Hatten Land Limited. Overweight. Strong Pipeline of Projects Justifies Upside

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1 Initiating coverage 28 February 2017 Current Price Overweight S$0.280 Fair Value S$0.440 Up / (downside) 57.1% Stock Statistics Market cap S$385.0m 52-low n.a. 52-high n.a. Avg daily vol n.a. No of share 1,375.1m Free float 17.2% Key Indicators ROE 17F 75.7% ROA 17F 6.0% P/RNAV 0.23x Net Debt-to-Total Assets FY17F 45.0% Major Shareholders Hatten Holdings 82.8% Tan June Teng Colin 82.8% Tan Ping Huang Edwin 82.8% Liu Jinshu (+65) jinshu.liu@nracapital.com Strong Pipeline of Projects Justifies Upside RNAV of up to S$ Hatten Land shall commence trading on 28 February. Our report enhances the existing information set by incorporating estimates for upcoming projects that are pending acquisition. Currently, Hatten Land s existing projects have a gross floor area of 9.8m sq. ft. and land pending acquisition of maximum gross floor area of 27.5m sq. ft. based on a sales and purchase agreement and a memorandum of understanding announced in February. Including these assets into our model, we yielded a RNAV of S$1.238 and a fair value of S$0.440 per share, thus representing upside of 57.1% from the compliance placement price of S$ Leveraging on Malacca s future growth. The key selling point of Hatten Land is its portfolio of choice sites in Malacca. Most of its sites face the sea, overlooking Pulau Melaka and the Straits of Malacca. Pulau Melaka is slated to be transformed into a tourism and entertainment hub because of the RM42 billion Melaka Gateway project which will be developed in partnership with Chinese companies. On completion, Pulau Melaka will feature international hotels and an international cruise terminal. In this context, Hatten Land s projects offer significant upside and hence marketability. Offers high growth with steady pipeline. Of the four existing projects, one has been completed and another two projects are expected to be completed within We expect Hatten Land s revenue to cross the RM 1 billion mark in FY19 or in two and a half years. Profit after tax is in turn expected to grow from RM68.6m in FY16 to more than RM100m in FY18 and RM300m in FY19. What are the risks? The risk is if Hatten Land fails to accelerate sales, leaving it with hefty holding costs and slower than expected revenue recognition. The existing projects range from being 51% to 75% sold. Generally, the higher quantum retail mall units sell at a slower rate while the sales rate of residential components can be as high as 93% for some projects. Hatten Land s growth plans may also be derailed if mega-projects such as the Melaka Gateway and the Singapore-KL high-speed rail are delayed. Thirdly, Hatten Land s shares have a limited trading history and there is the risk that its share price may underperform after trading starts. Overweight (high return / high risk). On balance, we rate Hatten Land Overweight with a high return / high risk classification. We like the company for its visible pipeline of value-accretive projects. Potential catalysts include any future partnerships with high profile funds or institutions and the completion of on-going acquisitions. We understand that Hatten Land is considering the payment of dividends at the end of each financial year. Assuming a 10% payout ratio, dividend yield is expected to rise from 0.7% for FY17 to 1.5% for FY18. Key Financial Data (RM m, FYE Jun) F 2018F Sales Gross Profit Net Profit EPS (cents)* EPS growth (%) NA PER (x) NAV/share (Singapore cents)* DPS (Singapore cents) NA NA NA Div Yield (%) NA NA NA Source: Company, NRA Capital *Based on post-placement number of shares outstanding

2 One of the Largest Landlords in Malacca Background. Hatten Land Limited is the property development arm of the Hatten Group. The Hatten Group has core businesses in property development, property investment, hospitality, retail and education, while Hatten Land specializes in retail, hotel, residential and mixed developments. We like Hatten Land for its pipeline of projects and assets under Right of First Refusal and Call Option. In other words, Hatten Group has a pipeline of projects in Malacca and other parts of Malaysia that can be injected into Hatten Land to enhance its RNAV. Hatten Land s pipeline can be summarized into a) 9.8m sq. ft. of gross floor area of existing projects, b) 1.2m sq. ft. of land pending completion of acquisition for RM850.3m ( SPA Projects), c) 3.7m sq. ft. of land under a memorandum of understanding for acquisition ( MOU Projects ) and d) 3.9m sq. ft. of land bank or development rights in Malacca that is not owned by Hatten Land, but held by Hatten Group. Figure 1: List of Projects and Assets under Right of First Refusal (ROFR) and Call Option in Malacca Existing Projects Gross Floor Area Net Saleable % Sold^, % (sq. ft.) Area (sq. ft.) ^^ Completion^^ Hatten City Phase 1 3,282,020 1,443,452 62% 100% Hatten City Phase 2 2,051, ,363 53% 84% Vedro by the River 307,953 95,505 65% 99% Harbour City 4,178,231 1,972,220 28% 10% Total 9,819,595 4,342,540 45% 58% ^Based on Net Saleable Area, ^^as of 31 January 2017 Projects under Sale and Purchase Agreement (SPA) for acquisition Maximum Gross Floor Area (sq. ft.)* Land Area (sq. ft.) Acquisition Cost (RM m) Thea Wellness Project 517,928 89, Cyberjaya Project (in Selangor) 5,787,382 1,112, Total 6,305,310 1,202, Projects under MOU for acquisition Maximum Gross Floor Land Area Area (sq. ft.)* (sq. ft.) MICC Project 1,627, ,850 Movie-Town Project 2,315, ,942 Plot K to E Project 17,249,760 2,874,960 Total 21,192,811 3,667,752 *Maximum gross floor area is based on land area multiplied by plot ratio as per 10 February announcement Land Area (sq. ft.) Landbank/Development Rights held by Hatten Group in Malacca 7,687,904 Less land being sold to Hatten Land under SPA or MOU -3,757,050 Available land/development Rights in Malacca available to Hatten Land under Right of First Refusal and Call Option Source: Company, NRA Capital All sites listed here are in Malacca, except for the Cyberjaya project. The Hatten Group also owns properties in other parts of Malaysia, but we have streamlined this list to only projects in Malacca and announced projects such as Cyberjaya; as we believe Hatten Land will focus on Malacca as a start. 3,930,854 page 2

3 Figure 2: Hatten Group s assets in Malacca are centred around two key areas A Ayer Keroh area, to take advantage of possible high speed rail station. These sites are under Right of First Refusal (ROFR) and Call Option in favour of Hatten Land. Source: Google Maps B Bandar Melaka area, to take advantage of development of Melaka Gateway. Current projects are all in this area, including those land under MOU for acquisition. Bandar Melaka Area Hatten Square Suites & Shoppes, Hatten Hotel, Terminal Pahlawan and Estadia Hotel and Dataran Pahlawan Melaka are existing investment assets held by Hatten Group. These are mature assets held for investment purposes and therefore were not injected into Hatten Land the property development arm of the group. Source: Google Maps, Company, NRA Capital page 3

4 Established Track Record of Revitalising Malacca Building the largest mall in Malacca. Hatten Land can trace its roots to 2005 when the founders of the Hatten Group Dato Colin Tan the Managing Director and Dato Edwin Tan the Deputy Managing Director took over a 7.7 hectare (approximately 800,000 sq. ft.) abandoned mall project. The brothers were in turn advised by their father Datuk Wira Eric who currently serves as group adviser and mentor of the Hatten Group. Phase 1 of the abandoned mall project was completed in 2006 as Dataran Pahlawan Melaka Megamall. The second phase was completed in To date, Dataran Pahlawan Melaka Megamall is still the largest shopping mall in Malacca. Building the largest hotel in Malacca. The group next embarked on the development of Hatten Square Suites & Shoppes which was completed in The hospitality component of Hatten Square Suites & Shoppes was branded Hatten Hotel and is the largest hotel in Malacca today with over 700 rooms. Most hotel owners will typically choose to work with hotel operating chains e.g. Accor to leverage on their guest reservation systems. However, Hatten operates the hotel itself and still manages to maintain occupancy at about 70%. According to the management, the group has over the years established its own network of leads and customers. For instance, Hatten Hotel frequently hosts corporate retreats with its conference facilities. Moreover, its large number of rooms means that it can host larger events without guests spilling over into other hotels. Figure 3: Dataran Pahlawan Melaka and Hatten Hotel (excluded from ListCo portfolio) Hatten Square / Hatten Hotel Dataran Pahlawan Melaka Megamall Source: Company page 4

5 In 2015, Hatten Group completed Terminal Pahlawan which can be said to be an extension of Hatten Hotel. The area suffered from traffic congestion caused by the lack of tourist bus parking bays and Hatten Square faced a large unsightly drain. Hence, the Hatten Group applied to the government to build Terminal Pahlawan on top of the drain, featuring bus parking, four retail levels and the 196 deluxe suites Estadia Hotel. Figure 4: Terminal Pahlawan (excluded from ListCo portfolio) Hatten Square / Hatten Hotel Dataran Pahlawan Melaka Megamall Terminal Pahlawan Source: Company As Hatten Land is the property development arm of the group, the above three investment assets have been excluded from the listed company s portfolio. Nonetheless, the projects show the group s ability to execute developments in Malacca with each project generally taking two to three years to build. By consistently developing differentiated projects e.g. the largest mall and the largest hotel in Malacca, the Hatten Group increases the odds of its retail malls and hotels in attracting customers. The focus on differentiated projects has led to the Hatten Group winning various awards such as Best Luxury Suite Hotel in 2014 and 2015 from the World Luxury Hotel Awards. Dataran Pahlawan Melaka Megamall was awarded "Highly Commended Retail Development Malaysia" and "Highly Commended Retail Architecture Malaysia" at the Asia Pacific Property Awards 2013/2014 Figure 5: Hatten Group Projects Projects Owned by Hatten Group Units GFA NLA Dataran Pahlawan Melaka Megamall 750 retail units 2m sq. ft. 0.8m sq. ft. Hatten Square Suites & Shoppes, including Hatten Hotel 200 retail units, >700 hotel rooms m sq. ft. Terminal Pahlawan and Estadia Hotel 4-floors of retail, 196 deluxe suites - - Source: Company page 5

6 Why Malacca Offers Potential? Malacca is a relatively small state in Malaysia, with a population of 0.9m people occupying land area of 1,652km 2. It is the sixth wealthiest of 15 states and federal territories in Malaysia with a GDP per capita of RM39,853 in , but contributes a mere 3% of Malaysia s GDP 2. Geographical advantage. Currently, Malacca s landscape can be said to be characterised by low-rise buildings with several high-rise structures. Economic activity is not as vibrant as that of Johor or Kuala Lumpur (KL). Both states have higher GDP than that of Malacca. What s interesting about Malacca is that it is situated along the Straits of Malacca and is located almost halfway between Selangor and KL to the north and Johor to the south. As such, Malacca is well positioned to be a satellite trade and services centre in support of KL and Johor. Therefore, Malacca will enjoy positive spill over effects so long as its neighbouring states continue to grow. This geographical advantage sets the property market of Malacca apart from that of other states such as Negeri Sembilan (which is closer to KL than Johor), Kelantan, Perlis or Kedah. Singapore-KL high-speed rail to boost people and capital flows between Malacca and other states. The development of the high-speed rail between KL and Singapore will further enhance this geographical advantage. Currently, it takes about three hours by road/car to travel from Singapore to Malacca and four hours from Singapore to KL. The high-speed rail will shorten travelling time to 90 minutes between Singapore and KL. With the high-speed rail, more people in Malacca can travel to other states to work and thus raise incomes. Given relatively higher property prices in KL, people in KL can in turn purchase properties and live in Malacca while continuing to work in KL. Figure 6: Map of Kuala Lumpur, Malacca, Johor and Singapore Malacca (GDP of RM31 billion in 2015) is situated along the Straits of Malacca and is located almost between Johor (GDP of RM99 billion in 2015) and Kuala Lumpur (GDP of RM160 billion in 2015). Source: Straits Times 1 Grouping Kuala Lumpur and Putrajaya together as one state. 2 As of 2015, based on GDP at constant prices. page 6

7 Figure 7: Population Density of Malacca relative to Other States Persons per sq. km. 2,000 1,668 1,633 1,000 1, Source: mysidc.statistics.gov.my, NRA Capital RM 100,000 94,722 Figure 8: GDP per capita (2015), at Current Prices 50,000 58,577 42,611 30,343 25,418 18,249 44,847 44,012 39,853 36,699 29,539 21,394 12,075 26,529 19,734 0 Source: mysidc.statistics.gov.my, NRA Capital Figures 7 and 8 show that Malacca (or Melaka in the figures) is a relatively wellto-do state in Malaysia of higher GDP per capita than Johor, with a decent population density of 545 people per sq. km. to justify a more vibrant property market. For instance, the Greater Sydney area has a population density of about 398 people per sq. km. 3 Property prices remain relatively affordable in Malacca. That said, the highspeed rail is expected to be operational in ten years or only after 31 December This explains for the relatively lower property prices in Malacca compared to Kuala Lumpur. According to statistics from the National Property Information Centre (NAPIC), property prices in Malacca are about 24% that of KL. Hence, we can envisage that property prices in Malacca may eventually appreciate to narrow the gap with KL with the progressive development of the high-speed rail. In fact, Malacca s property prices have remained lower than that of KL even after adjusting for differences in GDP per capita. In other states such as Selangor, Sabah, Sarawak and Penang, property prices become comparable to that of KL once local income (GDP per capita) is taken into account (See Figure 9). 3 page 7

8 Thousands Hatten Land Limited Figure 9: GDP per capita and All-House Price Index as a ratio to that of KL 1.00 Kuala Lumpur Vs Other States, All House Price Ratio, 3Q Source: mysidc.statistics.gov.my, NAPIC, NRA Capital Figure 10: Average All House Price, 3Q16 RM 1, Source: NAPIC, NRA Capital Figure 11: Quarterly Change in Average All House Price, (1Q15=100) 115.0% 112.5% 110.0% 107.5% 105.0% 102.5% 100.0% 112.3% 1Q15 2Q15 3Q15 4Q15 1Q16 2Q16 3Q16 Kuala Lumpur Melaka Johor Malaysia Source: NAPIC, NRA Capital page 8

9 Inflow of mega-projects to support future growth in Malacca Malacca obtained RM6.9 billion of foreign direct investment in 2015 and it has a target of attracting RM5 billion of FDI each year. 4 As part of the government s initiative to grow Malacca, the ambitious Melaka Gateway project has been rolled out at an estimated gross development cost of RM42 billion to be completed by 2025, translating to average FDI of RM4.2 billion each year. Work on Melaka Gateway shall commence on Pulau Melaka. On completion, it will feature four islands with the first two islands being slated for education, tourism and commerce. Island 3 will be a liquid cargo port with approximately 1.5m cubic metres of storage capacity while Island 4 will comprise of a maritime industrial park with facilities such as a container terminal, shipbuilding and repair facilities. The master developer of Melaka Gateway KAJ Development Sdn Bhd has signed a memorandum of understanding with PowerChina International Group Ltd for a RM30 billion joint investment to develop Islands 1 to 3 in September last year. 5 Island 4 will be jointly developed by KAJ Development, the Guangdong state government and a Malacca state-owned company. 6 As part of the project, KAJ Development and PowerChina International has partnered with Shenzhen Yantian Port Group and Rizhao Port Group to build the deep sea port on Island 3, to be completed in The entire project is expected to be completed by Figure 12: Melaka Gateway Concept (As extracted from website) Island 4: Maritime Industrial Park Island 2: Free Trade Economic Zone Island 3: Melaka Gateway Port Hatten Group and Hatten Land s properties Source: melakagateway.com Island 1: Theme park, hotels, marina, International cruise terminal page 9

10 Hatten Land s Projects face Melaka Gateway The upside for Hatten Land is that the bulk of its existing projects are near Melaka Gateway with upcoming MOU projects Movie-Town Project and Plot K to E Project facing Pulau Melaka or Island 1 of Melaka Gateway (Figure 2). Completing the tallest building in Malacca. Of the four existing projects, Hatten City Phase 1 has been completed and is now in the fit-out phase for the mall and hotel component with the residential units being handed over to residents. Hatten City Phase 1 is a single building comprising of 13 storeys of shopping complex (Elements Mall), five floors of carpark, two 44-storey of serviced apartments (SilverScape Residences) and a 19-storey hotel block (Hatten Suites) and a 16-storey hotel block (DoubleTree by Hilton). The block called DoubleTree by Hilton is the landowner s entitlement to the project and is not retained by Hatten Land. It is a common practice in Malaysia where developers may enter into a development rights agreement with the landowner and apportion part of the completed project to the landowner instead of outright purchasing the land. Figure 13: Hatten City Phase 1 (Completed, undergoing fit-out works) Level SilverScape Residences 19-storey hotel block Hatten Suites 16-storey hotel block DoubleTree by Hilton (original landowner s entitlement, not owned by Hatten Land) Level 1 13 Elements Mall View from top floor of SilverScape Pulau Meleka is being reclaimed for Melaka Harbour City Landbank owned by Hatten Group (being reclaimed) Hatten City Phase 2 roof Source: Company, NRA Capital, (Picture taken in early February) page 10

11 Figure 14: Hatten City Phase 2 (Completion in 2H 2017) Source: NRA Capital, Company, (Picture taken in early February) 7 storey retail mall called Imperio Mall, followed by 7-storey carpark and two blocks of services residences Imperio Residence. The cascading steps design functions as an outdoor jogging route for residents that offers views of the coast and the surrounding city. Figure 15: Movie-Town Project or Hatten City Phase 3 (Land to be acquired) Hatten City Phase 2 Hatten City Phase 1 Source: NRA Capital Figure 16: A Mock Up of Hatten Group s assets around Melaka Gateway Harbour City Land/Development Rights held by Hatten Group (being reclaimed) Source: NRA Capital page 11

12 Within Pulau Melaka itself, Hatten Land has the Harbour City project which is located right at the mouth of the Melaka Gateway project where the new international cruise terminal will be constructed. Harbour City shall comprise of Harbour City Mall, a water theme park and three hotel blocks. Completion is expected in 2H 2019 for the mall and one hotel block, and in 1H 2020 for the remaining two hotel blocks. The fourth project is the Vedro by the River mall located inland, along the Malacca River (See Figure 2). Figure 17: Harbour City (Completion expected in 2H 2019) Based on our observation, construction of the first floor and foundation of Harbour City is currently ongoing. Source: Company, NRA Capital, (Picture taken in early February) Figure 18: Vedro by the River (Completion in 1H 2017) Source: NRA Capital (Picture taken in early February) page 12

13 Financial Projections and Estimates ASP Assumptions and Gross Development Value Estimates. To formulate forecasts for Hatten Land, we assumed average selling prices (ASP) of RM 2,000 psf for retail properties, RM 850 psf for the residential component/serviced apartment components of Hatten City Phase 1 (SilverScape Residences), Hatten City Phase 2 (Imperio Residence) and Harbour City Suites. As per the Industry Overview Report in the circular, SilverScape Residences and Imperio Residence were sold at RM 654 psf and RM 849 psf respectively. The difference in prices between SilverScape Residences and Imperio Residence could be due to price appreciation during the different launch periods of 2011 for SilverScape and and 2013 for Imperio Residence. Hence, we decided on an ASP of RM 850 psf for these two properties. For hotel properties, we assumed RM 1,000 psf for Hatten Suites and Harbour City Luxury Hotel, and RM 900 psf for Harbour City Resort. As per the Industry Report, ASPs for Hatten Suites ranged from RM 803 psf in 2015 to RM 1,066 in Therefore, our assumptions are within the range of realized selling prices. We noted that our ASP assumptions may be on the high side of existing prices. However, this approach will factor in price appreciation since the launch of the respective projects. As the developer is adopting a strategy of maintaining prices while progressively selling the units, we do not mark down the ASPs in our assumptions, but assume longer selling periods of five to six years for each project except for Vedro by the River. Vedro by the River is a relatively small project. As such, full occupancy/sales should be achievable relatively quickly. Estimated GDV of RM 4.67 billion from four projects. In general, we assume lower remaining GDV for Hatten City Phases 1 and 2 and Vedro by the River, but higher GDV for Harbour City. Our total estimated GDV for these four projects sum up to RM 4.67 billion or 7% higher than that in the shareholders circular, probably due to different assumptions and computation methods. Figure 19: Remaining Gross Development Value Estimates RM m Our Estimates As per circular 4, , , , , , , Hatten City Phase 1 Hatten City Phase 2 Vedro by the River Harbour City Source: See Figure 20 for computations, NRA Capital page 13

14 Figure 20: Remaining Gross Development Value and Net Development Value Workings Net Saleable Area (NSA, sq. ft.) As of 30 June 2016 As of 31 January 2017 Unbilled Unsold % revenue in sq. NSA (sq. completion ft. equivalent. % sold ft.) Project Gross Floor Area (sq. ft.) % sold Unsold NSA (sq. ft.) NSA x (1- % NSA x % sold x NSA x Formula sold) (1 - % completion (1- % sold) Hatten City Phase 1 Elements Mall 1,530, ,682 34% 453, % 0 34% 453, % SilverScape Residences 820, ,638 85% 88, % 0 85% 88, % Hatten Suites 240, ,132 93% 11, % 0 93% 11, % DoubleTree by Hilton 283,521 N.A. Carpark 690,978 N.A. Total 3,565,541 1,443,452 62% 553, % 0 62% 553, % Hatten City Phase 2 Imperio Mall 622, ,885 60% 114,354 58% 71,871 60% 114,354 84% Imperio Residence 797, ,478 47% 289,103 58% 107,421 49% 278,194 84% Carpark 631,600 N.A. Total 2,051, ,363 51% 403,457 58% 179,292 53% 392,548 84% Vedro by the River Retail 213,547 95,505 65% 26,832 65% 21,727 65% 33,427 99% Carpark 94,406 Total 307,953 95,505 65% 26,832 65% 21,727 65% 33,427 99% Harbour City Harbour City Mall 1,766,847 1,033,914 15% 878,827 9% 141,129 16% 868,488 10% Harbour City Suites 661, ,706 81% 56,564 9% 219,439 85% 44,656 10% Harbour City Resort 586, ,545 24% 309,734 9% 89,008 31% 281,206 10% Harbour City Luxury Hotel 322, ,055 NA 233,055 9% 0 NA 233,055 10% Carpark 840,156 Total 4,178,231 1,972,220 75% 1,478,180 9% 449,576 28% 1,427,405 10% % compl eted Assumed ASP per NSA (RM psf) Est. Unbilled revenue (RM m) ASP x Unbilled revenue in sq. ft. equivalent as of 30 June 2016 GDV of unsold portion (RM m) Development cost per GFA (RM psf) ASP x Unsold NSA as of 30 June 2016 Assumed Development cost per NSA (RM psf) Development cost (DC) per GFA x GFA / Total NSA Development Cost (DC, RM m) DC per NSA x (unsold NSA + unbilled revenue in sq. ft.) Net Development Value (RM m, NDV) Unbilled revenue + GDV of unsold portion - DC Implied Gross Margin Formula Hatten City Phase 1 Elements Mall 2, % SilverScape Residences % Hatten Suites 1, % NDV / GDV Est. GDV (unbilled revenue + unsold portion) % Total Hatten City Phase 2 Imperio Mall 2, % Imperio Residence % Total Est. GDV % Vedro by the River Retail 2, , % Total Est. GDV , % Harbour City Harbour City Mall 2, , ,305 64% Harbour City Suites % Harbour City Resort % Harbour City Luxury Hotel 1, % Total Est. GDV 2, ,388 1, % Source: NRA Capital page 14

15 Adjusting for land costs. Hatten City Phases 1 and 2 and Vedro by the River were developed under development rights agreements with the landowners and parts of the properties, about 9.6% of net saleable area of Hatten City Phase 1, 9.8% of the net saleable area of Hatten City Phase 2 and 6,595 sq. ft. of Vedro by the River, are owned by the respective landowners. Hence, the land cost of these properties is effectively Hatten Land s cost of constructing the landowners entitlement of these properties. In our computations, we have assumed development cost of RM300 psf of gross floor area for the earlier project Hatten City Phase 1 and RM350 psf of gross floor area, including car parks, for the newer projects and adjusted it to development cost of per square feet of net saleable area, excluding car parks. We understand that the net saleable area provided generally excluded that of the landowners entitlement. Overall, our NDV estimate for the four projects amount to RM 2.31 billion or approximately 24% lower than that of the shareholders circular of RM 3.03 billion for the residual value of the properties. Our estimated NDV of RM1.48 billion for Harbour City is close to that disclosed in the circular. However, our estimated NDV for Harbour City is 52% of estimated GDV, as opposed to 64% based on the GDV and NDV figures provided in the circular. Figure 21: Remaining Net Development Value Estimates RM m Our Estimated NDV Remaining Residual Value as per Circular 1, , , , , , Hatten City Phase 1 Hatten City Phase 2 Vedro by the River Harbour City Source: See Figure 20 for computations, NRA Capital Valuing pipeline projects. Recently, Hatten Land has also announced entry into conditional sale and purchase agreements to acquire two projects known as Thea Wellness and Cyberjaya. The former has obtained development order approval while the latter is in the concept planning stage as of 10 February. Based on a ASP of RM 1,100 psf of NSA and 50% efficiency from the maximum gross floor area, we estimate that these projects have a GDV of RM 3.47 billion which is about 5% above Hatten Land s estimate of RM 3.3 billion. We had initially wanted to assume an ASP of RM 1,000 psf, but decided to add a 10% premium to factor in higher prices from the mall components. The ASP assumption is a subjective input, but is lower than the average selling prices of the existing projects, weighted by the respective mall, hotel and residential components. For instance, the ASP of Hatten City Phase 2 is about RM1,245 psf while that of Harbour City is about RM1,481. The ratio of NSA to GFA for the existing projects ranges from 31% to 47%. Hence, we assume an overall efficiency of 50% for the two projects. In the absence of more project information, e.g. NSA allocation between retail and hospitality, similar assumptions are used for the projects that are still under memorandum of understanding for acquisition in the future. page 15

16 Figure 22: Gross Development Value and Net Development Value Assumptions and Workings for Thea Wellness, Cyberjaya, MICC, Movie-Town and Plot K to E Projects (Pending acquisition by Hatten Land) Land Area (Acres) Plot Area Max Gross Floor Area (sq. ft.) Efficiency Est. NSA (sq. ft.) Land area x plot Max GFA x Formula ratio x 43,560 Assumed Efficiency SPA Projects Thea Wellness Project ,928 50% 258,964 Cyberjaya Project ,787,382 50% 2,893,691 MOU Projects MICC Project ,627,402 50% 813,701 Movie-Town Project ,315,650 50% 1,157,825 Plot K to E Project ,249,760 50% 8,624,880 Assumed ASP per NSA (RM psf) Gross Development Value (RM m) Land cost per Max. GFA (RM psf)^ Constructio n cost per Max. GFA (RM psf) Construction and other costs (RM m) NDV (RM m) Land cost (RM m) As per Construction cost Land cost / announceme per max GFA x Formula max. GFA Assumed nt Max GFA / NSA SPA Projects Thea Wellness Project Cyberjaya Project , , ,357.8 Total 3,468 Total 1,480.1 MOU Projects MICC Project Movie-Town Project , Plot K to E Project , , ,082.4 Total 11,656 Total 5,004.8 Source: NRA Capital ^based on RM 80 psf of land area. Figure 23: RNAV per share Remaining Our Estimated NDV Residual Value as per Circular Existing Projects Existing + SPA Projects Existing + SPA + MOU Projects Hatten City Phase Hatten City Phase Vedro by the River Harbour City 1, ,478.1 Remaining NDV 3, ,309.9 Admin & Overhead 15% Corporate 24% "Net NDV" 1,226.1 Book value of company 60.6 IPO Proceeds 71.5 RNAV (RM m) 1,358.2 Thea Wellness Project Cyberjaya Project 1,357.8 Admin & Overhead 15% Corporate tax RNAV + SPA Projects (RM m) 2,089.7 MICC Project Movie-Town Project Plot K to E Project 4,082.4 Admin & Overhead 15% Corporate tax -1,054.9 RNAV + SPA Projects + MOU Projects 5,430.1 Total RNAV (S$m) No of shares RNAV per share (S$) Source: NRA Capital GDV - land cost - construction cost page 16

17 RNAV to rise from S$0.310 per share to S$1.238 per share as pipeline expands. Based on our calculations, the completion of the SPA to acquire Thea Wellness and Cyberjaya will raise Hatten Land s RNAV per share by 54% to S$ The larger upside will come from the remaining MOU projects with an estimated GDV of more than RM10 billion. Including the estimated NDV of RM 5.0 billion for the three MOU projects, Hatten Land will have a RNAV per share of S$ Figure 24: Forecasting Assumptions FY17F FY18F FY19F FY20F FY21F FY22F Total Hatten City Phase 1 (Completed) % of Remaining GDV Sold 10% 22% 22% 22% 23% 100% Est. Revenue (RM m), should sum to GDV Gross Profit, should sum to NDV Hatten City Phase 2 (Completion in 2H 2017 or 1H FY18) Pre-sales % 5% 20% 25% 25% 25% 100% Pre-sales (end FY16 est.unbilled rev of RM 235m) Outstanding pre-sales % Completion 90% 100% 100% 100% 100% Revenue Gross Profit Vedro by the River (Completion in 1H 2017 or 2H FY17) Pre-sales % 30% 70% 100% Pre-sales Outstanding pre-sales (end FY16 est. unbilled rev of RM43.5m % Completion 100% 100% Revenue Gross Profit Harbour City (Completion in 2H 2019 or 1H FY20) Pre-sales % 5% 10% 20% 30% 25% 10% 100% Pre-sales Outstanding pre-sales (end FY16 est. unbilled rev of RM548.9m) % Completion 20% 45% 70% 95% 100% 100% Revenue Gross Profit SPA & MOU Projects FY17F FY18F FY19F FY20F FY21F FY22F FY23F FY24F FY25F FY26F FY27F Pre-sales % 5% 5% 10% 10% 10% 10% 10% 10% 10% 10% 10% Pre-sales Outstanding pre-sales % Completion 0% 2% 7% 15% 28% 40% 53% 65% 75% 85% 100% Revenue Gross Profit FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F Est. GFA Completed (based on change in % completion of each project above x GFA) 0 1,572,306 1,839,728 1,365,200 1,799,659 2,419,464 3,244,407 3,646,177 Total revenue (sum of above revenue per project) Revenue Growth 78.0% -5.5% 27.3% 43.5% 55.0% 62.4% 26.5% Total Gross Profit (sum of above gross profit per project) Other income (assume RM 5m per year from e.g. interest) Change in selling and distribution exp NA 44.1% -12.0% 50.0% 20.0% 20.0% 20.0% 20.0% Change in general and admin exp NA 55.5% 27.6% 20.0% 20.0% 20.0% 20.0% 20.0% Total debt to equity NA 317.9% 413.2% 572.4% 341.0% 224.8% 121.0% 42.4% Dividend payout ratio NA NA NA 10% 10% 10% 10% 10% Source: NRA Capital page 17

18 Forecasting 27% revenue growth to RM524.7m in FY17; PATMI to grow at CAGR of 56% to reach RM639m by FY21. As of end June 2016, Hatten Land had unbilled revenue of about RM0.8 billion, which is close to our estimate of RM827.4m (as per Figure 20). To formulate our forecasts, we assume certain sales and completion progress as shown in Figure 24. Based on the assumptions, we expect Hatten Land to report revenue RM524.7m for FY17 versus revenue of RM412.3m in FY16. We reckon that these estimates are reasonable, considering the unbilled revenue. Our forecasts include contribution from the SPA and MOU projects, lumped together for convenience. In general, we assume that the SPA and MOU projects will be progressively sold and completed over the next 10 years from FY18 to FY27. Figure 25: Net Income Forecasts FY14 FY15 FY16 FY17F FY18F FY19F FY20F FY21F Revenue , , , Cost of sales (180.02) (342.32) (257.63) (304.22) (381.72) (594.56) (985.36) (1,295.08) Gross profit , Other income Selling & distribution costs (17.68) (25.48) (22.42) (33.63) (40.36) (48.43) (58.12) (69.74) General & Administrative costs (23.77) (36.95) (47.16) (56.59) (67.91) (81.49) (97.78) (117.34) IPO Expenses (15.95) Finance costs (0.32) (0.71) (0.86) (1.54) (5.54) (6.78) (8.32) (8.01) Profit before tax Income tax expense (8.30) (11.27) (27.85) (35.34) (78.73) (132.35) (225.51) (273.91) Profit After Tax Source: NRA Capital Fair value pegged at S$0.440 or 64% discount from full RNAV comprising of existing, SPA and MOU projects. With our sales projections, we deducted an arbitrary 5% of net development profits (after overheads and tax) as capital charge and discounted the residual profits back to present value by a subjective discount of 15% per annum to yield a valuation of RM 1.93 billion or S$604.9m based on a SGDMYR exchange rate of On a per share basis, our valuation works out to S$0.440 or 64% discount from the full RNAV of S$1.238 (See Figure 23). As per the shareholders circular, the estimated weighted average cost of capital of Hatten Land is about 12.67% based on a cost of equity of 15.91%. To stress test our valuation, we applied discount rates of 10% to 20% per annum and yield a valuation of S$0.355 to S$0.559 per share, translating to upside of 26.8% to 99.6%. Accounting for potential dilution. Given the size of Hatten Land s pipeline, it is also reasonable to assume further fund raising or some form of dilution as new partners come on board. To factor in this possibility, we assumed potential additional share issuance at S$0.28 per share to raise S$50m, thus leading to total net proceeds of S$72.4m (RM231.0m). Under this scenario, a valuation of S$0.346 to S$0.527 is obtained based on a discount rate of 10% to 20%, with a 15% discount rate valuation yielding S$0.422 per share. As a base case, we set our fair value at S$ page 18

19 Figure 26: Valuation Based on existing projects Based on existing + SPA + MOU Projects Assuming additional share issuance to raise S$50m BV of company as of 30 June Net Proceeds (S$22.4m S$72.4m x 3.19) PV of future development gains Hatten City Phase Hatten City Phase Vedro by the River 16.6 Harbour City SPA and MOU Projects Fair value (RM m) , ,089.0 Number of shares (m) Fair value per share (RM) Fair value per share (S$) RNAV per share (Figure Discount to RNAV -37% -64% IPO Issue Price Upside -30.3% 57.1% 50.5% Scenario Analysis Discount rate 10% 15% 20% Valuation (no dilution) Valuation (assumes additional share issuance) Source: NRA Capital page 19

20 Key Risks and Recommendation Fund raising risk. Based on the project pipeline and our working capital projections, we estimate that Hatten Land s borrowings will rise from RM250m at the end of FY16 to RM 900m by the end of FY17 with debt to total equity rising from about 413% at the end of FY16 to 572.4% by the end of FY17. Hence, there is the risk that Hatten may not be able to obtain these borrowings, thus forcing it to issue more new shares to fund its developments. As reflected in Figure 26, we still value Hatten Land at S$0.422 per share after accounting for the issuance of S$50m of shares at S$0.280 each. The risk is if future fund raising turns out to be larger than expected. Execution risk. While we are confident of Hatten Land s ability to develop landmark projects, our valuation is also dependent on the completion of the acquisition and the future development and sale of the SPA and MOU projects, which may or may not occur. Geographical concentration risk. The bulk of Hatten Land s projects are in Malacca. The upside of the Malacca market will depend on the execution of projects such as the high-speed rail and Melaka Gateway. Should these projects be delayed or fail to materialise, sales may turn out to be slower than expected. We noted that some of the existing projects such as Hatten City Phase 1 and Vedro by the River have not seen new sales between June 2016 and January Therefore, it is paramount that Hatten Land redoubles on sales efforts to meet forecasts. Share price risk. Hatten Land s shares do not have an established trading history and its share price may experience volatility post RTO/IPO. However, short term share price performance may not be reflective of the company s fundamentals. This risk is worthy of mention given that Hatten Land s issue price is substantially above its book value per share as existing accounting standards do not allow the capitalisation of the RTO consideration into Hatten Land s book value of equity. Other risks include foreign exchange, interest rate and regulatory risks. 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. Finally, foreign buyers are among the target markets of Hatten Land. Should the Malaysian government implement curbs against foreign buyers, or if key foreign markets e.g. China implement capital controls, demand may also be affected. Recommendation Overweight (high return / high risk). In view of the upside factors that we have discussed and the risks presented by Hatten Land, we rate Hatten Land Overweight with a high return / high risk classification. Factors that will lead us to reduce the risk classification for Hatten Land include faster project sales and the completion of acquisition of the SPA and/or MOU projects. page 20

21 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 at year-end (m) NA NA NA Balance Sheet (RM m, as at Jun) F 2017F 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$) (based on 1,375m shares) Total Assets Total Liabilities + S holders' funds Cash Flow (RM m, FYE Jun) F 2017F 2018F 2019F 2020F 2021F Pretax profit Depreciation & non-cash adjustments Working capital changes Cash tax paid Cash flow from operations Capex Net investments & sale of FA Others Cash flow from investing Debt raised/(repaid) Equity raised/(repaid) Dividends paid Others Cash flow from financing Change in cash Change in net cash/(debt) NA Ending net cash/(debt) KEY RATIOS (FYE Jun) F 2017F 2018F 2019F 2020F 2021F Revenue growth (%) NA EBITDA growth (%) NA Pretax margins (%) Net profit margins (%) Effective tax rates (%) Net dividend payout (%) ROE (%) NA Free cash flow yield (%) based on issue price of S$ Source: Company, NRA Capital page 21

22 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 22