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Proxy for China property play?

A step closer to second project in China
Sunway City moved a step closer to securing its second project in China following the entering into a collaboration agreement with Sino-Singapore Tianjin Eco-City Investment and Development Co., Ltd (“SSTEC”) for the joint development of 102.3 acres land in Tianjin, People’s Republic of China which forms part of the 7,500 acres Sino-Singapore Tianjin Eco-City project. The company has previously entered into a memorandum of understanding with SSTEC in Oct 2009.

A massive RM4.7bn project
The project is strategically located in the fast growing Tianjin Binhai NewArea and is well-positioned to be the focal point for the acceleration of growth in the Bohai Rim region. Over the next 2 decades, this project will be transformed into an urban city with 110,000 homes for about 350,000 population.

The mixed residential and commercial project will have an estimated GDV of CNY10bn or RM4.7bn (based on CNY0.4674 per RM), double that of earlier estimate of CNY5bn The project, which comprises of more than 5,000 units, will be developed over 5 years and is expected to commence in March 2011 at the earliest.

This project is even bigger than Sunway South Quay project and is poised to be Sunway City’s largest project. It will boost its remaining GDV from approximately RM15bn to RM20bn. The project will also position Sunway City to be the Malaysian developer with largest exposure to China property market.

No revision to earnings yet
We are not making any revision to earnings at this juncture as the joint venture is still subject to the approval of Tianjin local government. Upon procurement of authority’s approval, SSTEC and Sunway City will enter into joint venture agreement.

While no details have been revealed on the equity investment and profit sharing at this juncture, we understand that Sunway City will have a majority stake in the JV.

Reiterate BUY
We maintain our buy call as we like Sunway City for its undemanding 10.4x P/E and 32% discount to RNAV of RM5.77. Our unchanged target price of RM4.33 is based on 12x P/E on FY10 EPS. With increasing sales momentum and landbank acquisitions, Sunway City’s valuation is compelling as our target price implies PEG multiple of 0.7x only.

Furthermore, its impending REIT listing later this year will unlock the value of its investment properties which will be a catalyst to narrow its valuation gap to its RNAV.

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