hence continue
to support our convincing Overweight rating on the sector: (i) Faster growing of young demographics to drive
big-ticket purchases i.e. homes and motor vehicles; (ii) Low mortgage rate as commercial banks continue to offer
discount to BLR; (iii) Aggressive promotions/incentives being offered by developers; (iv) Stregthening in ringgit
that encourages foreigners participation; (v) Property is a preferred vehicle to hedge against inflation; and (vi)
Sector is still fueld with good news on Government’s development plans.

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 20 October 2010

♦ Massive liquidity to boost the physical property and equity market. We believe the influx of liquidity will
continue to drive both the physical property sales and property stocks. The liquidity is mainly led by the low
interest rate in the regional countries. Note that, the US Federal Reserve has again kept its benchmark interest
rate unchanged on 22nd Sept 2010, and the Bank of Japan has also cut its overnight call rate target to a range of
0% and 0.1% on 5th Oct 2010. All these may signal that, reserve banks in the region may be reluctant to raise
interest rate over the short term to ensure stable economic growth. We also highlight that, ringgit and excess
liquidity have a negative correlation of 0.72. Hence, as ringgit continues to strengthen, liquidity will continue to
flow into Malaysia. The recent 2.1% mom strengthening in ringgit has led to a 3.3% mom increase in excess
liquidity in Sept 2010. According to RHBRI’s economics team, BNM will likely resume its policy normalisation in
2011 and the OPR will be raised by 50-75 basis points to bring it to a more neutral level of 3.25-3.50%. The
timing, however, will depend on how soon the global economy stabilises. Earlier, we expect BNM to resume its
policy normalisation in 1H2011. The potential delay will be a good news to the property sector, as the resulting
cheap financing will continue to support property buying momentum, and the liquidity created will also flow to the
equity market, thus benefiting the property sector as a tactical play.

Chart 2: Excess liquidity mopped up by BNM vs strengthening in ringgit (negative correlation factor of 0.72)
RM bn
240 3.8

3.7
235
3.6
230
3.5
225
3.4

220 3.3

3.2
215
3.1
210
3.0
205
2.9

200 2.8
Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

Sep-10
Excess liquidity USD/MYR

Source: BNM, RHBRI

Chart 3: Increase in M3 vs strengthening in ringgit

RM bn
1,100 3.8

3.7

3.6
1,050
3.5

3.4

1,000 3.3

3.2

3.1
950
3.0

2.9

900 2.8
Jan-09

Feb-09

Mar-09

Apr-09

May-09

Jun-09

Jul-09

Aug-09

Sep-09

Oct-09

Nov-09

Dec-09

Jan-10

Feb-10

Mar-10

Apr-10

May-10

Jun-10

Jul-10

Aug-10

M3 USD/MYR

Source: BNM, Bloomberg, RHBRI

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 20 October 2010

♦ Margin expansion to kick in next year. With liquidity-led asset reflation coming into play, we expect
developers’ margin to strengthen going forward as property prices continue to head north. This will especially be
evident for big developers, such as SP Setia and IJMLD, with big parcels of landbank acquired at low price. We
note that, land cost for SP Setia’s Setia Alam is only at RM3.50 psf, whereas, for IJMLD’s Canal City land, the
effective cost is about RM4.50-6.00 psf. After the initial hefty infrastructure cost, margins for subsequent
launches will be higher as any price increase will directly flow to the bottom-line, given the current steady
building material prices. Already, during its 3QFY10 results, SP Setia has indicated that it has managed to restore
margins to normalised levels due to significant price increases after the expiration of its 5/95 campaign. To recap,
prior to the introduction of 5/95 campaign, SP Setia’s EBIT margin hovered around 20%, and weakened to about
15% when the 5/95 programme was launched in early 2009. We expect the same trajectory of margin expansion
for IJMLD for its current projects, as well as its Canal City project once it is started.

Chart 4: EBIT margin trend for SP Setia and IJM Land

30%

25%

20%

15%

10%

5%

0%
1Q07 2Q07 3Q07 4Q07 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10

SPSB IJMLD

Source: Company, RHBRI

♦ Possible M&A catalysts for the sector. Apart from the key drivers above, we believe the M&A catalyst will be
an additional factor to keep investors’ interest in the property sector. Given the continued upcycle of the property
sector, the M&A story could well be on the cards, especially for the big boys – SPSB and IJMLD. Apart from the
privatisation potential for IJMLD, the story of the merger of SPSB and other PNB-owned (Permodalan Nasional
Bhd) developers could come back again. These developers are Island & Peninsular, Petaling Garden, and Pelangi
Bhd. Note that, the merger of these players will create a huge property outfit in Malaysia, considering the amount
of landbank held by these PNB-owned developers. In addition, if Sime Darby Property is spun off from Sime, and
included in the merger, a “property giant” will be formed. While this is just our “guesses” and we are not going to
examine the pros and cons of the merger in this report, we opine that developers may excite the market by
undertaking such an exercise or any M&A with the key objective of growing bigger landbank and to boost market
cap. To note, the competitive bidding process for landbank typically drives up land values especially in the current
stage of property cycle. By consolidating with other developers, it could save the time-consuming effort of land
hunting. In addition, the inclusion of any big developer into the FBMKLCI top 30 may lead to a significant re-
rating on the “merged” entity, as there is currently no pure property developer in the list.

Key Risks for the sector

♦ Risks. Key risks for the property sector are: 1) regulatory risk; 2) discontinuation of incentives offered by
developers; and 3) country risks.

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 20 October 2010

Valuations and Recommendations

♦ Upgrade valuations. Admittedly, regulatory risk still exists, but we are of the view that the Government will
unlikely hit the property sector badly, in view of the repercussion on the property related sectors, such as the
banks and building materials. As share price of many property stocks are now close to our target price, we seize
the opportunity to upgrade our target price further for the property stocks (except REITs and property asset
owner) under our coverage. We believe the supportive macro-environment factors warrant the property sector to
be traded at higher valuations, and the faster new launches justify for lower discount to RNAV. In our table
below, we also include the indicative valuations based on +2 stdev above the mean of P/B as a support for our
RNAV-based valuations. Our adjustment in discount rate ranges from 0 to +20%, depending on the prospects of
the developers, location of landbank, turnaround time of landbank and individual exposure to the respective
segments – high-rise residential, landed residential, commercial etc. Due to the changes in upside from current
price, we downgrade Hunza to Market Perform and upgrade YNH to Trading Buy.

Table 3: Our revised indicative fair value for the property stocks under our coverage
Company Current Previous Revised +2 stdev BPS Valuations based on
Fair Fair Premium/
Price value (Discount) value (Discount) Upside P/B FY11 +2 stdev P/B
RM RM % RM % % x RM RM
SP Setia 4.74 4.95 0 5.94 +20 25.3 2.64 2.19 5.78
IJM Land 2.67 3.18 0 3.50 +10 31.1 1.94 1.77 3.43
Suncity 4.05 5.48 -15 5.80 -10 43.2 1.18 5.32 6.28
Mah Sing 1.92 2.33 +10 2.33 +10 21.4 1.87 1.20 2.24
Sunrise 2.24 2.88 -30 3.30 -20 47.3 1.84 2.60 4.78
YNH 1.82 1.86 -40 2.17 -30 19.2 1.36 2.02 2.75
Paramount 4.87 5.80 -35 5.80 -35 19.1 0.71 5.47 3.88
Glomac 1.58 1.72 -30 2.09 -15 32.3 1.06 2.00 2.12
Hunza 1.46 1.58 -50 1.58 -50 8.2 1.19 2.45 2.92

♦ Big caps top our list. We maintain our Overweight stance on the sector. The recent market correction would
be a good entry point for investors. We believe the liquidity play, margin expansion, and the potential M&A theme
will first benefit the big cap developers, followed by mid and small caps. We hence include the all-time-favourite
property stock – SP Setia into our BUY list. Our picks for the sector are SPSB (Upgrade to OP, FV = RM5.94);
IJMLD (OP, FV = RM3.50); Suncity (OP, FV = RM5.80) and Mah Sing (OP, FV = RM2.33).

Chart 5: Forward P/B for SP Setia Chart 6: Forward P/B for IJM Land

3.0 2.3

2.0
2.5
1.8

2.0 1.5

1.3
1.5
1.0

0.8
1.0
0.5

0.5 0.3
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-08 Jan-09 Jan-10

Average P/B = 1.63x; +2 stdev = 2.57x; -2 stdev = 0.7x Average P/B = 1.14x; +2 stdev = 1.94x; -2 stdev = 0.35x
Source:Bloomberg, RHBRI Source: Bloomberg, RHBRI

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 20 October 2010

Chart 7: Forward P/B for Suncity Chart 8: Forward P/B for Mah Sing

1.5 2.3

2.0
1.3
1.8

1.0
1.5

1.3
0.8
1.0
0.5
0.8

0.3 0.5
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Average P/B = 0.68x; +2 stdev = 1.18x; -2 stdev = 0.18x Average P/B = 1.1x; +2 stdev = 1.87x; -2 stdev = 0.34x

Source: Bloomberg, RHBRI Source: Bloomberg, RHBRI

Chart 9: Forward P/B for Sunrise Chart 10: Forward P/B for YNH

2.5 2.0

2.3
1.8
2.0
1.5
1.8

1.5 1.3

1.3
1.0
1.0
0.8
0.8

0.5 0.5

0.3 0.3
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Average P/B = 1.09x; +2 stdev = 1.84x; -2 stdev = 0.35x Average P/B = 0.87x; +2 stdev = 1.36x; -2 stdev = 0.39x
Source: Bloomberg, RHBRI Source: Bloomberg, RHBRI

Chart 11: Forward P/B for Paramount Chart 12: Forward P/B for Glomac

1.0 1.8

0.9 1.5

0.8 1.3

0.7 1.0

0.6 0.8

0.5 0.5

0.4 0.3

0.3 -
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Average P/B = 0.48x; +2 stdev = 0.71x; -2 stdev = 0.25x Average P/B = 0.61x; +2 stdev = 1.06x; -2 stdev = 0.16x
Source: Bloomberg, RHBRI Source: Bloomberg, RHBRI

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 20 October 2010

Chart 13: Forward P/B for Hunza

1.8

1.5

1.3

1.0

0.8

0.5

0.3
Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10

Average P/B = 0.72x; +2 stdev = 1.19x; -2 stdev = 0.26x

Source: Bloomberg, RHBRI

Chart 14: SunCity Technical View Point

♦ The share price of SunCity began its recovery trend
since Mar 2009 near RM1.31 low, and reached a
resistance at RM3.18 in Aug 2009, before forming a
sideways consolidation trend.

♦ However, the stock staged a breakout rally in Apr

2010 to hit a high of RM3.95 near a tough
resistance at RM3.98, prior to a fall into a
consolidation phase again that lasted until late Aug
2010.

♦ In late Aug, the stock broke out from the RM3.50

level with a technical breakaway gap and blasted all
the way towards the RM3.98 tough resistance level.

♦ It broke out from the level successfully, with

another gap in early Oct, but has since covered the
gap during recent profit-taking dips.

♦ It climbed to RM4.09 yesterday, before closing the

day at RM4.05 to indicate further upside potential.

♦ Given the upbeat momentum readings and the

firmer uptrend on the 10-day and 40-day SMAs,
the stock is expected to climb higher in the near
term towards the RM4.50 level resistance.

♦ To maintain its current upbeat momentum, the

stock must sustain at above the RM3.98 level in the
immediate term, in our view.

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IMPORTANT DISCLOSURES

This report has been prepared by RHB Research Institute Sdn Bhd (RHBRI) and is for private circulation only to clients of RHBRI and RHB Investment Bank Berhad
(previously known as RHB Sakura Merchant Bankers Berhad). It is for distribution only under such circumstances as may be permitted by applicable law. The
opinions and information contained herein are based on generally available data believed to be reliable and are subject to change without notice, and may differ or be
contrary to opinions expressed by other business units within the RHB Group as a result of using different assumptions and criteria. This report is not to be
construed as an offer, invitation or solicitation to buy or sell the securities covered herein. RHBRI does not warrant the accuracy of anything stated herein in any
manner whatsoever and no reliance upon such statement by anyone shall give rise to any claim whatsoever against RHBRI. RHBRI and/or its associated persons may
from time to time have an interest in the securities mentioned by this report.

This report does not provide individually tailored investment advice. It has been prepared without regard to the individual financial circumstances and objectives of
persons who receive it. The securities discussed in this report may not be suitable for all investors. RHBRI recommends that investors independently evaluate
particular investments and strategies, and encourages investors to seek the advice of a financial adviser. The appropriateness of a particular investment or strategy
will depend on an investor’s individual circumstances and objectives. Neither RHBRI, RHB Group nor any of its affiliates, employees or agents accepts any liability for
any loss or damage arising out of the use of all or any part of this report.

RHBRI and the Connected Persons (the “RHB Group”) are engaged in securities trading, securities brokerage, banking and financing activities as well as providing
investment banking and financial advisory services. In the ordinary course of its trading, brokerage, banking and financing activities, any member of the RHB Group
may at any time hold positions, and may trade or otherwise effect transactions, for its own account or the accounts of customers, in debt or equity securities or loans
of any company that may be involved in this transaction.

“Connected Persons” means any holding company of RHBRI, the subsidiaries and subsidiary undertaking of such a holding company and the respective directors,
officers, employees and agents of each of them. Investors should assume that the “Connected Persons” are seeking or will seek investment banking or other
services from the companies in which the securities have been discussed/covered by RHBRI in this report or in RHBRI’s previous reports.

This report has been prepared by the research personnel of RHBRI. Facts and views presented in this report have not been reviewed by, and may not reflect
information known to, professionals in other business areas of the “Connected Persons,” including investment banking personnel.

The research analysts, economists or research associates principally responsible for the preparation of this research report have received compensation based upon
various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.

The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on higher
risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

RHBRI is a participant of the CMDF-Bursa Research Scheme and will receive compensation for the participation. Additional information on recommended securities,
subject to the duties of confidentiality, will be made available upon request.

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actions of third parties in this respect.

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