Capital World Limited

Transcription

1 Initiating coverage 5 June 2017 Current Price Overweight S$0.131 Fair Value S$0.255 Up / (downside) 94.7% Stock Statistics Market cap S$166.1m 52-low S$ high S$0.240 Avg daily vol 1,304,376 No of share 1,268.3m Free float 15.9% Key Indicators ROE 17F 88.4% ROA 17F 12.7% P/RNAV 0.18x Net Debt-to-Total Assets FY17F 29.6% Major Shareholders Siow Chien Fu 39.56% Colin Tan 19.78% Edwin Tan 19.78% Source: Bloomberg Liu Jinshu Historical Chart /16 08/16 10/16 12/16 02/17 04/17 06/1 (+65) jinshu.liu@nracapital.com Current Share Price Looks Attractive 9M17 results were encouraging. For the quarter ended 31 March 2017, Capital World Limited reported a net profit of RM38.4m on revenue of RM74.6m. Gross margin remained high at 73.8%, which was similar to reported historical margins. On a 9M basis, revenue and net profit grew by about 72%/71% to RM120.3m and RM62.3m respectively. Unique business model. Capital World insists that it has a unique business model that entails low initial capital outlay, fast project turnaround and higher profitability by entering into joint venture agreements with landowners whose assets are ready for development. Under this business model, Capital World will fund the development of the land and repay the landowner progressively in the form of cash or on completion in units. From our perspective, the company s CEO being a veteran architect is well qualified to propose highly differentiated projects such as large scale integrated developments. Trading at close to Capital City s land value. What we find attractive about Capital World right now is that it is trading at a market capitalisation of S$166.1m (RM513.4m), compared to a land cost of RM324m for its flagship Capital City project. Capital City is slated for completion in stages from 2018 to Comprising of a thematic retail mall, serviced suites, serviced apartments and a hotel (to be operated under one of Hilton s brands), this high quality development has a total net floor area of about 1.9m sq. ft. Capital World s current market capitalisation translates to only RM270.6 psf., whereas Capital City s retail mall units fetch selling prices of as high as RM2,800 psf or more. We estimate the present value of the net development profits of Capital City Project to be RM560.7m, against an earlier value of RM970m obtained from the 29 March 2017 Circular. Legacy business presents key risk. In the listing of Capital World, the shell company Terratech did not dispose its marble mine at Kelantan. We have not incorporated any on-going losses and write-offs from the marble business in our forecasts and valuation which purely reflect that of the newly injected business. Hence, there is the risk that reported group profits may vary significantly from our forecasts. As of end 2016, Terratech had a book value of RM9.8m, which can serve as a buffer against any related losses, before our valuation is impaired. That said, we reckon that value can be unlocked if a buyer can be secured for this legacy asset. Overweight (high return / high risk). The bottom line is that Capital World can deliver high returns if its projects proceed smoothly, e.g. sustained sales at Capital City, etc. Some buffer of safety is also offered as Capital World now trades at close to the land value of Capital City. On the flip side, we also caution that risks are high and recognize Capital World as a high-risk prospect. Key Financial Data Based on the results and balance sheet of Capital City Group Only (RM m, FYE Jun) F 2018F 2019F Sales Gross Profit Net Profit EPS (cents)* EPS growth (%) nm PER (x) NAV/share (cents)* DPS (cents) Div Yield (%) Source: Company Circular, NRA Capital *Based on post-placement and consolidated number of shares outstanding

2 Background Marble quarry operator to re-emerge as integrated property developer. Following the completion of the Reverse Takeover by Capital City Group (CCG), Terratech Group Limited has been renamed as Capital World Limited and derives the bulk of its income from the development of properties. Terratech s Existing Business is in the exploration, development, quarrying, extraction and removal of marble from the quarry located in Kelantan, Malaysia, and the commercial sale of marble and marble products. For the quarter ended 31 December 2016, Terratech reported revenue of S$3.1m and a net loss attributable to shareholders of S$1.1m, of which S$0.47m was expenses incurred pursuant to the Reverse Takeover. In its maiden quarterly results announcement, Capital World reported revenue of RM74.6m and net profit of RM38.4m. Therefore, the completion of the Reverse Takeover has resulted in higher profitability and an overall stronger balance sheet for the listed company. Figure 1: From Mining to Property Development As of latest practicable date or 17 March 2017, construction of the structure of the mall of Capital City has been completed and construction of the multi-storey carpark has commenced. Figure 2: Recent Financial Performance Existing Marble Quarry Business (Y/E March) Enlarged Quarry and Development Group (Y/E June) S$m FY14 FY15 FY16 Revenue Profit after tax RM m FY14 FY15 FY16 Revenue Profit after tax Source: Terratech Annual Reports, Circular dated 29 March, NRA Capital page 2

3 Figure 3: Corporate Structure Upon Completion of Reverse Takeover Capital City Group FSVL, AVL and REGL are BVI holding companies. Terratech Capital Group World Limited, Limited to be renamed as Capital World Limited Existing Business of Terratech CCF, CCP and CCV are the respective property development companies. CCMPL will be undertaking the Singapore sale and marketing of the Capital City Group s projects. FSVL= First Star Ventures Limited CCF= Capital City Frontier Sdn. Bhd. AVL= Altimate Ventures Limited CCP= Capital City Property Sdn. Bhd. CCMPL= Capital City Management Pte. Ltd. REGL= Rise Expedition Global Limited CCV= Capital City Ventures Sdn. Bhd. Source: Extracted from Page 130 of the Circular dated 29 March 2017 Figure 4: List of Capital City Group Projects Development Company Project Location Tenure Land Area Landowner CCP Capital City Jalan Tampoi, Johor Bahru Freehold 40,852 sqm. Achwell Property CCV Austin Tebrau, Johor Bahru Freehold 27,670 sqm. EHSB CCF Sitiawan Wellness Hub Perak Leasehold (expiring on 5 June years) 154,892 sqm. PESB Leasehold (expiring on 29 Dec years) 33,170 sqm. MTSB Project Capital City Austin Sitiawan Wellness Hub Date of Joint Venture Agreement with Landowners* Description Status Remarks 26-Dec-13 9-Nov-16 7-Dec-16 Integrated development project, comprising of a mall, hotel, serviced suites and serviced apartments Integrated development, comprising of a multi-storey mall, office suites, hotel and residential apartments Mixed development as a destination for tourists seeking health and wellness services, e.g. from Ipoh and KL Construction started in June Completed construction of structure of mall and commenced construction of multi-storey carpark as of March Retail podium was 46% completed as of 31 March. Submitted application for planning permission on 9 March 2017 No development activity has commenced. Retail Podium must be completed within 36 months from Commencement Date, subject to extension. Entire project to be completed and approved within 66 months from date of first Building Plans approval received from the appropriate authorities (Commencement Date). 60 months from the commencement of construction with an extension of 12 months upon expiry thereof Within 10 years from the date of last relevant project approvals from the authorities *CCG s business model is such that it does not acquire the land, but signs joint venture agreements with the landowners to complete the project within a stipulated period. In turn, the landowners will be compensated with a share of the sales proceeds (via progressive payments as the group receives cash from the sale of units) or completed units Source: Circular dated 29 March EHSB= Elit Hartamas Sdn. Bhd., PESB= Permatang Eksklusif Sdn. Bhd., MTSB= Mara Tegas Sdn. Bhd. page 3

4 Offering Specialized Skills for Complex Projects Balanced mix of architectural, engineering and construction expertise. The interesting part of Capital World is that it will be led by a veteran architect with about 30 years of experience in designing and developing various properties Mr. Siow Chien Fu and an equally experienced engineer Mr. Tham Kok Peng from the construction and engineering sector. Upon completion of the Reverse Takeover, Mr. Siow will be the CEO and Executive Director of the listed company with Mr. Tham as an Executive Director. Mr. Siow will also be the single largest shareholder with about 40% of the listed company. Corporate management expertise is also provided by Mr. Dominic Tan who was the Managing Director of United Engineers (Singapore) Private Limited (now known as UES Holdings Pte. Ltd.) from 2001 to Mr. Dominic Tan shall act in a non-executive capacity as the Non-Executive Chairman and independent director of the proposed Board of Directors. Figure 5: Key Management Name Mr. Siow Chien Fu Mr. Tham Kok Peng Proposed Position Executive Director and CEO 30 years of experience in the design and development of various property projects in Malaysia, Hong Kong, Singapore and overseas, including 25 years as business founder and entrepreneur. Experience spans almost all property types from small to large scale projects, including integrated, residential, industrial, commercial and retail properties Graduated from the University of Kansas in the United States with a Bachelor of Architecture Joined Devine Architects Inc. in Kansas, USA Joined Gould Evans Associates in Kansas, USA Senior Architect at Singapore Regional Development Consortium Architect to 1992 Associate at Singapore Regional Development Consortium Architect Founded Regional Development Consortium Architect (RDCA) in Malaysia Transferred the RDCA business to RDC Arkitek and passed on management of architectural business to new partners. - Non-executive director and shareholder of RDC Arkitek Executive Director Over 30 years of experience in the engineering and construction sector, holding mid to senior management appointments. Professional Engineer of the Republic of Singapore, Professional Engineers Board from 1983 to Design Engineer at TechnoCon Engineers Director and Professional Engineer at TechnoCon Engineers Joined Sembcorp Engineers and Constructors Pte Ltd Executive Vice President at Sembcorp Engineers and Constructors Pte Ltd Director at Koh Brothers Building & Civil Engineering Contractor (Pte.) Ltd Executive Director of Koh Brothers Building & Civil Engineering Contractor (Pte.) Ltd Advisor to Koh Brothers Building & Civil Engineering Contractor (Pte.) Ltd. Source: Circular dated 29 March 2017 Leveraging on combination of expertise to build complex projects. We highlight Mr. Siow s and Mr. Tham s architectural and engineering expertise as key competitive advantages that will allow Capital World to undertake complex project such as large scale integrated developments. In contrast, other small and medium developers may not have access to good architectural and engineering talent and may not offer the best designs. In some cases, they may not even be aware of the full potential of their land assets, after years of developing conventional properties such as terrace houses, thus overlooking development opportunities. In fact, Capital World s flagship project Capital City was conceived in 2013 when a Bursa listed construction company-cum-developer Gadang Holdings Berhad s subsidiary approached Mr. Siow with a plan to develop shophouses on the land asset. Subsequently, Mr. Siow convinced the developer that there was greater value realisation in developing the land into an integrated property, thus cumulating in the incorporation of CCP (See Figure 3) in June page 4

5 Other advantages of having a good architect include a) the application of urban planning knowledge to spot promising localities and recognize untapped development potential within the neighbourhood. b) designing to maximise building efficiency, i.e. highest net floor area vis-àvis maximum permissible floor area. c) the application of the latest design and industry trends to a project, e.g. latest façade designs and energy efficient designs. d) Overcoming design and regulatory challenges such as the odd-shaped land plot, plot ratio and land use restrictions. In turn, Mr. Tham can advise on the engineering aspects such as the constructability or buildability of the project. This will minimize execution risk and cost overruns. Figure 6: One of the Projects Designed by Mr. Siow - Eco Tree Hotel, Melaka (on an odd shaped land plot) Source: Growing emphasis on well-designed projects. The crux of the issue is that large developers are increasingly investing resources into project design to develop well differentiated projects, e.g. setting up theme parks within a multistorey mall and integrating hotel facilities with residential apartments etc, to attract affluent buyers. In turn, consumers get accustomed to such products and demand for them. On the other hand, small medium developers are locked out of this market due to limited resources, and end up being confined to specific niches such as mass market housing projects. 1 1 This is particularly true for small construction companies turned developers who offer design-and-build capabilities rather than fully designed projects. page 5

6 Figure 7: From Plain Vanilla to Well-Designed Projects Snapshot of Projects by Developer Snapshot of Projects designed by an Architect Firm Source: Various internet websites, newlaunch.iproperty.com.my, propertyinsight.com.my, Figure 7 does not suggest that the developer is inferior, but attempts to show the more varied designs and projects types by the architect firm. To be fair, developers may focus more on cost efficiency for affordable housing projects. Collaborative model for mutual access to land and expertise. Admittedly, an ambitious developer can attempt to engage a top architect or project manager to venture into more sophisticated projects. Capital World goes one step further by taking a proactive role to contribute equity and propose projects in return for influence over the project. This ensures alignment of interests and sharing of risk and reward. Currently, Capital World operates a model that is somewhat common in Malaysia where it undertakes the conceptualisation, design, implementation and sale of the project, and repays the landowner a portion of the sales proceeds or a predetermined number of completed units. This way, Capital World takes control over the project, thus facilitating decision making. Other developers that have acted as either the landowner or developer include Eco World Development Group Bhd (market capitalisation of RM4.6 billion) and Mah Sing Group Bhd (market capitalisation of RM3.7 billion). Of course, joint ventures are also popular with small developers who lack the financial muscle to acquire the land. That said, this business model also opens opportunities for Capital World to inject its expertise and participate in projects especially when developers are unwilling to sell quality land. Gadang s joint venture with Capital World is proof that developers are willing to take a passive role given that the project is in the right hands. page 6

7 Figure 8: Joint Venture Property Development Business Model Contributes project management, design and construction expertise Landowners CCG will fully fund the development and construction of project CCG pays the landowners, their entitled percentage share of sales proceeds on a progressive basis or in completed units, subject to minimum and maximum limits as per the joint venture agreement. Upon full payment to the landowner, the land title is transferred to the company. Source: NRA Capital page 7

8 Overview of Johor Of the three projects in CCG s portfolio, the two most advanced ones are based in Johor. A leading investment destination in Malaysia. Johor has a population of 3.66m in While income levels are not as high, Johor is the fourth largest state in Malaysia by GDP. As of 2015, Johor has a GDP of RM 98.9 billion, similar to that of Sarawak and 38% lower than that of Kuala Lumpur. 2 However, its GDP per capita amounted to only RM29,539, ranked 9 th in Malaysia. 3 That said, Johor is a major investment destination in Malaysia, attracting RM26.4 billion of investments in In fact, its share of investments attracted by Malaysia has grown from 13.5% in 2012 to 29.5% by 2014 and 45.2% by Figure 9: GDP at 2010 constant prices, by State RM billions Source: mysidc.statistics.gov.my, NRA Capital Existing mega projects in Johor include the 20-year RM442 billion gross development value Forest City 4, RM97 billion Pengerang Integrated Petroleum Complex 5, Singapore-Kuala Lumpur high-speed rail and the RM8.9 billion Gemas-JB electrified double-tracking railway line project. 6 There has been some concern about China s capital controls affecting sales at Forest City. However, the developer for this project appears to be bringing forward plans to target international and global buyers. As for the Pengerang petroleum complex, it has successfully attracted a US$7 billion or RM31 billion investment from Saudi Aramco. These projects mean that Johor will continue to enjoy a consistent flow of investments over the next few years to support GDP growth. Johor s real GDP grew at a rate of 5.6% in In turn, high GDP growth and investments has supported property prices. Among the different states in Malaysia, Johor s property prices grew the fastest in 2016, with the All-House Price Index growing by 9.1% in the preceding five quarters up to 4Q16. 2 At 2010 constant prices 3 At current prices page 8

9 Figure 10: Total Capital Investment in Johor RM billions % 27.7% 29.5% % 45.2% % 30.0% 10.0% -10.0% % Investments attracted as % of all states -50.0% Source: NRA Capital Figure 11: % Change in All House Price Index (from 4Q15 to 4Q15 inclusive) 10.0% 5.0% 0.0% -5.0% 5.9% 6.1% 6.3% 7.9% 8.7% 9.1% 9.1% 2.0% 2.5% 3.0% 3.8% 0.1% 0.4% -1.3% Source: mysidc.statistics.gov.my, NRA Capital Limited large scale hotels in Johor. As of 2015, Johor had 570 hotels with a total of 31,025 rooms, translating to an average of 54 rooms per establishment. In comparison, the 222 gazetted hotels in Singapore have a total of 52,552 rooms or an average of 237 rooms each. In fact, the average number of rooms per establishment fell from 67 in 2012 to 54 in 2015, despite the number of hotels doubling or growing by 133% to 570 during the same period. This suggests that more small establishments were opened instead. Smaller establishments lack scale and may not offer the same standards and amenities as larger professionally run establishments. Secondly, they tend to lack access to international marketing networks to attract visitors, unlike the reservation systems of international operators such as Accor and Hilton. This may explain why the average occupancy rate in Johor is relatively low at 58.5% with guests staying for less than a day on average. With the developments ongoing in Johor, we reckon that there may be a market gap for larger professionally run three to five star hotels to meet the needs of business travellers and tourists. Our view is validated by the addition of at least eight hotels with 176 to 345 room each in Johor from 2013 to We counted another six hotels with an average of 413 rooms that will open in 2017, followed by another two hotels with 214 and 315 rooms respectively in page 9

10 Figure 12: Hotel Statistics, Johor 35,000 30,000 25,000 20,000 15,000 10,000 5, Hotel rooms No of hotels Avg no of room per hotel Source: mysidc.statistics.gov.my, NRA Capital Figure 13: Hotel Statistics, Johor Hotel rooms 14,299 15,723 16,509 20,537 29,021 31,025 No of hotels Avg no of room per hotel Average occupancy rate 54.5% 52.0% 56.1% 56.4% 56.6% 58.5% No of room nights 2,805,464 2,943,346 3,334,158 4,169,832 5,913,319 6,533,865 Foreign guests 1,566,977 1,781,765 1,794,729 2,631,674 2,402,884 2,565,092 Domestic guests 2,051,955 2,003,611 2,162,130 3,138,895 4,023,691 4,388,235 Total 3,618,932 3,785,376 3,956,859 5,770,569 6,426,575 6,953,327 Average length of stay Source: NRA Capital Figure 14: Recent Hotel Openings in Johor Source: Google Maps, NRA Capital The red balloon in Figure 10 shows the approximate location of CCG s current project s hotel to be branded as Hilton Garden Inn. It shows that there are relatively few new hotels in the immediate vicinity of the project. Hotel No of rooms Est. Year of Opening 1 Renaissance Hotel Jen Hotel DoubleTree by Hilton Amansari Hotel Nusajaya Somerset Medini Amerin Hotel Hotel Phoenix Amansari Hotel Desaru Amari Hotel Paradigm JB Hotel Cititel Boulevard Hotel The Gardens Hotel Hard Rock Hotel Citadines Medini Hilton Garden Inn - Capital City page 10

11 Project Capital City One of the Largest Malls in Johor The Capital City Group s projects in Johor include Project Capital City and Project Austin. Project Sitiawan Wellness Hub is in Perak. Capital City is currently under construction and is slated to be completed in Phases from 2018 to 2019 and Project Austin and Project Sitiawan Wellness Hub are still in the planning phase with no or insignificant construction activity undertaken. The Group s key focus is in the completion of Capital City. Project Capital City comprises of six floors of retail mall, followed by six to seven floors of carparks and one storey of common facilities e.g. convention and function rooms. Above the mall, carpark and common facilities are five blocks a 16-storey hotel, an 18-storey of serviced suites and three 15-storey blocks of serviced apartments. With an estimated population of 1.2 million within five kilometre and 2.5 million within 10 kilometres from the project site, Capital City will benefit from patronage by the local community upon completion. 7 Figure 15: Location of Capital City Population of 1.2 million within 5 km radius Source: page 11

12 Figure 16: Floor Plan of Capital City Mall Gross Floor Area (sq. ft.) Net Floor Area (sq. ft.) No of units No of units sold Retained Units Unsold Units Estimated Completion Sales Launch 2013; 242 units held as investment properties Retail mall called Capital 21 1,225, , Carpark and other facilities 1,823, ,742 NA 2018 Held as PPE Hotel (Garden Inn by Hilton) 130, , NA Held as PPE Serviced suites (Capital Suites) 363, , Pre-launch Serviced apartments 532, , Total 4,075,556* 1,897,020** *Subject to rounding error etc. **The total net floor area of the hotel, serviced suites and serviced apartments is 85,352 sqm. We allocated the net floor ar ea across the three components based on their proportionate gross floor area. Source: Circular dated 29 March 2017, NRA Capital Five-in-One integrated property development. One of the compelling value propositions of Project Capital City is that it offers 1) accommodation i.e. serviced suites and serviced apartments, 2) hospitality i.e. hotel, 3) MICE i.e. convention rooms and a World Museum, 4) entertainment i.e. Cineplex and Children Theme Park and 5) retail services in one development. Integrated properties have only caught on in Malaysia in recent years. Most older properties are of single-use only, while some of the early integrated properties feature limited elements e.g. only residential and retail properties in one location. Project Capital City brings the integrated property development concept one step further by integrating accommodation and hospitality with retail, supplemented by MICE and entertainment concepts, e.g. theme park and museum. In addition, the second to sixth floor of retail shops will feature different continental décor, e.g. Middle East/Africa and Asia themes to bring about a unique retail experience. Therefore, Project Capital City can be said to be a differentiated lifestyle destination for visitors upon completion, able to withstand competition from other projects in Johor. Sales progress. As of the latest practicable date or 17 March 2017, 54% or about 895 of the 1,655 retail units have been sold while 29% or 180 of the 630 serviced suites have been sold. The 690 serviced apartments were launched in May. The bulk of the sold retail units were transacted at RM2,853 per sq. ft., while most of the serviced suites were sold at RM627,378 per unit. 242 retail units, the hotel, carparks and common facilities will likely be held for income. page 12

13 Malaysians make up for more than half of buyers. According to the circular, only eight serviced suites units have been sold to foreign buyers, while no mention was made on foreigner purchases of the retail units. 8 Therefore, we can infer that more than half of the buyers are Malaysians. We reckon that CCG will be able to increase sales by stepping up marketing in other states such as Selangor or even East Malaysia, Sarawak; as well as in overseas markets. Part of project to be retained for recurring income. Other than earning revenue from the sale of units, CCG will be retaining the hotel, 242 retail units, common facilities and carpark for income. We estimate that these assets will have approximately 2.1m sq. ft. of gross floor area or close to 53% of the total gross floor area of the project. For a company with only one on-going project, the retained assets will help in providing recurring income to the group and mitigate against income volatility. For instance, we estimate that the hotel and carpark may generate RM31m of revenue in FY21 in our forecasts. To ensure the success of the hotel, CCG has entered into a management contract with Hilton Worldwide to operate the hotel under the Hilton Garden Inn for 15 calendar years. The initial operating term may be extended for up to two successive periods of 10 calendar years each. Financial forecasts and valuation of Project Capital City. Based on an ASP of about RM825 to RM2,231 psf. for the retail, serviced suites and serviced apartments, we yielded a gross development value of RM2.4 billion for these three components, including the 242 retained retail units. For simplicity, we assume that these 242 units will be progressively sold after the completion of the mall component. According to the circular, the present value of the gross development value of the entire development, including the hotel and carpark, is RM2.416 billion. After deducting for land cost of RM324.0m and construction cost of RM250 per sq. ft. of gross floor area, we estimate a RNAV of RM1.7 billion for the retail mall, serviced suites and serviced apartments. After deducting for 15% of GDV as operating expenses and 24% corporate tax, we estimate cumulative net development profits of RM1.0 billion, of which RM963m is expected to be recognized from FY17 to FY23 (9M17: RM62.3m). Discounting the portion of net development value from FY17 to FY23, we yielded a present value of residual net development profits of RM560.7m from the retail mall, serviced suites and serviced apartments. In comparison, the entire project is valued at RM965m in the circular. Other than differences in our assumptions, we also applied a steeper discount rate of 15%. Key assumptions are presented below. 8 Page 104 Figure 17: Financial Assumptions for Project Capital City Land Cost Construction Development Gross Margin ASP (RM psf) GDV (RM m) (RM m) Cost (RM m) gross profit Capital 21 retail mall 2,300 x 0.97 = 2,231 1, , % Capital 21 - carpark To be held as PPE Hotel To be held as PPE Serviced suites 1000 x 0.97 = % Serviced apartments 850 x 0.97 = % Total 2, , , % ASPs have been adjusted for bumiputra discount by about 3%. GDV= ASP x Net floor Area from Figure 16, except for the GDV of serviced suites which is based on gross floor area due to limited information. Our serviced suites ASP assumption implies a per unit price of RM500,000, within the realized value of RM627,378. Land cost as per the joint venture agreement is set at 16.7% of the aggregate of selling prices, subject to a maximum of RM m. We assume construction cost to be RM1,019m or at an average off RM250 per sq. ft. of gross floor area from Figure 16, page 13

14 regardless of the property type. The land cost and construction cost of the hotel and carpark are assumed to be capitalized on the balance sheet as PPE. The estimated gross margin of 76.0% for the mall is in line with the reported historical gross margin of the project of 75.6% from FY14 to FY16. Source: NRA Capital Figure 18: Revenue, Profitability and Valuation Workings Forecasting Assumptions Cumulative % Sold (by floor area) FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Capital 21 - retail mall 35.0% 45.0% 55.0% 65.0% 75.0% 85.0% 100.0% 100.0% Serviced suites 30.6% 40.6% 50.6% 60.6% 75.6% 90.6% 100.0% 100.0% Serviced apartments 0.0% 30.6% 40.6% 50.6% 60.6% 75.6% 90.6% 100.0% Estimated Cumulative Pre-sales (% sold x GDV in Figure 17) FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Capital 21 - retail mall ,096 1,264 1,433 1,686 1,686 Serviced suites Serviced apartments Total 686 1,007 1,246 1,485 1,741 2,015 2,357 2,394 As reported Forecasting Assumptions % Completion FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Capital 21 - retail mall 0.9% 9.5% 24.8% 50.0% 75.0% 100.0% 100.0% 100.0% 100.0% 100.0% 100.0% Serviced suites 5.0% 9.5% 24.8% 50.0% 75.0% 100.0% 100.0% 100.0% Serviced apartments 5.0% 9.5% 24.8% 50.0% 75.0% 100.0% 100.0% Revenue (Cumulative pre-sales x % completion Cumulative revenue recognized) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Capital 21 - retail mall Serviced suites Serviced apartments Gross profit (Revenue total land and construction cost in Figure 13 x % Completion) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 Capital 21 - retail mall Serviced suites Serviced apartments Total Operating expenses % of revenue % -32.0% -11.8% -12.0% -15.0% -15.0% -15.0% -15.0% -15.0% -15.0% -15.0% Tax Net development Profit Residual development profit Discount factor PV of Net Development Profit Total (RM m) We generally assume 15% of revenue as operating expenses. For 9M17, selling, distribution and administrative expenses accounted for about 8.9% of revenue. Hence, we assumed that operating expenses in FY17 will be about 12% of revenue. Longer term, we reckon that the company will spend more on marketing and thus assume 15%. Adjusted net development profit includes an arbitrary 5% capital charge over net development profit to derive the residual profits which are discounted back at a 15% discount rate per annum to derive a present value of RM560.7m. Source: Circular, NRA Capital page 14

15 Figure 19: Assumptions and Estimates for Garden Inn Hotel and Carpark FY21 FY22 FY23 FY24 FY25 No of Hotel Rooms Average Room Rate Occupancy 45.0% 55.0% 65.0% 75.0% 80.0% Est. Annual hotel revenue (No of rooms x occupancy x average room rate x 360) Net operating margin 15% 20% 30% 30% 30% Net operating profit Residual net operating profit Terminal value Discount factor PV of net operating profit Total (RM m) 90.9 Car park FY19 FY20 FY21 FY22 FY23 No of lots Occupancy 40% 50% 60% 70% 80% Hourly rate (RM) Est. Revenue (Lots x Occupancy x hourly rate x 12 hours x 360 days) Net operating margin 10% 10% 12.5% 15% 15% Net operating profit Residual net operating profit Terminal value 50.2 Discount factor PV of net operating profit Total 33.0 Average room rate is assumed at RM300 in the first year, followed by 5% increment each year. DoubleTree by Hilton in Johor Bahru goes at about RM363 per room. Given the positioning of Garden Inn, we decided on a rate of RM300 per night. We expect occupancy to slowly grow from 45% in FY21 to 80% in FY25. In 2015, the average occupancy of hotels in Johor is about 58.5%; albeit due to the large number of small establishments. Nonetheless, we decided to assume a more moderate rate of occupancy growth. For both the hotel and carpark, the terminal value component is based on a discount rate of 8% and terminal growth rate of 2%. The discount rate for the explicit period is set at a lower rate of 15% per annum. These assets are being held for income purpose and are not for sale. Development properties for sale may require a higher discount for value to be realized. On the other hand, we reckon that we can apply a lower discount rate, more reflective of cost of capital over time, for income yielding assets. Source: NRA Capital Project Pipeline Austin and Sitiawan Wellness Hub Other than Capital City, CCG also has two projects, Austin and Sitiawan Wellness Hub which are pending development. We understand that Austin will be launched later in We assume that Austin will commence construction in FY19 given that planning permission application has been submitted. From the application of the planning permission to launch takes about six months for most projects, followed by another three to six months before construction commences. Hence, we have prudently factored in time for any delays. In turn, the construction of Sitiawan is assumed to commence one year later in FY20. Both projects are relatively large and occupy total land area of 215,732 sqm. Given assumptions about plot ratio and efficiency, we estimate that the total net area for these projects may be about 2.5m sq. ft. Based on an average selling price of RM1,450 and RM500 psf respectively, we project that these two projects may have a gross development value of RM2.1 billion. The ASP for page 15

16 Sitiawan is assumed to be lower due to its location in Perak and is similar to the listed prices of high end properties in Perak. Figure 20: Key Assumptions, Financial Estimates and Valuation for Project Austin and Sitiawan Wellness Hub Land area (sqm) Plot ratio Max GFA (sq. ft.) Efficiency Est. Net Area (sq. ft.) ASP (RM psf) GDV (RM m) Project Austin 27, ,489,199 60% 893,520 1,450 1,295.6 Sitiawan Wellness Hub 188, ,024,299 80% 1,619, Land cost as per circular (RM m) Construction cost based on RM250 per Max GFA (RM m) Development gross profit (RM m) GDV (RM m) Gross margin Project Austin 1, % Sitiawan Wellness Hub % Project Austin FY19 FY20 FY21 FY22 FY23 FY24 Total % of completion 10% 20% 40% 60% 85% 100% Revenue ,295.6 Gross profit Operating 15% of revenue % Net development profit Residual development profit (5% capital charge) Discount 15% PV of development profit Sitiawan Wellness Hub FY19 FY20 FY21 FY22 FY23 FY24 FY25 Total % of completion 0% 10% 20% 40% 60% 85% 100% Revenue Gross profit Operating 15% of revenue % Net development profit Residual development profit (5% capital charge) Discount 15% PV of development profit Based on Capital City s land area of 40, sqm and gross floor area of approximately 4.075m sq. ft., the plot ratio of Capital City is computed to be around nine times, which is relatively high in our view. In fact, page 35 of the circular mentions a plot ratio of up to 4.0 times. Hence, we assumed a more conservative plot ratio of five times for Project Austin. Based on an efficiency of 60% (which is similar to that of Capital City), a net floor area of 893,520 sq. ft. for Project Austin is derived. For Sitiawan, visuals in the circular suggest that it may be a low-rise development. Hence, we decided on a plot ratio of one, but with a higher efficiency of 80%. Source: NRA Capital Forecasts and Valuation Based on the assumptions in Figures 16 to 20, we expect CCG s revenue and net profit to increase strongly in FY17 as construction picks up pace. Hence, we forecast revenue of RM179.1m and PATMI of RM77.1m in FY17, after including approximately RM10m of one-off RTO expenses. Income from the hotel and carpark are treated as other income in our forecast horizon of FY17F to FY21F. Overall, we derived a RNAV per share of S$0.724, discounted by 65% to a fair value per share of S$0.253 (rounded to S$0.255), excluding the value of Terratech s marble mine. page 16

17 Figure 21: Summary of Financial Forecasts of CCG RM m (Y/E June) FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 Revenue Cost of sales Gross profit Other income Operating expenses IPO expenses Profit before tax Income tax Profit after tax Revenue, cost of sales and gross profit are assumed to be derived from the sale of properties while hotel and carpark income are classified as other income for convenience. We also assume that all financing costs are capitalised. Source: NRA Capital Figure 22: Valuation Gross Development Value (RM m) Gross Floor Area (sq. ft.) GDV / GFA (RM psf) Net Floor Area (sq. ft.) GDV / NFA (RM psf) Capital City - Mall, Suites & Apartments 2,394 (from Fig 17) 2,121,186 1,128.6 Capital City - Hotel & Carpark 644.0* (from Fig 17) 1,954, ,897,020 1,601.4 Project Austin 1,295.6 (from Fig 20) 1,489, ,520 1,450 Sitiawan Wellness Hub (from Fig 20) 2,024, ,619, *Based on land and construction costs. Land costs (RM m) Land cost per GFA (RM psf) Land cost per Net Floor Area (RM psf) Construction costs (RM m) Construction cost per GFA (RM psf) Construction cost per Net Floor Area (RM psf) Capital City - Mall, Suites & Apartments Capital City - Hotel & Carpark Project Austin Sitiawan Wellness Hub Gross development profit or RNAV (RM m) RNAV / GDV PV of NDV (RM m) Discount Capital City - Mall, Suites & Apartments 1,603.7** 70.5% % Capital City - Hotel & Carpark Fair values from Figure % % Project Austin % % Sitiawan Wellness Hub % % Total 2, % Book value of AVL Net proceeds from compliance (S$0.2 x 26m shares - 3.3m) x SGDRM Total 2, % FX rate RNAV in S$m Fair value in S$m Number of shares 1, ,268.3 Value per share **Excludes revenue and profits already recognized from FY14 to FY16. Source: NRA Capital As of 31 March 2016, Terratech s Existing Business has 20.03m cubic metres of white marble resources, inclusive of 10.9m cubic metres of proved and probable white marble reserves. The quarry commenced development in 2012 and Terratech s operating licence shall only expire on 26 January We do not know if this business will be disposed subsequently. For convenience, we exclude the Existing Business from our valuation. page 17

18 Key Risks and Recommendation Losses from the Existing Business may drag on profitability. The track record of the Existing Business remains sketchy and there is the risk of losses sustaining at the Existing Business and thus drag on group profitability. In the financial forecasts presented in this report, we have focused solely on CCG and have disregarded the Existing Business. Geographical concentration risk. Two of CCG s ongoing projects are located in Johor. Should the Johor market slow down, the performance of CCG may be affected. We have assumed relatively longer sales periods for Project Capital City to factor in this risk. Ability to access funding will be crucial. In our forecasts, we assumed gross gearing of 200% by end 2017 or total borrowings of approximately RM257.3m. If Capital World is unable to obtain such funding, its ability to continue constructing Capital City may be slowed. Other risks include foreign exchange, interest rate and regulatory risk. Should the MYR depreciate materially against the SGD, we may have to revise our valuation downwards and vice versa. Rising interest rates may also lead to higher mortgage rates and fewer loan approvals. In turn, these factors may affect demand for property. Recommendation Overweight (high-average return / high risk). Based on our estimates, there appears to be attractive upside for Capital World Limited. Even at a steep discount rate of 25% per annum, we still yield an attractive valuation of S$ The risk for Capital World pertains more to business risks such as how fast can Capital World sell its units. Conversely, we are of the view that Capital World at 13 cents per share offers attractive upside. One positive factor in Capital World s favour is its lack of indebtedness. Figure 23: Projected Shareholding Structure Upon Completion of Compliance Placement (as of 5 May 2017) Shareholding after Share Consolidation Existing Directors (m shares % of total) Dr. Wang Xiaoning % Dr. Loh Chang Kaan % Mr. Aw Eng Hai Mr. Tay Yew Khem Proposed New Directors Mr. Siow Chien Fu % Mr. Tham Kok Peng Mr. Aw Eng Hai Mr. Dominic Tan Mr. Victor Lye Controlling Shareholders Tritech % Mr. Colin Tan % Mr. Edwin Tan % Substantial Shareholders Luminor Pacific Fund 1 Ltd % Mr. Lim Choon Hian % Other Shareholders PrimePartners Corporate Finance % Other public shareholders % Total % Source: Extracted from Page 131 of Circular dated 29 March page 18

19 Profit & Loss (RM m, FYE Jun) F 2018F 2019F 2020F 2021F Revenue Operating expenses EBITDA Depreciation & amortisation EBIT Net interest & invt income Associates' contribution Exceptional items Pretax profit Tax Minority interests Net profit Shares (m) Based on consolidated capital 1, , , , , , , ,268.3 Balance Sheet (RM m, as at Jun) F 2018F 2019F 2020F 2021F PPE Investment properties Other long-term assets Total non-current assets Cash and equivalents Stocks Trade debtors Other current assets Total current assets Trade creditors Short-term borrowings Other current liabilities Total current liabilities Long-term borrowings Other long-term liabilities Total long-term liabilities Shareholders' funds Minority interests NAV/share (S$) (based on 1,375m shares) Total Assets , , ,244.9 Total Liabilities + S holders' funds , , ,244.9 Cash Flow (RM m, FYE Jun) F 2018F 2019F 2020F 2021F Pretax profit Depreciation & non-cash adjustments Working capital changes Cash tax paid Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Others Cash flow from financing Change in cash Change in net cash/(debt) NA Ending net cash/(debt) KEY RATIOS (FYE Jun) F 2018F 2019F 2020F 2021F Revenue growth (%) NA NM EBITDA growth (%) NA NM Pretax margins (%) NM Net profit margins (%) NM Effective tax rates (%) NM Net dividend payout (%) ROE (%) NA NM Free cash flow yield (%) based on S$ Source: Company, NRA Capital page 19

20 NRA Capital Pte. Ltd ( NRA Capital ) has received compensation for this valuation report. This publication is confidential and general in nature. It was prepared from data which NRA Capital believes to be reliable, and does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. No representation, express or implied, is made with respect to the accuracy, completeness or reliability of the information or opinions in this publication. Accordingly, neither we nor any of our affiliates nor persons related to us accept any liability whatsoever for any direct, indirect, special or consequential damages or economic loss that may arise from the use of information or opinions in this publication. Opinions expressed are subject to change without notice. NRA Capital and its related companies, their associates, directors, connected parties and/or employees may own or have positions in any securities mentioned herein or any securities related thereto and may from time to time add or dispose of or may be materially interested in any such securities. NRA Capital and its related companies may from time to time perform advisory, investment or other services for, or solicit such advisory, investment or other services from any entity mentioned in this report. The research professionals who were involved in the preparing of this material may participate in the solicitation of such business. In reviewing these materials, you should be aware that any or all of the foregoing, among other things, may give rise to real or potential conflicts of interest. Additional information is, subject to the duties of confidentiality, available on request. You acknowledge that the price of securities traded on the Singapore Exchange Securities Trading Limited ("SGX-ST") are subject to investment risks, can and does fluctuate, and any individual security may experience upwards or downwards movements, and may even become valueless. There is an inherent risk that losses may be incurred rather than profit made as a result of buying and selling securities traded on the SGX-ST. You are aware of the risk of exchange rate fluctuations which can cause a loss of the principal invested. You also acknowledge that these are risks that you are prepared to accept. You understand that you should make the decision to invest only after due and careful consideration. You agree that you will not make any orders in reliance on any representation/advice, view, opinion or other statement made by NRA Capital, and you will not hold NRA Capital either directly or indirectly liable for any loss suffered by you in the event you do so rely on them. You understand that you should seek independent professional advice if you are uncertain of or have not understood any aspect of this risk disclosure statement or the nature and risks involved in trading of securities on the SGX-ST. page 20