PP 7767/09/2010(025354)

Malaysia Corporate Highlights

RHB Research
Institute Sdn Bhd
A member of the
RHB Banking Group
Company No: 233327 -M

V is it Note
23 June 2010
MARKET DATELINE

Sunway Holdings Share Price

Fair Value
:
:
RM1.53
RM2.35
Earnings Visibility Improves Further Recom : Outperform
(Maintained)

Table 1 : Investment Statistics (SUNWAY; Code: 4308) Bloomberg: SGW MK

Turn- Net FD Net
FYE over Profit EPS# Growth PER EPS# C.EPS P/CF P/NTA ROE Gearing GDY
Dec (RMm) (RMm (sen) (%) (x) (sen) (sen) (x) (x) (%) (%) (%)
2009** 2,589.9 109.3 13.6^ (27.0) 11.3 - - 9.5 1.4 9.5 0.6 1.5
2010f 2,519.8 137.1 22.8 67.9 6.7 17.9 20.0 12.4 1.2 15.1 0.5 1.9
2011f 2,519.2 151.1 25.2 10.2 6.1 19.5 22.0 15.4 1.0 14.3 0.4 1.9
2012f 2,960.0 170.1 28.3 12.5 5.4 21.8 25.0 12.5 0.8 13.9 0.3 1.9
Main Market Listing /Non-Trustee Stock / Syariah-Approved Stock By The SC #Excluding EI * Consensus Based On IBES
**18M ^Annualised

Issued Capital (m shares) 601.8

♦ High construction margins sustainable. The high construction margins Market Cap(RMm) 920.7
Daily Trading Vol (m shs) 0.9
recorded by Sunway in its recently announced 1QFY12/10 results appear to
52wk Price Range (RM) 1.07-1.68
be sustainable over the next few quarters thanks to continued strong
Major Shareholders: (%)
contributions from two high-margin contracts, namely: (1) The pre-cast
Tan Sri Jeffrey Cheah 43.3
concrete components contract in Singapore; and (2) The Rihan Heights
project of the Arzanah Development in Abu Dhabi, UAE.
♦ Riding on “boutique development” strategy. Riding on its seemingly
FYE Dec FY10 FY11 FY12
workable “boutique development” strategy, Sunway’s property profits from EPS Revision (%) +7 +11 +9
Malaysia are likely to exceed our forecasts. On the heels of strong take-up Var to Cons (%) +14 +14 +13
for the RM165m Sunway Rydgeway in Melawati comprising 40 bungalows
and 30 semi-detached houses, launched in Oct 2009, Sunway will over the PE Band Chart
next 6-9 months start to put onto the market similar products in Templer,
PER = 10x
Taman Equine and Puncak Jalil with a total GDV of RM870m. PER = 8x
PER = 6x
♦ Non-construction profits can anchor growth. The relatively poor PER = 4x

visibility for new local public jobs still at present will not derail Sunway’s
overall growth prospects as: (1) Sunway has been able to secure private
sector jobs including those from sister company SunCity; and (2) Rising non-
construction profits, particularly, those from property development and
trading/manufacturing, can still anchor group earnings growth.
♦ Risks to our view. The risks include: (1) New contracts secured in Relative Performance To FBM KLCI
FY12/10-12 coming in below our target of RM1.5bn per annum; and (2)
Sunway Holdings
Rising input costs.
♦ Forecasts. FY12/10-12 net profit forecasts are raised by 7-11% largely to
reflect higher construction margins and stronger property profits from
Malaysia.
♦ Fair value raised to RM2.35. We are Neutral on the construction sector. FBM KLCI
However, we are positive on Sunway due to the still undemanding
valuations. Indicative fair value is raised by 39% from RM1.69 to RM2.35 to
reflect: (1) The earnings upgrade; (2) The rolling forward of base year for
valuation purpose from FY12/10 to FY12/11; and (3) The upgrade in our 1-
year forward target PER for Sunway from 10x to 12x to reflect Sunway’s
improved earnings visibility with sustained firm construction margins and
rising non-construction profits. The new indicative fair value of RM2.35 is Joshua CY Ng
based on 12x fully-diluted FY12/11 EPS of 19.5sen, line with our benchmark (603) 92802151
1-year forward target PER for the construction sector of 10-14x. Maintain joshuang@rhb.com.my
Outperform.

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 Earnings Visibility Improves Further

♦ Highlights. Key takeaways from our recent meeting with Sunway are:
1. The high construction margins recorded in 1QFY12/10 appear sustainable over the next few quarters;
2. Property profits from Malaysia are likely to exceed our forecasts as Sunway rides on its seemingly workable
“boutique development” strategy; and
3. The still relatively poor visibility for new public jobs will not derail Sunway’s overall growth prospects as
growth in non-construction profits remains robust.

♦ High construction margins sustainable. The high construction margins of 9.4% at the EBIT level recorded by
Sunway in its recently announced 1QFY12/10 results (see Chart 1) appear to be sustainable over the next few
quarters. Making this possible, are continued strong contributions from two high-margin contracts, namely:
1. The pre-cast concrete components contract in Singapore (RM354m outstanding) that is effectively a
manufacturing-like operation and has been fetching “double-digit margins”; and
2. The Rihan Heights project of Arzanah Development in Abu Dhabi, UAE (Effective RM731m outstanding).

♦ To recap, the RM1.8bn Rihan Heights building contract Sunway secured back in FY12/08 comprising five
residential towers, a 3-level podium, 14 townhouses and a clubhouse, is a “high-completion-risk-high-return” job.
This is largely due to the tight completion deadline, i.e. 30 months (ending Apr 2011) vis-à-vis the normal 36
months, we understand, for jobs of similar nature and scale. The Rihan Heights is the first phase of the greater
US$25bn Arzanah Development, a brain child of Mubadala CapitaLand Real Estate LLC or Capitala, a 51:49 JV
between the investment arm of the Emirate of Abu Dhabi called Mubadala and Singapore-based global property
giant CapitaLand. The project has been on schedule with about 40% completion at present. It has been highly
profitable to Sunway, also with “double-digit margins”. The other key reason for the high margins of the contract
is that Sunway has retained certain specialist/sub-contracting work packages, i.e. M&E (Effective RM216m
outstanding) and stone & tiling (Effective outstanding RM46m).

Chart 1: Sunway’s Quarterly Construction EBIT Margins

10
9.4

6 6.1 6.1
(%) 4.9
4.7
4

2
1.6 1.6

0
Oct-Dec

Oct-Dec
Apr-Jun
Jul-Sep

Jul-Sep
Jan-Mar

Jan-Mar
08

09
08

09

09
09

10

Source: Bursa Malaysia

♦ Riding on “boutique development” strategy. Riding on its seemingly workable “boutique development”
strategy, Sunway’s property profits from Malaysia are likely to exceed our forecasts. On the heels of a strong
take-up rate of 90% for the RM165m Sunway Rydgeway in Melawati, a high-end landed residential project
comprising 40 bungalows and 30 semi-detached houses, launched in Oct 2009, Sunway will over the next 6-9
months start to put onto the market similar products in Templer, Taman Equine and Puncak Jalil with a total GDV
of RM870m (see Table 2). Meanwhile, Sunway’s third property project in Singapore along Jalan Senang
comprising 500 high-rise private housing units with a total GDV of S$420m (RM1bn) is due for launching anytime
now. This, coupled with The Peak @ Toa Payoh, Sunway’s second property project in Singapore comprising 1,203
high-rise public housing units with a total GDV of S$680m (RM1.7bn), will underpin Sunway’s associates’ earnings
over the next three years (also see Table 2). Sunway’s very first property project in Singapore called City View
@ Boon Keng comprising 714 high-rise public housing units with a total GDV of S$421m (RM1bn) is currently

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 already at the tail-end of progress billings. In all the three ventures, Sunway took a 30% minority stake in a
30:70 JV with Singapore-based private property group Hoi Hup Realty.

Table 2: Key Drivers Of Property Profits Over The Short Term

Project Products Sunway’s Take-up GDV Unbilled
Stake Sales
(%) (%) (RMm) (RMm)
Rydgeway, Melawati 40 bungalows and 30 semi- 100 90 165 106
detached houses
Templer, Gombak Bungalows 60 Launching in 4Q2010 500 -
Puncak Jalil Link and semi-detached houses 65 Launching in 4Q2010 120 -
Taman Equine Bungalows and semi-detached 100 Launching in 1Q2011 250 -
houses
City View @ Boon Keng, Singapore 714 high-rise public housing units 30 100 S$421 -
The Peak @ Toa Payoh, Singapre 1,203 high-rise public housing units 30 90 S$680 394*
Jalan Senang, Singapore 500 high-rise private housing units 30 Launching in mid-2010 S$420 -
Others - - - - 15
Total 515
*Sunway’s 30% share
Source: Company

♦ Non-construction profits can anchor growth. Sunway did acknowledge the relatively poor visibility for new
local public jobs still at present. However, this will not derail Sunway’s overall growth prospects as: (1) Sunway
has been able to secure private sector jobs including those from sister company SunCity (see Table 3 for new
jobs secured by Sunway YTD); and (2) In the worst case, rising non-construction profits, particularly, those from
property development and trading/manufacturing, can still anchor group earnings growth. In our earnings
forecasts, we assume Sunway to secure RM1.5bn worth of new jobs in FY12/10. YTD, has secured RM408m.

Table 3: New Jobs Secured YTD

When Job Client Value
(RMm)
Feb 2010 Residential units/TNB sub-station, Shah Alam SunCity 22
Apr 2010 Impiana Hotel, KLCC Private 88
May 2010 Sunway Office Tower (substructure) SunCity 88
May 2010 Sunway Velocity (shop-offices & apartments) SunCity 210
Total 408
Source: Company

♦ Risks to our view. The risks include: (1) New contracts secured in FY12/10-12 coming in below our target of
RM1.5bn per annum; and (2) Rising input costs.

♦ Forecasts. FY12/10-12 net profit forecasts are raised by 7-11% largely to reflect higher construction margins
and stronger property profits from Malaysia.

♦ We are Neutral on the construction sector. On one hand, we foresee improved investors’ risk appetite for
construction stocks following: (1) The massive underperformance of the sector vis-à-vis the market in 4Q2009
and 1H2010; and (2) A better sector news flow and new expectations on the heels of the recent announcement of
the 10th Malaysia Plan (10MP). On the other hand, certain negative elements remain such as: (1) The still slow
pace of the roll-out of public projects, a highly competitive market and declining dominance of established players
in large-scale projects locally; and (2) The not-so-rosy outlook and increased operating risks in key overseas
markets (following the Dubai credit crisis, Dong’s devaluation and rising arbitration cases).

♦ Fair value raised to RM2.35. However, we are positive on Sunway due to the still undemanding valuations.
Indicative fair value is raised by 39% from RM1.69 to RM2.35 to reflect: (1) The earnings upgrade; (2) The
rolling forward of base year for valuation purpose from FY12/10 to FY12/11; and (3) The upgrade in our 1-year
forward target PER for Sunway from 10x to 12x to reflect Sunway’s improved earnings visibility with sustained
firm construction margins and rising non-construction profits. The new indicative fair value of RM2.35 is based on
12x fully-diluted FY12/11 EPS of 19.5sen, line with our benchmark 1-year forward target PER for the construction
sector of 10-14x. Maintain Outperform.

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Table 4: Outstanding Construction Orderbook
Project Outstanding Works
(RMm)
Overseas
Rihan Heights, Arzanah Development in Abu Dhabi, UAE (excluding M&E and stone & tiling works) 469^
Rihan Heights, Arzanah Development in Abu Dhabi, UAE (M&E) 216*
Rihan Heights, Arzanah Development in Abu Dhabi, UAE (stone & tiling works) 46#
Pre-cast concrete components in Singapore 354
Road projects in India 48
Al Reem Island, Abu Dhabi 91
Total 1,224

Local
Government office towers in Precinct 4, Putrajaya 297
Sunway Velocity (shop-offices & apartments) 210
Hotel and office tower in Precinct 1, Putrajaya 144
Impiana KLCC (Phase 2) 88
Sunway office tower (substructure) 88
South Klang Valley Expressway 34
Others 149
Total 1,010

Grand Total 2,234

^60% share of RM782m *75.1% share of RM288m #70% of RM65.7m
Source: Company, RHBRI

Table 5: Earnings Forecasts Table 6: Forecast Assumptions

FYE Dec (RMm) FY09a* FY10F FY11F FY12F FYE Dec FY10F FY11F FY11F

Turnover 2,589.9 2,519.8 2,519.2 2,960.0 Construction EBIT margin (%) 8.6 7.5 6.8
Turnover growth (%) -5.3 45.9 0.0 17.5 New orderbook secured (RMm) 1,500 1,500 1,500

EBITDA 178.8 248.7 240.4 261.4

EBITDA margin (%) 6.9 9.9 9.5 8.8

Depreciation -43.0 -45.1 -47.4 -49.8

Net Interest -54.0 -28.4 -26.7 -25.0
Associates 72.2 38.3 58.0 58.0
EI 0.0 0.0 0.0 0.0

Pretax Profit 153.9 213.5 224.3 244.6

Tax -33.9 -44.7 -50.8 -57.7
PAT 120.1 168.9 173.5 187.0
Minorities -10.8 -31.7 -22.3 -16.9
Net Profit 109.3 137.1 151.1 170.1
*18M ^Annualised
Source: Company data, RHBRI estimates

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Chart 2: Sunway Technical View Point
♦ After hitting a high of RM1.58 in Aug 2009, the
share price of Sunway began a major sideways
trend.

♦ The stock drifted to a low of RM1.19 in Dec 2009,

but recovered gradually and tested a higher
resistance level of RM1.60 in Mar 2010.

♦ Although it has reached a multi-year high of

RM1.73 in Apr 2010, it has failed to sustain at
above RM1.60.

♦ As a result, it trended back into a consolidation

move in May.

♦ Of late, the stock has been trading on a recovery

mode, but after hitting a high of RM1.56 on
Monday, it closed with a “bearish engulfing” candle
yesterday, indicating a negative reversal ahead.

♦ Chart wise, we may see another weakening of the

share price movement, heading towards RM1.44
support level, before retesting the RM1.30
stronghold.

♦ However, for a medium- to long-term outlook, we

foresee a fluctuation of share price between
RM1.30 and RM1.60 likely.

IMPORTANT DISCLOSURES

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The recommendation framework for stocks and sectors are as follows : -

Stock Ratings

Outperform = The stock return is expected to exceed the FBM KLCI benchmark by greater than five percentage points over the next 6-12 months.

Trading Buy = Short-term positive development on the stock that could lead to a re-rating in the share price and translate into an absolute return of 15% or more
over a period of three months, but fundamentals are not strong enough to warrant an Outperform call. It is generally for investors who are willing to take on
higher risks.

Market Perform = The stock return is expected to be in line with the FBM KLCI benchmark (+/- five percentage points) over the next 6-12 months.

Underperform = The stock return is expected to underperform the FBM KLCI benchmark by more than five percentage points over the next 6-12 months.

Industry/Sector Ratings

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Overweight = Industry expected to outperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Neutral = Industry expected to perform in line with the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

Underweight = Industry expected to underperform the FBM KLCI benchmark, weighted by market capitalisation, over the next 6-12 months.

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actions of third parties in this respect.

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