Property Developers UNDERWEIGHT. At a Crossroads. Sector Update

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1 At a Crossroads By Sarah Lim l sarahlim@kenanga.com.my UNDERWEIGHT We reiterate UNDERWEIGHT on Developers. Post our sector downgrade last quarter, the KLPRP Index decline (-4.6% QoQ) was more severe than the FBMKLCI s drop (-3.7% QoQ). We also saw lower dividend pay-outs among small-mid caps, unexpected cashcalls by some big-boys while a few land deals were rescinded. Valuations weakened but at a slower rate as the market wait-and-see. Property loans data continued to weaken in terms of approval rates while LDR makes new highs, indicating that the current tight lending liquidity to the sector is unlikely to change. Our studies show that a 25bps cut in OPR rates is unlikely to cause a significant improvement in demand. Meanwhile structural change in the sector is becoming evident as the Malaysia Property Transacted Values to Nominal GDP (PGDP) Ratio is making new lows indicating that the sector is becoming a lesser proxy to the economy; it also implies that property prices could weaken further. We think more cash-calls maybe announced in the next 12 months. Budget-2017 is expected to be rakyat-centric and hence likely to be muted for developers. Earnings risks are prevalent with margin compressions arising from heavy A&Ps, LADs and switch towards volume-based mass-market housing products. We will monitor two key indicators, namely 1H16 sales and unbilled sales visibility (1.3 years currently); if certain conditions are met by most developers during the next reporting season, we are likely to UPGRADE the sector to NEUTRAL. If the majority of developers fail to meet these conditions, we would likely MAINTAIN a NEGATIVELY bias call because our main concern is the sector s earnings risks which may de-rate valuations further. For the sector to see a sharp re-rating, positive monetary policy or administrative measures relating to the sector or a sharp improvement in the economy are prerequisites. Until then, we advise investors to stay away from the sector on potential sector de-rating. Our only Preferred Pick for 3QCY16 is UOADEV (OP; TP: RM2.22) for its defensive qualities and strong yields of 6.5%. Property stocks weakened over 2QCY16. After downgrading the sector to UNDERWEIGHT on 25/3/16, the FBMKLCI slid by 3.7% QoQ, the KLPRP Index declined 4.6% while our universe of developers saw 7.1% fall, which was significantly worse off compared to 1QCY16. This was amidst the unexciting-toweak 1QCY16 reporting season which saw more earnings disappointments compared to the last quarter. The quarter also saw deterioration in headline sales with 67% of developers under our coverage being proportionately behind their sales targets; most developers are banking on a stronger 2HCY16. Big-cap developers (>RM3b market cap) fared better than small-mid cap players (<RM3b market cap) with 4.0% and 11.4% declined QoQ, respectively. It was unnerving to see small-mid cap developers lowering dividend pay-outs (e.g. HUAYANG) with some failing to honour their dividend policies while others may not be able to do so in the future (e.g. KSL, MATRIX). Adding to that are margin compressions observed from several factors: (i) heavy A&P costs arising from incentives/freebies, (ii) late deliveries (LAD). Meanwhile, average unbilled sales have dropped to 1.3 years YoY visibility from 1.5 years, which is still considered healthy. (Refer to Not Quite Ripe for Bottom Picking, 2/6/16 report for details on 2QCY16 result review). We also saw unexpected cash calls from ECOWLD and SPSETIA while landbanking newsflow was relatively quiet, save for: (i) ECOWLD s rescinding the Eco Marina deal and signing its Eco Ardence deal shortly after, and (ii) UEMS and WCT mutually rescinding the Serendah land JV deal. Big caps fared better than small-mid cap developers so far. YTD, the KLPRP has declined by 3.5%, which was steeper than the FBMKLCI (-0.1%). Big-cap developers (>RM3b market cap) fared better at -0.4% YTD vs. small-mid caps (<RM3b market cap) -7.3% as investors move back to the big-boys for stability while the small-mid caps were affected by higher earnings volatility and potential reduction in dividend pay-outs (Refer to Appendix for YTD return charts). PP7004/02/2013(031762) Page 1 of 21

2 Property Share Prices Quarterly Performance 2QCY15 3QCY15 4QCY15 1QCY16 2QCY16 Share Price Share Price Share Price Changes YTD Changes YTD Changes YTD since 23/6/ since 25/9/ since 23/12/ /9/ /12/ /3/2016 Share Price Changes YTD since 20/3/ /6/2015 Share Price Changes YTD since 18/3/ /6/2016 UEM Sunrise -24.1% 14.9% -3.4% -1.8% -5.5% Eco World -20.7% -4.6% -2.1% 2.8% -12.9% Mah Sing Group 5.4% -22.1% 5.2% 0.0% 4.3% IOI Properties -10.0% 3.2% 12.4% 3.2% 2.7% UOA Development -8.8% -7.3% 8.4% 4.8% 0.0% SP Setia -5.0% 2.2% -2.1% -1.9% -10.2% Sunway Berhad 0.4% 2.9% -12.9% 4.9% -6.6% Big cap average -9.0% -1.5% 0.8% 1.7% -4.0% Hua Yang -6.7% -4.1% -0.5% 3.2% -9.9% KSL -19.4% -10.6% -14.5% 4.6% -18.4% Crescendo -5.3% -12.1% -14.2% 1.1% -15.8% Matrix Concepts 13.3% -16.0% 5.6% -0.8% 0.0% MRCB -2.4% -9.8% 14.4% -3.1% -13.0% Small-mid cap average -4.1% -10.5% -1.9% 1.0% -11.4% Overall Average -7.0% -5.3% -0.3% 1.4% -7.1% KLPRP -5.6% -5.6% 1.4% 0.3% -4.6% FBMKLCI -4.3% -6.5% 3.0% 3.2% -3.7% Valuations weakened but at a slower rate as the market adopts a wait-and-see stance. We highlighted some concerns in our 2QCY16 Strategy ( Make Hay While the Sun Shines, 25/3/16) regarding: (i) developers' ability to meet their sales targets and the potential unbilled sales risks if targets are not met, and (ii) compression in valuations if unbilled sales, and hence, earnings continue to weaken. Back then, we were reluctant to call a bottom on the sector s valuations as we felt there still have more earnings risks in the near horizon and now, our negatively bias views remain unchanged because we are still waiting for 1H16 sales confirmations. QoQ / YoY Changes in Fwd PER / PBV 2QCY15 1QCY16 2QCY16 QoQ YoY 2QCY15 1QCY16 2QCY16 QoQ YoY Fwd PER at last price at 23 Jun 15 Fwd PER at last price at 18 Mar 16 Fwd PER at last price at 30 June 16 Fwd PBV at last price at 23 Jun 15 Fwd PBV at last price at 18 Mar 16 Fwd PBV at last price at 30 Jun 16 UEMS IOIPG SPSETIA SUNWAY MAHSING UOADEV ECOWLD MATRIX CRESNDO HUAYANG MRCB KSL Average* * Excludes MRCB due to their volatile earnings amidst massive corporate restructuring. Developer s average Fwd PER/PBV has compressed from 12.0x to 11.5x / 0.87x to 0.83x QoQ, respectively. YoY, average Fwd PER/ PBV has fallen from 11.7x to 11.5x / 0.98x to 0.83x, respectively, vs. its 6-year mean of 17.4x and trough of 7.9x. While this appears closer to the bottom, many developers Fwd PERs may be a misleading barometer at this juncture as sales and earnings risks still loom. On another note, stocks like UEMS and MRCB have seen significant Fwd PER expansions. We observe that UEMS and MRCB have experienced higher than average earnings volatility/disappointments but their share prices appear sticky, possibly due to shareholding structure. However, we still see further earnings risks with these two stocks and would not be surprised if some forms of cash call announcements are made within the next 12 months. (Refer to Appendix for Peak/Trough levels). The sector s average Property RNAV discount is down by 2.1ppt YoY to 53.5% vs. the sector s 6-year mean of 49.6%, and was relatively flat over the quarter at (-0.1ppt QoQ). However, against the sector s peak historical RNAV discount of 64.2%, can we truly say that valuations have bottomed if earnings risks still looms? (*Note that Property RNAV discounts and our SOP discounts may vary depending on the stock). PP7004/02/2013(031762) Page 2 of 21

3 Developers FD RNAV Discounts Historical HIGH Discount to FD RNAV Historical Average Discount to FD RNAV (2009) Historical LOW Discount to FD RNAV 2QCY15 1QCY16 2QCY16 Discount to FD Discount to Price FD at Sector Cut- Last Price Off Date 30/6/16 18/3/16 Discount to FD Price at Sector Cut- Off Date (23/6/15) UEMS -80.2% -58.8% -23.4% -76.3% -74.4% -75.5% IOIPG* -65.5% -58.2% -50.9% -64.6% -59.5% -58.4% SPSETIA -48.3% -40.2% -15.2% -42.8% -43.9% -45.0% SUNWAY** -49.2% -35.7% -15.0% -35.5% -34.4% -40.2% MAHSING -68.8% -55.5% -46.3% -48.7% -54.8% -46.3% UOADEV -60.4% -45.3% -32.5% -48.5% -47.5% -45.3% ECOWLD* ** -59.3% -54.4% -42.6% -51.7% -53.6% -56.8% Average (>RM3b mkt cap) -61.7% -49.7% -32.3% -52.6% -52.6% -52.5% MATRIX -69.3% -42.9% -26.5% -25.5% -30.2% -26.5% CRESNDO -76.4% -57.8% -39.0% -63.3% -73.6% -76.4% HUAYANG -50.0% -39.7% -22.9% -44.6% -48.3% -50.0% MRCB* ** -57.9% -28.2% 25.0% -39.4% -40.0% -37.8% KSL* -84.9% -78.8% -64.7% -76.0% -80.8% -84.2% Average (<RM3b mkt -67.7% -49.5% -25.6% -49.7% -54.6% -55.0% cap) Overall Sector Average -64.2% -49.6% -29.5% -51.4% -53.4% -53.5% * May not be representative due to limited data ** (i) Sunway: For its property division, we have applied 61% discount to its FD RNAV, which results in an affective SoP discount of 36%. (ii) for MRCB our TP is driven by PNTA. (iii) For ECOWLD, we applied 51% discount to its Property RNAV excluding the warrants effect which implies SOP discount of 45%. Property loans data offers no reprieve. YoY, 5M16 Residential Loans Applied was marginally higher at+1% while corresponding Loans Approved was sharply down by 21%. Residential Loans Approved data has been on a declining trend for the last consecutive 15 months, while Loans Applied is showing some improvement after 28 months of consecutive decline. 5M16 Non-Residential Loans Applied and Approved was down by 21% and 33%, respectively. We are aware there is still demand on the ground for genuine buyers but given weak sentiment, investors/speculators demand remains relatively tamed as seen by the Loans Applied data. Nonetheless, what is evident is the banking system still not favouring the sector at the moment considering that the Loans Approved data is much weaker than Loans Applied. Loan-to- Deposit Ratio (LDR) made a new high at 88.3% in May 2016, indicating that lending liquidity is likely to remain tight while lending to the sector is unlikely to see significant improvement as the banking system appears to be reducing the property loan exposures as a proportion of total banking system loan approvals with May 2016 at 31% vs. CY14-15 average rate of 43%- 36%. Our Banking Analyst believes the current tight lending situation will remain for the year. This supports our view that the sector is going through a structural change, as we highlighted in our earlier sector reports. Monthly LDR 1,800, % 1,600,000 1,400,000 1,200,000 1,000, , , , , % 86.0% 84.0% 82.0% 80.0% 78.0% 76.0% 74.0% Total Deposits (RM'm) Total Loans (RM'm) Loan to Deposit Ratio 0 Jan-13 Feb-13 Mar-13 Apr-13 May-13 Jun-13 Jul-13 Aug-13 Sep-13 Oct-13 Nov-13 Dec-13 Jan-14 Feb-14 Mar-14 Apr-14 May-14 Jun-14 Jul-14 Aug-14 Sep-14 Oct-14 Nov-14 Dec-14 Jan-15 Feb-15 Mar-15 Apr-15 May-15 Jun-15 Jul-15 Aug-15 Sep-15 Oct-15 Nov-15 Dec-15 Jan-16 Feb-16 Mar-16 Apr-16 May % Source: CEIC, BNM, Kenanga Research PP7004/02/2013(031762) Page 3 of 21

4 YoY Changes in Annual Cumm. Loans Applied & Approved (Residential & Non Residential) KLPRP Index ANNUAL CUMM: Loans Applied: BS: PP: Purchase of Residential Property - YoY Change ANNUAL CUMM: Loans Approved: BS: PP: Purchase of Residential Property - YoY Chg KLPRP Index 120% 100% 80% 60% 40% 20% 0% -20% -40% -60% YoY Change in Cumm. Loans Approved/Applied KLPRP Index ANNUAL CUMM: Loans Applied: BS: PP: Purchase of Non Residential Property - YoY Change ANNUAL CUMM: Loans Approved: BS: PP: Purchase of Non Residential Property - YoY Chg KLPRP Index 200% 150% 100% 50% 0% -50% -100% YoY Change in Cumm. Loans Approved/Applied Source: BNM, CEIC, Kenanga Research Property Loans Approved vs. Applied Property Loans vs. Banking System Loans Approved 70% 60% 50% 40% 30% 20% 10% 0% Annual Average: Ratio of Property Loans Approved vs. Applied CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 YTD-CY16 50% 45% 40% 35% 30% 25% 20% 15% 10% 5% 0% Annual Average: Property loans approved to Total Banking System loans approved CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 YTD-CY16 Source: BNM, CEIC, Kenanga Research Is an interest rate cut enough to spur the property market? Unlikely! Back in Sep-14 when BNM raised the OPR by 25bps to 3.25%, Average Lending Rates (ALR) was relatively unchanged. Similarly, we believe that a 25bps cut in the OPR is unlikely to swing demand significantly. As it is, property demand has declined even with current low lending rate environment, as seen in the chart below. We reckon the issue of lending is not with buyers demand but rather lending liquidity. While we admit that an OPR cut may warrant better consumer sentiment, we take the view that it will not change the property demand landscape significantly. If the OPR cut is 50bps or more, this may change our view. OPR vs. AVL vs. Property Demand Source: CEIC, BNM, JPPH, Bloomberg, Kenanga Research PP7004/02/2013(031762) Page 4 of 21

5 Structural change becoming evident. We have been tracking Malaysia Property Transacted Values to Nominal GDP Ratio (PGDP Ratio) because real estate forms one of the major pillars of this country or most economies; note that the Malaysia Property Transacted Values has a 92% correlation with Nominal GDP. We observe the KLPRP Index and the PGDP ratio have similar cycles, although the market or the KLPRP Index tends to peak first before PGDP ratio, which is expected as the market tends to price-forward. It appears that real estate is becoming a lesser proxy to the economy as the PGDP ratio has been on a declining trend for the last three years to a current 10-year low of 4.3% (1Q16) vs. its 10-year average of 6.6% while the KLPRP Index has yet to de-rate in a similar manner as seen in the chart below. Malaysia Property Transacted Values % of Nominal GDP vs. KLPRP Index Source: CEIC, JPPH/NAPIC, BNM, Kenanga Research Interestingly, the KLPRP Index has a relatively high correlation to the Malaysia House Price Index (HPI) at 86% and Nominal GDP at 83%. If the KLPRP Index or share prices of developers are expected to see further weakness given the trends indicated by the PGDP ratio, property prices could weaken further. The House Price Index (HPI) data for 1Q16 and 2Q16 have not been released yet. As at 4Q15, Malaysia HPI grew at 5.8%, which is below its 10-year average of 6.5%, indicating that the sector has cooled down. However, we gather that HPI data is derived based on the gross prices stated on the transacted SPA. Over the last 1-2 years, new launches do come with variations of rebates/freebies/incentives with many amounting up to 20%- 30% of the SPA prices, implying the increasing disparity between gross and net house prices, so house price growth rates could be much weaker than the official HPI. Additionally, residential supply is worsening on the back of weaker demand, i.e. absorption rates have worsened. Malaysia: House Price Index 4Q15 vs. 10-yr average Source: CEIC, BNM, NAPIC, Kenanga Research PP7004/02/2013(031762) Page 5 of 21

6 Malaysia, KL, Selangor, Penang, Johor Absorption Rates (Incoming SS / DD) Source: CEIC, JPPH/NAPIC, Kenanga Research Cash calls... The average FY16-17E net gearings of developers remain at x which is below our comfort threshold of x. Even then, SPSETIA recently did a cash-call albeit having a healthy FY16E net gearing of 0.28x. ECOWLD s recent cash call, while not a surprise, came earlier than expected. Meanwhile in the small-mid cap space, developers have either: (i) reduced dividend pay-outs (e.g. HUAYANG), (ii) and may reconsider their minimum pay-out dividend policies (e.g. MATRIX) or (iii) forgo their dividend policies (e.g. KSL). With weak demand while developers seeking to capitalise on good land deals amidst weak sentiment, we would not be surprised if there are more cash-calls and further dividend risks. These events do cause earnings dilution and affect investors returns, which may weigh down valuations. and more to come? We think the following developers have high odds of doing some form of cash calls in the next 12 months; (i) UEMS has a few Australian projects, which are extremely capital intensive while local billings are thinning very quickly - the group aspires to diversify out of Johor, which may entail landbanking and hence, new funding, (ii) HUAYANG due to their higher-than-average net gearing and potential landbanking as the group is still looking for affordable housing landbanks, (iii) ECOWLD may consider non-dilutive fund raising options as current landbanking momentum is expected to continue. Developers that are less likely to do another one for the next 12 months are MAHSING and IOIPG as they still have unutilized rights proceeds. For the other developers (e.g. SUNWAY, CRESNDO, MATRIX, KSL), it is not so clear if they may attempt cash-calls because it depends on their landbanking deals. However, we are confident that UOADEV will not do cash calls given their strong net cash position while almost a third of their market cap is cash. We were extremely surprised to see SPSETIA s recent IRCPS cash-call (RM1.07b) because of their strong balance sheet, bullet deliveries from overseas projects and perpetual bond put in place. We believe a big land deal will likely follow shortly after. However, we are concerned on the longer term implications of this cash call. The IRCPS dividend rate of 6.49% works out to be an 8% pay-out. As it is, SPSETIA has the highest minimum dividend pay-out policy of 50% amongst our coverage, while over the last three years, its average pay-out was 64%; assuming ordinary dividend pay-out are not affected, the group will be paying out c.74%. We reckon such pay-outs are not sustainable for a developer like SPSETIA, which has cash-flow intensive projects in the UK (i.e. Battersea) while the group has started to adopt the traditional financing scheme for some of its newer projects (e.g. Eco Templer) and is also on an aggressive expansion mode in both Australia and Malaysia. We believe one of two things may happen to the stock over the next months; (i) ordinary dividend pay-out maybe reduced to make room for the IRCPS dividends, or (ii) another round of cash-call. Net Gearing Company FY16/17 FY17/18 UEM Sunrise IOI Properties SP Setia Sunway Berhad* Mah Sing Group UOA Development (0.14) (0.16) Eco World Matrix Concepts Crescendo Hua Yang* MRCB* KSL* Average (all) Big-Cap Average (UEMS, IOIPG, SPSETIA, SUNWAY, MAHSING, UOADEV, ECOWLD) Small-mid Cap Average (MATRIX, CRESNDO, HUAYANG, MRCB, KSL) PP7004/02/2013(031762) Page 6 of 21

7 BREXIT risks. With BREXIT, we can expect volatility in currencies and equity markets. While we maintain that cities like London are largely ever-green in the long-run, the nearer term may see an adjustment period in demand and prices. However, a quick channel check indicates many investors are looking at this as an opportunity to invest in London, especially if the GBP depreciates against the MYR. We think the market and developers may take a short breather to assess the situation, but we expect news-flow/launches to resume next year. SPSETIA has the largest exposure (c.20% of Total Remaining GDV) under our coverage. For SPSETIA, their 40% owned Battersea Ph 1 and 2 have been sold while Ph 3 is between 60%-70% take-up rate. The risk for SPSETIA is more on the earnings front; if the combined property value and currency depreciation effect amounts to more than 20% of the property value upon completion (Note that Phase 1 delivery is over 4Q16-1Q17), buyers may not go through with the remaining 80% payment and forgo the purchase; however, judging from the GBP-MYR movement from Battersea Ph1 launch and today, the dynamics remain favourable and we reckon earnings from Battersea remain intact. Currently, SPSETIA is not launching new phases of Battersea pending the completion of the Northern Line extension. Battersea makes up 10% of SPSETIA s FD RNAV. As for ECOWLD, the listing of EWI is coming during volatile times, but management remains unfazed. Post listing of EWI, ECOWLD s exposure is estimated to be c.10% of their enlarged effective remaining GDV. The listing of EWI has been delayed slightly to Sep/Oct 2016 from July 2016, due to SC s approval process for entry of a strategic partner, which apparently is taking a co-anchor position rather than a cornerstone position. While the strategic partner has not been revealed by management, it was reported in several media sources that it could be one of Tan Sri Quek Leng Chan s vehicles. It appears the group is unperturbed by BREXIT; according to EWI management, it appears overseas investors are looking at BREXIT as an opportunity to enter into the London property market at discounted prices. In fact, BREXIT could bring about more attractive land deals for EWI. Note that EWI will have a light balance sheet post IPO. We have imputed for EWI in our estimates based on a 30% stake, which makes up 7% of our FD SoP (including funding). Budget anything to look forward to? At this juncture, we believe Budget-2017 will still be very rakyat-centric where goodies will be given out under government housing schemes (e.g. PR1MA) and if we are lucky, additional subsidies for government affordable housings. However, this will not have any significant impacts for our universe of developers. In terms of monetary measures, (i) our Economist is of the view that Malaysia s OPR will remain unchanged, (ii) we believe that adjustments to the 70% LTV cap on third home purchases is also unlikely as those who are buying third homes are investors/speculators rather than genuine home buyers, so increasing the LTV cap may send the wrong message to the rakyat. Fiscal measure-wise, we believe lowering or removing the RPGT will be detrimental for the property market as it may cause a panic-sell which further exacerbates the oversupply situation. We reckon if there is an increase in withdrawal limit from EPF Account 2 (30% of EPF account), this will help increase home ownership substantially but such actions may require longterm studies by EPF due to long-term repercussions on future retirees. All in, we expect a relatively muted Budget-2017 for developers. RECOMMENDATIONS 1Q sales are not good indicators. Recall last year when industry players stated they expected a stronger 2H during the first half of 2015, which was subsequently met with huge sales targets and earnings cuts during the 2QCY15 reporting season in Aug As mentioned earlier, most developers are proportionately behind their targets premised on new launches being skewed to 2H16. Since Apr 2016, developers have been rolling out new launches and so far, bookings appear healthy although the real test is the conversion of booking sales into SPAs. We also noticed more roll-outs of very small apartment unit launches, i.e. RM300k-400k/unit, in 1H16; while this bodes well to beef up developers sales numbers, it will definitely be a margin drag. Developers are becoming very aggressive with incentives (e.g. i. developers deferring interest and/or instalment payments, including the traditional program, ii. low upfront deposits or rebates, iii. alternative financing options) to spur interests on the ground, but again, will be another factor for margin compressions. Aug 2016 reporting season will be important for developers. So, we will monitor two key indicators, namely 1H16 sales and unbilled sales visibility. If certain conditions as stated below are met by most developers during the next reporting season (Aug 2015), we are likely to UPGRADE the sector to NEUTRAL. If the majority of developers do not meet these conditions, we would then likely to MAINTAIN a NEGATIVELY bias call because our main concern is the sector's earnings risk, which may de-rate valuations further. 1. 1H16 sales must meet at least 40% of full-year target, else we would likely trim targets if sales fall below 40%, and hence earnings, which may result in further downgrades in earnings. 2. Average unbilled sales visibility has dropped to 1.3 years earnings visibility from 1.5 years YoY. Developers with unbilled sales closer or above 2-year visibility (e.g. UEMS, SPSETIA) are driven by their overseas projects or earnings normalizations (e.g. ECOWLD). However, if sales targets are further trimmed this year, we can expect our average visibility to drop below 1-year, i.e. higher risks of earnings volatility. Notably, developers with less than 1-year earnings visibility are: IOIPG, UOADEV, MATRIX, CRESNDO, HUAYANG. If unbilled sales drop below 1 year, this is usually alarming as it means the next 2-3 years earnings trajectory will likely see a declining trend. (Refer to Appendix for Developers Earnings/Sales forecasts) PP7004/02/2013(031762) Page 7 of 21

8 Unbilled Sales Visibility* Based on 1QCY15 Based on 1QCY16 Unbilled Sales Unbilled Sales RM'b RM'b UEMS IOIPG* SPSETIA SUNWAY* ECW MAHSING UOADEV MRCB* KSL MATRIX CRESNDO HUAYANG Total Visibility ** Visibility ** Years Years UEMS IOIPG* SPSETIA SUNWAY* ECW MAHSING UOADEV MRCB* KSL n.a. n.a. MATRIX CRESNDO HUAYANG Simple Average *IOIPG, Sunway, MRCB Revenue is based on their property division only ** Unbilled sales visibility based on our average 2-year forecast revenue Reiterate UNDERWEIGHT on Developers. We are maintaining most of our calls and TPs save for the following; (i) UOADEV upgraded to OUTPERFORM from MARKET PERFORM on unchanged TP of RM2.22 as its share price has corrected post dividends while we continue to like the stock for its defensive qualities and strong yields of 6.5%, (ii) lower TP for HUAYANG to RM1.83 but maintain MARKET PERFORM due to wider discount applied given its higher than average net gearing, lower than average dividend pay-out and weak earnings trajectory. ECOWLD s (OP; TP: RM1.58) listing of its associate overseas arm, EWI, should take place by Sep/Oct 2016, which should lend strength to its share price. Our other recommendations are maintained and largely MARKET PERFORM to UNDERPERFORM calls. Overall, we advise investors to stay away from the sector for now or remain nimble for trading plays. Our Preferred Pick currently is UOADEV. Changes in CALLs/TPs Developers New Call New TP (RM) Valuation (Discount to PROPERTY RNAV) Valuation (Discount to SoP) New FD SoP RNAV (RM) Quantum of TP revision Call Action UEMS UP % -77% % Maintain IOIPG UP % -62% % Maintain SPSETIA MP % -45% % Maintain SUNWAY MP % -36% % Maintain ECOWLD OP % -46% % Maintain MAHSING MP % -46% % Maintain UOADEV OP % -44% % Upgrade MRCB MP % -30% % Maintain KSL UP % -86% % Maintain MATRIX MP % -30% % Maintain CRESNDO UP % -76% % Maintain HUAYANG MP % -48% % Maintain Note: For further details and explanation, please refer to APPENDIX PP7004/02/2013(031762) Page 8 of 21

9 APPENDIX YTD Performance of Big Cap Developers (>RM3b mkt cap) Share Price YTD Gain CY16 (>RM3b market cap) SP SETIA BHD ECO WORLD DEVELOPMENT GROUP KLPRP UEM SUNRISE BHD Average SUNWAY BHD KLCI UOA DEVELOPMENT BHD MAH SING GROUP BHD IOI PROPERTIES GROUP BHD IGB CORPORATION BHD -12.0%-10.0%-8.0%-6.0%-4.0%-2.0% 0.0% 2.0% 4.0% 6.0% 8.0% Source: Bloomberg, Kenanga Research YTD Performance of Small-mid Cap Developers (<RM3b mkt cap) Share Price YTD Gain CY16 (<RM3b market cap) -50.0% -40.0% -30.0% -20.0% -10.0% 0.0% 10.0% 20.0% 30.0% 40.0% Source: Bloomberg, Kenanga Research THRIVEN GLOBAL BHD TANCO HOLDINGS BHD TIGER SYNERGY BHD EWEIN BHD DPS RESOURCES BHD NAIM HOLDINGS BERHAD MALAYSIA PACIFIC CORP BHD BCB BHD ENCORP BHD SAPURA RESOURCES BHD MULTI-USAGE HOLDINGS BHD GLOBAL ORIENTAL BHD GSB GROUP BHD TITIJAYA LAND BHD PARAMOUNT CORP BHD TALAM TRANSFORM BHD SELANGOR PROPERTIES BERHAD Y&G CORP BHD CRESCENDO CORPORATION BHD COUNTRY VIEW BHD MALAYSIAN RESOURCES CORP BHD ENRA GROUP BHD MALTON BHD GLOMAC BHD MK LAND HOLDINGS BHD PLENITUDE BHD KSL HOLDINGS BHD YTL LAND & DEVELOPMENT BHD SEAL INCORPORATED BERHAD WING TAI MALAYSIA BHD BERTAM ALLIANCE BHD GRAND HOOVER BHD MUI PROPERTIES BERHAD SOUTH MALAYSIA INDUSTRIES SYMPHONY LIFE BHD TA GLOBAL BHD SBC CORPORATION BHD DAMANSARA REALTY BHD MAGNA PRIMA BHD EUPE CORP BHD HCK CAPITAL GROUP BHD MCT BHD HUA YANG BHD ASIAN PAC HOLDINGS BHD Average JKG LAND BHD SUNSURIA BHD IBRACO BHD PLB ENGINEERING BERHAD SENTORIA GROUP BHD BERJAYA ASSETS BHD MAJUPERAK HOLDINGS BHD KEN HOLDINGS BHD ORIENTAL INTEREST BHD MEDA INC BHD AMCORP PROPERTIES BHD TAHPS GROUP BHD KLPRP SELANGOR DREDGING BHD O.S.K. HOLDINGS BHD GUOCOLAND MALAYSIA BHD BINA DARULAMAN BHD PJ DEVELOPMENT HOLDINGS BHD ISKANDAR WATERFRONT CITY BHD LBI CAPITAL BHD KLCI LIEN HOE CORP BHD SHL CONSOLIDATED BHD MATRIX CONCEPTS HOLDINGS BHD I-BHD DAIMAN DEVELOPMENT BHD ECOFIRST CONSOLIDATED BHD PETALING TIN BHD TAMBUN INDAH LAND BHD GROMUTUAL BHD TROPICANA CORP BHD LAND & GENERAL BHD IVORY PROPERTIES GROUP BHD JIANKUN INTERNATIONAL BHD FARLIM GROUP BHD YNH PROPERTY BHD LBS BINA GROUP BHD COUNTRY HEIGHTS HOLDINGS BHD MKH BHD A & M REALTY BHD EASTERN & ORIENTAL BHD MENANG CORP MALAYSIA BHD KARAMBUNAI CORP BHD PASDEC HOLDINGS BHD TADMAX RESOURCES BHD PP7004/02/2013(031762) Page 9 of 21

10 Malaysia/Klang Valley Residential Transacted Values (Quarterly Trends) 25, Msia: TOTAL Residential Sales Value (RM'm) Msia: TOTAL Residential Sales (Value): YoY change 60% Klang Valley Residential Sales Value Index KLPRP QoQ Chg 50% , % % , % , % 0% , % % % Source: CEIC, JPPH, Kenanga Research Malaysia, KL, Selangor, Penang, Johor Incoming Supply of Residential Property Stock Units - KL, Johor, Selangor, Penang 250, , , ,000 50,000 0 RPS: IS: Kuala Lumpur RPS: IS: Selangor RPS: IS: Johor RPS: IS: Pulau Pinang Residential Property Stock (RPS): Incoming Supply (IS) 1,000, , , , , , , , , ,000 0 Units -RPS IS Source: CEIC, JPPH/NAPIC, Kenanga Research Kenanga Sales and Earnings Estimates Company Kenanga Sales Estimates Kenanga Earnings Estimates (RM'm) (RM'm) FY16/17E FY17/18E FY16/17E FY17/18E CRESNDO* ECOWLD 4,000 4, HUAYANG IOIPG* 1,800 1, KSL* MAHSING 2,300 2, MATRIX MRCB* SPSETIA* 4,000 4, SUNWAY 1,000 1, UEMS* 1,400 1, UOADEV* 1,000 1, * Core Earnings PP7004/02/2013(031762) Page 10 of 21

11 Kenanga Sales and Earnings Estimates YoY Growth YoY Change Kenanga Sales Estimates Kenanga Earnings Estimates FY16/17E FY17/18E FY16/17E FY17/18E CRESNDO* 42% 33% 3% 4% ECOWLD 33% 13% 188% 104% HUAYANG 22% 29% -4% -9% IOIPG* -10% 0% 33% 2% KSL* -40% 44% -7% -4% MAHSING 0% 9% 6% 3% MATRIX -11% -6% -12% 11% MRCB* 1% 0% n.m. -49% SPSETIA* -7% 0% -23% 18% SUNWAY -17% 20% -18% 4% UEMS* -41% 7% -18% 12% UOADEV* 25% 20% -11% 2% Simple Average 0% 14% 13% 8% Simple Average w/o ECOWLD -3% 14% -5% -1% Weighted Average w/o ECOWLD -9% 7% -14% 3% * Core Earnings ** We excluded ECOWLD earnings growth from average calculations as their property earnings are at maiden stages and will only normalize in FY17. Fwd PER levels Fwd PER at last price at 30 June 16 Valuation Levels Std Dev Valuation Levels Fwd PER Fwd PER Fwd PER Peak (Since 09) Average (Since 09) Trough (Since 09) UEMS Below Average IOIPG Below Average SPSETIA Trough SUNWAY Near Peak MAHSING Below Average UOADEV Average ECOWLD Trough MATRIX Above Average CRESNDO Above Average HUAYANG Near Trough MRCB 68.3 n.m n.m KSL Average AVERAGE * Stocks excluded from the average computation are MRCB due to its corporate restructuring activities and previous loss making years. Fwd PBV levels Fwd PBV at last price at 30 June 16 Current PBV Valuation Levels Fwd PBV Fwd PBV Fwd PBV Std Dev Peak (Since 09) Average (Since 09) Trough (Since 09) UEMS Near Trough IOIPG Below Average SPSETIA Trough SUNWAY Near Trough MAHSING Near Trough UOADEV Near Trough ECOWLD Trough MATRIX Trough CRESNDO Below Average HUAYANG Average MRCB Near Trough KSL Below Average AVERAGE * Stocks excluded from the average computation are MRCB due to its corporate restructuring activities and previous loss making years. PP7004/02/2013(031762) Page 11 of 21

12 KLPRP Fwd PBV vs. YoY Chg in Malaysia Residential Transacted Values (MRTV) x 1.30 Forward PBV 9 Years Average FWD PBV Fwd 9 Years Ave PBV +1SD Fwd 9 Years Ave PBV -1SD Fwd 9 Years Ave PBV +2 SD Fwd 9 Years Ave PBV -2 SD Declining trend? CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 CY16E 30% 25% 20% 15% 10% 5% 0% -5% CY07 CY08 CY09 CY10 CY11 CY12 CY13 CY14 CY15 Est CY16-10% -15% YoY Chg in Malaysia Residential Values Transacted 10-yr Average Source: CEIC, Bloomberg, JPPH, Kenanga Research Incremental Population Study vs. MRTU Source: CEIC, DOS, JPPH/NAPIC, Kenanga Research PP7004/02/2013(031762) Page 12 of 21

13 KLPRP vs. MRTV and MRTU Source: CEIC, Bloomberg, JPPH/NAPIC, Kenanga Research This section is intentionally left blank. PP7004/02/2013(031762) Page 13 of 21

14 KLPRP Fwd PBV vs. Policies Source: Bloomberg, Various, Kenanga Research PP7004/02/2013(031762) Page 14 of 21

15 CALLs/TPs (Part 1 of 2) Developers New Call New TP (RM) Valuation (Discount to PROPERTY RNAV) Valuation (Discount to SoP) New FD SoP RNAV (RM) Quantum of TP revision Call Action Previous TP (RM) Previous Discount to FD SoP RNAV Previous Discount to SoP UEMS UP % -77% % Maintain % -77% 4.28 UP IOIPG UP % -62% % Maintain % -62% 5.55 UP SPSETIA MP % -45% % Maintain % -45% 5.55 MP SUNWAY MP % -36% % Maintain % -36% 5.03 MP ECOWLD OP % -46% % Maintain % -46% 2.92 OP MAHSING MP % -46% % Maintain % -46% 2.72 MP UOADEV OP % -44% % Upgrade % -44% 4.00 MP MRCB MP % -30% % Maintain % -30% 1.72 MP KSL UP % -86% % Maintain % -86% 7.07 UP MATRIX MP % -30% % Maintain % -30% 3.51 MP CRESNDO UP % -76% % Maintain % -76% 6.32 UP HUAYANG MP % -48% % Maintain % -45% 3.52 MP Weighted Average -58% -52% -58% -51% Simple Average -59% -52% -59% -52% CALLs/TPs (Part 2 of 2) UEMS No changes to CALL/TP. IOIPG SPSETIA SUNWAY ECOWLD MAHSING UOADEV MRCB KSL MATRIX CRESNDO No changes to CALL/TP. No changes to CALL/TP. No changes to CALL/TP. No changes to CALL/TP. No changes to CALL/TP. No changes to TP but upgrade CALL to OP from MP given its defensive net cash position and richer than big-cap MREIT yields. No changes to CALL/TP. No changes to CALL/TP. No changes to CALL/TP. No changes to CALL but lower TP as we applied historical peak RNAV discount to the stock. HUAYANG Maintain CALL but lower TP as we widen discount factor to close to historical peak RNAV discount (50%) given its higher than average net gearing, potentially lower dividend payouts and weak earnings trajectory. Nonetheless, we like the company for its positioning as an affordable developer and management style. Our TP implies 5.0x FY18E PER which is undemanding vs. small-mid cap peers average of 7x. Previous FD SoP RNAV (RM) Previous Call (RM) PP7004/02/2013(031762) Page 15 of 21

16 Peer Comparison NAME Price (30/6/16) DEVELOPERS UNDER COVERAGE (RM) Mkt Cap PER (x) Est. NDiv. Yld. (RMm) FY15/16 FY16/17 FY17/18 Hist. ROE P/BV (%) (%) (x) Net Profit (RMm) FY15/16 FY16/17 FY17/18 FY16/17 NP Growth FY17/18 NP Growth Target Price (%) (%) (RM) S P SETIA BHD* , % 13.9% % 17.8% 3.05 MARKET PERFORM IOI PROPERTIES GROUP BHD* , % 3.9% % 1.6% 2.09 UNDERPERFORM UEM SUNRISE BHD* , % 3.9% % 11.5% 1.00 UNDERPERFORM SUNWAY BHD , % 11.7% % 3.7% 3.22 MARKET PERFORM MAH SING GROUP BHD^ , % 14.3% % 2.6% 1.46 MARKET PERFORM ECO WORLD DEVELOPMENT , % 2.5% % 103.7% 1.58 OUTPERFORM GROUP BHD UOA DEVELOPMENT BHD* , % 14.1% % 2.1% 2.22 OUTPERFORM MALAYSIAN RESOURCES CORP BHD , % -3.3% % -48.7% 1.20 MARKET PERFORM KSL HOLDINGS BHD , % 10.0% % -4.1% 0.99 UNDERPERFORM MATRIX CONCEPTS HOLDINGS BHD , % 29.5% % 10.7% 2.46 MARKET PERFORM CRESCENDO CORPORATION BHD* % 2.2% % 4.0% 1.50 UNDERPERFORM HUA YANG BHD % 25.9% % -12.2% 1.83 MARKET PERFORM Rating CONSENSUS NUMBERS IGB CORPORATION BHD , % 4.8% % 8.6% 4.10 NEUTRAL GLOMAC BHD % 8.3% % 18.5% 0.79 NEUTRAL PARAMOUNT CORP BHD % 6.1% % 6.3% 2.18 BUY TAMBUN INDAH LAND BHD % 20.8% % 11.0% 1.59 BUY * Core NP and Core PER ** Crescendo per share data is based on non-fully Diluted ^ Last price and TP is Ex-rights and Ex-Bonus. PP7004/02/2013(031762) Page 16 of 21

17 DEVELOPERS FWD PBV Fwd PBV: UEM Sunrise Fwd PBV: SP Setia Fwd PBV: Sunway Bhd Fwd PBV: Mah Sing Fwd PBV: UOA Development Fwd PBV: Matrix Concepts Fwd PBV: Hua Yang Fwd PBV: Crescendo PP7004/02/2013(031762) Page 17 of 21

18 Fwd PBV: MRCB Fwd PBV: IOI Properties Fwd PBV: KSL Fwd PBV: Eco World This section is intentionally left blank PP7004/02/2013(031762) Page 18 of 21

19 DEVELOPERS FWD PER Fwd Core PER: UEM Sunrise Fwd Core PER: SP Setia Fwd PER: Sunway Bhd Fwd PER: Mah Sing Fwd Core PER: UOA Development Fwd PER: Matrix Concepts Fwd PER: Hua Yang Fwd Core PER: Crescendo PP7004/02/2013(031762) Page 19 of 21

20 Fwd PER: MRCB Fwd Core PER: IOI Properties Fwd Core PER: KSL Fwd PER: Eco World This section is intentionally left blank PP7004/02/2013(031762) Page 20 of 21

21 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 to the 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) 8th Floor, Kenanga International, Jalan Sultan Ismail, Kuala Lumpur, Malaysia Telephone: (603) Facsimile: (603) Website: Chan Ken Yew Head of Research PP7004/02/2013(031762) Page 21 of 21