A Two-Tier Market. Study Visit Note

Transcription

1 A Two-Tier Market By Adrian Ng l adrian.ng@kenanga.com.my; Sarah Lim l sarahlim@kenanga.com.my NEUTRAL We recently visited Johor to investigate the tourism angle given the weaker Ringgit and the influx of interest from China with regards to the massive Forest City project by Country Garden. Projects visited in our study trip included Forest City, Sunway Iskandar and E&O Avira Iskandar Malaysia and selected malls like KSL City Mall, Al- Salam REIT s Komtar JBCC and Genting Plantations Johor Premium Outlet. It has become apparent that Johor can no longer be looked as a whole but rather by pockets of hot spots. With the upcoming development of the High-Speed-Rail (HSR) which will bring about the Johor-Singapore Rail Transit System (RTS), it appears that the longer term growth story of Johor may still be in play. While most of the local developers are saying that sales have been soft, it appears this is not a case across the board. Forest City by Country Garden has garnered a lot of attention from the Chinese and their aggressive sales methods have outpaced most of our local boys. It was reported by Oriental Daily that Forest City has engaged 32 travel agencies in Singapore and Malaysia with some agencies organising an average of 10 group visits a month per agency, which is phenomenal in terms of traffic flow. Meanwhile, the 9,000-units Country Garden@Danga Bay is near completion and has achieved 90% take-up rate. We believe that Johor s property market maybe a two-tiered one as local demand remains relatively soft while projects like Forest City are seeing overwhelming interests from the Chinese. Even if developers focus on landed residential, we note that local demand is still for the affordable housing segment than the high-end ones. Buyers have become more selective and developers will have to work harder to differentiate themselves. Note that Johor HPI performance remains the weakest amongst the major states. In terms of mall performance, we believe the high incoming supply of new malls over the next 3-4 years may add further pressure on occupancy rate unless tourist traffic picks up significantly. Maintain NEUTRAL on Developers. Johor Residential Market Overview House prices in Johor is growing at a more moderate pace at 5.5% YoY at 3Q16 vs. its 10-year average of 7.4% and a peak of 26% back in M16 (3Q16) residential transacted value has declined by 11% YoY (-20% YoY) to RM6.3b while units transacted is also down by 18% YoY (-30% YoY) to 19,304 units. In terms of residential unsold units (completed), Johor s have been easing since mid-2014 and are now currently at 13.7k units. Contrary to perception, we note that 2-3 storey terraces are the ones with the highest overhang rates while condos are relatively lower. In terms of incoming supply and planned supply, landed residential appear to have a higher volume vs. condominiums. HPI Comparisons PP7004/02/2013(031762) Page 1 of 11

2 Johor: Residential Transacted Values & Units Meanwhile, Johor residential annual absorption rate of incoming supply (transacted units / incoming supply) has deteriorated to 19% vs. its 10-year average of 31% and is slightly worse off to Malaysia s overall absorption rate of 24%*. Johor s absorption rate of overall supply (existing supply and incoming supply) is at 3.0% vs. its 10-year average of 3.7% and Malaysia s 3.5%*. The trend is in line with overall Malaysia but it is clear Johor is showing greater weakness. Nonetheless, the popularity of future supply of landed residential stems from the fact that absorption rate is still relatively healthier than condos. We reckon most local based developers will continue emphasising on landed residential products, especially as the China-based developers are focusing mainly on high-rises. *Based on annualized 9M16 data. Johor: Residential Unsold Units Johor: 2-3 Storey Terrace Johor: Semi-d and detached Johor: Condo Johor: Incoming Supply and Planned Supply PP7004/02/2013(031762) Page 2 of 11

3 Residential Absorption Rate of Incoming Supply (Johor vs. Malaysia) 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Msia: RES: Annual Absorption Rate (x) 10-yr Average: Johor: RES: Annual Absorption Rate (x) Johor: RES: Annual Absorption Rate (x) * 2016 is based on annualized 9M16 data Residential Absorption Rate of Overall Supply (Johor vs. Malaysia) 6.0% 5.5% 5.0% 4.5% 4.0% 3.5% 3.0% 2.5% 2.0% Msia: RES: Annual Absorption Rate (x) Johor: RES: Annual Absorption Rate (x) 10-yr Average: Johor: RES: Annual Absorption Rate (x) *Future Supply = Existing Supply + Incoming Supply / Note that Absorption Rates are based on Annual Data while 2016 is based on annualized 9M16 data FOREST CITY BY COUNTRY GARDEN The journey to Forest City from Senai Airport took us approximately 30 minutes in smooth traffic condition. We were attended by one of its Chinese national sales personnel which offered to do a brief introduction to our group in three languages which is Mandarin, English and Malay, despite their reputation of not entertaining walk-in groups but only pre-arranged tour groups from China. By 10:00am, we observed tourist buses bringing tour groups from China. What was impressive was the sizeable scale of the show village, which could easily be the size of a neighbourhood mall complex. Retail shops are fully operational while their beach has become a recreational appeal to both tourist and locals alike. Beginning of last year, Country Garden unveiled an estimated GDV of RM175.0b for the initial phase (Island 1) of Forest City where the entire development will span over 3,425 acres of freehold reclaimed land (over 4 islands) with a development period of 20 years. Currently, most of the launches consists of high-rise projects with a built up starting from 517-1,862sf priced between RM1,200-1,800psf. Apart from high-rises, Country Garden also allocated 240units of exclusive villas with built-up of 3,000-6,000sf priced from RM m. According to its sales personnel, they managed to sell close to 10,000 units of apartments since its official launch back in the beginning of Estimating conservative average selling price per unit of RM800.0k-RM1.0m, we estimate that they would have easily churned RM b worth of sales in within a year, of which 70% of its buyer are mainly from China, 20% from Singapore while the remaining 10% are from Malaysia and other countries. We note that RM b worth of sales in a year is no easy feat, and it is highly impressive considering Country Garden s aggressive marketing back in China promoting Forest City have managed to bring in an average 20 Chinese tour buses per day to visit its sales gallery in Johor (peak at 60 tour buses per day) serviced by its massive sales force that consist of personnel. Interestingly, we gather from its sales personnel that Country Garden adopts an elimination system in which underperforming sales staffs will be laid off and replaced on an annual basis whereby only the fittest would last, which explains the aggressiveness of its sales force. For Forest City, while Country Garden is offering 10-year financing scheme and 5% discount for its buyers, we gather from its sales that most of its buyers from China are mainly cash buyers and they have their own legal team to execute the sales and purchase agreements on the spot before their buyers depart to their next site visit in Johor. We reckon that the investment merit for the Chinese in Forest City is mainly due to its proximity to Singapore, approximately 2km to Second Link s access, and they been granted approval for new CIQs (by land and sea) for the ease of access to Singapore, coupled that it has also been granted a duty zone status. For the land access, Country Garden will build an access connecting the second link from its development while there will be a port to Marina Bay for its sea access. Currently, the construction of its street mall and 5-star hotel are already completed and commenced operations. They also advertised that Forest City is just ¼ the price of Singapore properties. PP7004/02/2013(031762) Page 3 of 11

4 Forest City is a duty-free zone. It also enjoys the reduction or exemption of corporate tax (certified developer company, certified developer management company, and companies related to tourism, education and medi-care will qualify for full tax relief in the first 5 years of business operations) with no restriction on foreign ownership of company shares which have attracted the likes of corporations such as Huawei, Cisco, and Alibaba. There is also corporate tax incentive for Green Developers and Green Development Manager allowing them to enjoy 100% income tax exemption up to Forest City PP7004/02/2013(031762) Page 4 of 11

5 SUNWAY ISKANDAR After our visit at Forest City, we proceeded to our next site visit which is Sunway Iskandar, 15 minutes from Forest City s sales gallery. Sunway Iskandar is a 1,770 acre development with an estimated GDV of RM30.0b located at the southern tip of Johor with close proximity to Singapore through the Second Link. Out of the 1,770 acres of development, 691 acres (GDV: RM12.0b) are located in Medini area with a 129-year lease period, while the remaining 1,079 acres (RM18.0b) Pendas land are located right beside its Medini land which is freehold. Notably, Sunway International Sunway Iskandar is up and running as of Jan 2016 and thus far, they have 180 students enrolled. To date, Sunway has launched several projects in that area, which comprises Citrine Offices and Service Apartments with a total GDV of RM300.0m. The office suites which is fully sold have built-ups that range between 746sf and 1,671sf with the average selling price of RM760psf, while its 328 units of serviced apartments (take up 60%) have built-ups that ranges from 618sf to 1,571sf with a price range between RM800-RM900psf. Sunway Iskandar Apart from high rise development, Sunway had also launched its landed homes and retail shops back in 4Q15 namely Emerald Residence (222units) and Emerald Boulevard (88units),with booking of 60% in total, which we estimate a total GDV of RM m. Emerald Residence comprises of 2-storey terrace homes, 2-storey cluster home and 3-storey semi-detached with built-up that range between 1,919sf 4,192sf are priced between RM1.4m to RM5.9m. As for Emerald Boulevard s retail shops, it is priced from RM1.8m onwards. Sunway Iskandar Emerald Residence That said, we also visited Sakura residence (GDV: RM210.0m), its joint-venture development with Daiwa for pre-fabricated homes which Sunway owns 30%. Sakura residence consists of 10 units of bungalows and 90 units of semi-detached houses. The homes also come with prefab bathrooms while the homes use weather insulating materials to keep the houses cool. While the pricing for Sakura residence have yet to be finalised, we gather that the indicative pricing would start from RM3.2m for bungalow and RM2.3m for its semi-detached houses. We note that the house may come with a lot of optional features which bring household convenience to new levels; these include the finger-light doors, unique storage solutions, to name a few. PP7004/02/2013(031762) Page 5 of 11

6 Sunway-Daiwa Sakura Residence E&O Avira Iskandar Malaysia Avira Iskandar Malaysia is situated right across Sunway Iskandar. Avira Iskandar Malaysia is a 210-acre development with a total GDV of RM3.5b comprising of landed residences, condominiums, service apartments, a commercial hub and a Wellness Centre, which will be the heart and soul of the entire development. Currently, E&O has launched Avira Garden Terraces superlink houses that are part of phase 1 of Avira Iskandar Malaysia s development. The phase 1 development of Avira covers 60 acres and has a gross development value (GDV) of RM1.4 billion with 700 units of serviced apartments, a wellness centre dubbed Wellness Sanctuary, and 458 units of double-storey superlink houses in Avira Garden Terraces. We visited Avira Garden Terraces Phase A which comprises 208 units of fully fitted doublestorey superlink houses is already completed with a take up rate of 90%, launched back in 2014 at a price tag of RM1.3m onwards, of which most of the buyers are locals and Singaporeans. Upon the clearance of its 10% inventory in Phase A, management intends to launch another 70 units of double-storey superlink houses priced from RM1.7m onwards by March/April- 17 as construction works for these intended launches are already in progress with some at advance stages. E&O Avira Garden Terraces (Part 1) PP7004/02/2013(031762) Page 6 of 11

7 E&O Avira Garden Terraces (Part 2) JOHOR RETAIL SPACE OVERVIEW Has China tourist traffic picked up in Johor? Due to Forest City and the improving relationship between Malaysian and China, and the weaker Ringgit encouraging more spending in Johor by Singaporeans, retail activities should be a beneficiary. While we are unable to get official numbers of China tourist entering Johor for 2016, it is noteworthy that it has increased by 27% YoY to 0.80m in 2015 according to the Johor Immigration Department. Just a quick check with AirAsia indicates that they started the first direct flight from China (Guangzhou) to Johor back last year (May 2016) with daily routes (7x a week). Meanwhile, starting early 2017, China s Spring Airlines started doing China-to-Johor trips at 2x a week. We believe these are good indications of the popularity of Johor for the Chinese although we note that major footfalls could be mainly concentrated in Forest City. Based on our observation of the three malls we visited, we note that the activity on Friday was quite decent for KSL City Mall and Johor Premium Outlet and we noticed higher local traffic. Komtar JBCC was relatively quieter. Admittedly, this may be very different on the weekends. More incoming supply of retail spaces. According to NAPIC, 9M16 data indicates there is 19.0m sf of existing retail space while they expect future supply (incoming supply and planned supply) of 4.6m sf. However, according to Savills Research, there appears to be a lot of new retail spaces coming up based on their data, there is 6.6m sf of retail spaces under construction with delivery in (some of it are redevelopment) and another 2.3m sf in planning stages. Relative to existing supply it is significant. Considering that Johor has relatively lower occupancy rates of 73% (9M16) vs. Klang Valley (85%-86%), a significant amount of footfall traffic, either from other states or foreign tourists, is required to keep up with the amount of new spaces coming in. Retail Occupancy Rates and Retail Existing Supply Retail Floor Space Incoming and Planned Supply PP7004/02/2013(031762) Page 7 of 11

8 Savills: Future Retail Supply in Johor Source: Savills Research (Independent Property Market Report for IPO of KIP REIT) Malls Visited in Johor Johor Malls Visited Status Completion date Net Lettable Area (sf) Attractions 1 Komtar JBCC Completed Nov ,000 Angry Birds Activity Park and 4 floors of retail area. 2 KSL City Mall Completed Dec ,000 Integrated shopping mall development in Johor Bahru, Johor, Malaysia which comprises 500 retail outlets, 8 cinema halls, 868 hotel rooms, 602 condominium, 2800 car parks and a roof playground 3 Johor Premium Outlet Completed Dec ,000 Off-season branded goods at a discounted price 4 Paradigm Mall JB (formerly Kemayan Mall) Under Construction Apr-17 1,300,000 6-floor shopping centre with a very modern and exquisite 4 star hotel including an ultra- modern 263 unit service apartment. 5 Mid Valley Southkey Under Construction End -18 1,500,000 Largest mall in the Johor region once completed PP7004/02/2013(031762) Page 8 of 11

9 Komtar JBCC KSL City Mall Johor Premium Outlet PP7004/02/2013(031762) Page 9 of 11

10 Peer Comparison NAME DEVELOPERS UNDER COVERAGE Price (16/2/17) Mkt Cap PER (x) Est. NDiv. Yld. Hist. ROE Fwd ROE P/BV Net Profit (RMm) FY16/17 NP Growth FY17/18 NP Growth (RM) (RMm) FY15/16 FY16/17 FY17/18 (%) (%) (%) (x) FY15/16 FY16/17 FY17/18 (%) (%) (RM) S P SETIA BHD* , % 4.1% 4.0% % 0.3% 2.10 MARKET PERFORM IOI PROPERTIES GROUP BHD* , % 13.9% 9.2% % 12.7% 3.53 OUTPERFORM UEM SUNRISE BHD* , % 3.9% 2.0% % 12.5% 1.00 UNDERPERFORM SUNWAY BHD , % 11.7% 7.4% % 1.0% 3.23 MARKET PERFORM MAH SING GROUP BHD^ , % 14.3% 11.4% % 0.1% 1.49 MARKET PERFORM ECO WORLD DEVELOPMENT , % 3.7% 3.5% % 67.5% 1.53 OUTPERFORM GROUP BHD UOA DEVELOPMENT BHD* , % 14.1% 12.2% % 8.1% 2.54 OUTPERFORM MALAYSIAN RESOURCES CORP BHD , % -3.3% 5.1% % -51.2% 1.33 MARKET PERFORM KSL HOLDINGS BHD , % 10.5% 9.0% % -4.1% 0.99 UNDERPERFORM MATRIX CONCEPTS HOLDINGS BHD , % 31.8% 22.7% % 12.8% 2.65 OUTPERFORM SUNSURIA BERHAD , % 6.9% 13.3% % 60.1% 1.50 OUTPERFORM CRESCENDO CORPORATION BHD* % 2.2% 3.3% % 19.6% 1.68 MARKET PERFORM HUA YANG BHD % 21.9% 12.2% % -12.3% 1.18 MARKET PERFORM Target Price Rating CONSENSUS NUMBERS IGB CORPORATION BHD , % 7.0% 5.5% % 9.4% 4.80 NEUTRAL GLOMAC BHD % 14.2% 4.7% % 51.4% 0.74 SELL PARAMOUNT CORP BHD % 8.2% 8.3% % 5.3% 2.24 BUY TAMBUN INDAH LAND BHD % 22.9% 18.9% % -3.0% 1.63 BUY * Core NP and Core PER ^ Last price and TP is Ex-rights and Ex-Bonus. # IOIPG's Price/per share data is based on ex-rights PP7004/02/2013(031762) Page 10 of 11

11 Stock Ratings are defined as follows: Stock Recommendations OUTPERFORM : A particular stock s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). MARKET PERFORM : A particular stock s Expected Total Return is WITHIN the range of 3% to 10%. UNDERPERFORM : A particular stock s Expected Total Return is LESS than 3% (an approximation to the 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). Sector Recommendations*** OVERWEIGHT : A particular sector s Expected Total Return is MORE than 10% (an approximation to the 5-year annualised Total Return of FBMKLCI of 10.2%). NEUTRAL : A particular sector s Expected Total Return is WITHIN the range of 3% to 10%. UNDERWEIGHT : A particular sector s Expected Total Return is LESS than 3% (an approximation tothe 12-month Fixed Deposit Rate of 3.15% as a proxy to Risk-Free Rate). ***Sector recommendations are defined based on market capitalisation weighted average expected total return for stocks under our coverage. This document has been prepared for general circulation based on information obtained from sources believed to be reliable but we do not make any representations as to its accuracy or completeness. Any recommendation contained in this document does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may read this document. This document is for the information of addressees only and is not to be taken in substitution for the exercise of judgement by addressees. Kenanga Investment Bank Berhad accepts no liability whatsoever for any direct or consequential loss arising from any use of this document or any solicitations of an offer to buy or sell any securities. Kenanga Investment Bank Berhad and its associates, their directors, and/or employees may have positions in, and may effect transactions in securities mentioned herein from time to time in the open market or otherwise, and may receive brokerage fees or act as principal or agent in dealings with respect to these companies. Published and printed by: KENANGA INVESTMENT BANK BERHAD (15678-H) Level 12, Kenanga Tower, 237, JalanTun Razak, Kuala Lumpur, Malaysia Telephone: (603) Website: research@kenanga.com.my Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 11 of 11