HLIB Research PP 9484/12/2012 (031413)

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1 Sunway (BUY, EPS ) INDUSTRY: OVERWEIGHT EARNINGS EVALUATION 2Q results: Decent rebound Results 1HFY12 core earnings grew by 7% to RM141.9m (10.98 sen/share) making up 42% ours and streets estimates respectively. Deviations Dividends Highlights Risks Forecasts Rating Valuation We consider earnings to be largely in line as we are expecting stronger sequential earnings growth. None. Quarterly results QoQ, revenue and core earnings rebounded by 22% and 21% respectively from a seasonally weak 1Q performance as activities picked-up in all major divisions. However, on a YoY basis, core earnings only grew by 1% due to lower associate contribution from the Singapore development projects and absence of overseas construction contribution. 1HFY12 performance For the 6-month period, core earnings growth of 7% was largely derived from 1Q s core earnings as 2Q s YoY growth was affected by the timing in profit recognition for its Singapore development projects. Rebound in property sales During 2Q, Sunway achieved new property sales of RM443m (based on effective stake), a reversal of fortune compared to only RM175m new sales achieved for 1QFY12. ~RM285m sales were from Singapore s launches, mainly SeaEsta (Effective GDV: S$107m) which has achieved a take-up rate of ~80% as of Jul-12. We believe that Sunway s is on track to exceed its full year new sales target of RM800m. The management will also be prudent in new launches that offer the right products at a fair or affordable price range. Among the new launches will be Sunway Velocity s retail and designer suites (Effective GDV: RM120m) and Sunway Geo (Effective GDV: RM180m). Earnings visibility Overall, Sunway s outstanding construction order book stands at ~RM2.9bn (see Figure #3), translating to ~2.4x FY11 s construction revenue, while its unbilled property sales of ~RM1.8bn (see Figure #4) translates to ~2.0x FY11 s property revenue. Execution risk; Regulatory and political risk (both domestic and overseas); Rising raw material prices; and Unexpected downturn in the construction and property cycle. Unchanged. BUY ( ) Positives: (1) Acquiring strategic land bank. (2) Deep values and is still trading at a discount to its peers. (3) Integrated construction/property business model. Negatives: (1) Slower take-up for its property launches. Maintain TP of RM2.93 based on SOP valuation (see Figure #5). HLIB Research PP 9484/12/2012 (031413) 29 August 2012 Price Target: RM2.93 ( ) Share price: RM2.25 Jarod Soon [email protected] (603) KLCI 1,647.1 Expected share price return 30.2% Expected dividend return 2.3% Expected total return 32.5% Share price Information Bloomberg Ticker SWB MK Bursa Code 5211 Issued Shares (m) 1,293 Market cap (RM m) 2,908 3-mth avg. volume ( 000) 895 Price Performance 1M 3M 12M Absolute Relative Major shareholders Tan Sri Jeffrey 45.0% GIC 12.5% Free Float 51.7% Summary Earnings Table FYE Dec (RM m) 2011A 2012E 2013E 2014E Revenue 3,692 3,478 3,774 4,226 EBITDA EBIT Profit Before Tax PATAMI Core PATAMI Core EPS (sen) FD EPS (sen) Net DPS (sen) Net DY (%) P/E (x) FD P/E (x) P/B (x) Net Gearing (%) ROE (%) ROA (%) HLIB Page 1 of 7 29 August 2012

2 Figure #1 Quarterly results comparison FYE Dec (RM m) 1Q11 1Q12 2Q12 QoQ (%) YoY (%) Comments Revenue 1, Refer to segmental. Property Development YoY: Affected by slower property sales. QoQ: Higher billings from Sunway Nexis, Velocity and South Quay. Property Investment YoY: Higher contribution from Monash U Residence and Sunway Putra Hotel. QoQ: Due to higher theme park visitorship and hotel occupancy rate. Construction YoY: Construction activities remained unchanged. QoQ: Pick-up in construction activities, especially in the Southern region. Trading/Manufacturing YoY/QoQ: Held steady despite challenging economic conditions. Quarry EBIT Refer to segmental. Property Development >100 YoY/QoQ: Affected by fluctuations in earnings margin. Property Investment YoY/QoQ: Due to higher property investment revenue. Construction > YoY/QoQ: Affected by fluctuations in earnings margin. Trading/Manufacturing YoY/QoQ: Affected by fluctuations in earnings margin. Quarry > YoY: Lower contribution from overseas operation in Trinidad & Tobago and higher operating losses in Vietnam. QoQ: Due to higher quarry revenue. Net Interest Expense (6.8) (18.6) (22.8) 22 >100 Net gearing ratio climbed to 54% from 52% in 1QFY12. Share of Associates/JCE > QoQ: Due to fair value gain of RM85m on Sunway REIT. Lower contribution from Singapore property developments due to timing difference in profit recognition. PBT > PATAMI > EI (31.5) (0.2) (76.7) >100 >100 Derivative gain of RM0.2m and fair value gain of RM76.5m on Sunway REIT. Core Earnings QoQ: Rebound in earnings due to pick-up in activities. Core EPS (sen) EBIT Margin (%) 5.8% 7.4% 10.5% Refer to segmental. YoY: Remained flattish due to lower contribution from Singapore property developments and contribution from overseas construction project. Property Development 3.9% 11.3% 14.7% 30 >100 YoY/QoQ: Higher value-added property development activities carried out. Property Investment 22.9% 16.2% 26.1% YoY/QoQ: Achieved better degree of operating leverage due to higher revenue. Construction 2.7% 2.8% 4.5% YoY/QoQ: Higher value-added construction works recognised. Trading/Manufacturing 9.1% 8.4% 8.7% 4-4 Remained fairly stable. Quarry 7.3% 2.5% 5.9% > PBT Margin Ex-Assoc (%) 5.1% 5.2% 8.2% Figure #2 Cumulative results comparison FYE Dec (RM m) 1HFY11 1HFY12 YoY (%) Comments Revenue 1, , Refer to segmental. Property Development Affected by slower property sales. Property Investment Higher contribution due to Monash U Residence and Sunway Putra Hotel. Construction Construction activities remained unchanged. Trading/Manufacturing Held steady despite challenging economic conditions. Quarry EBIT Refer to segmental. Property Development Affected by fluctuations in earnings margin. Page 2 of 7 29 August 2012

3 Property Investment Due to higher property investment revenue. Construction >100 Affected by fluctuations in earnings margin. Trading/Manufacturing Affected by fluctuations in earnings margin. Quarry Slightly better due to lower forex loss incurred from its Vietnam operations. Net Interest Expense (19.5) (41.4) >100 Net gearing ratio climbed to 54% from 46% in 1HFY11. Share of Associates/JCE Mainly due to fair value gain of RM85m on Sunway REIT. PBT PATAMI Lower contribution from Singapore property developments due to timing difference in profit recognition and contribution from overseas construction project. EI (44.4) (76.9) 73 Derivative gain of RM0.4m and fair value gain of RM76.5m on Sunway REIT. Core Earnings Earnings growth lifted by 1QFY12 s performance. Core EPS (sen) EBIT Margin (%) 5.5% 9.1% 65 Refer to segmental. Property Development 7.6% 13.2% 74 Higher value-added property development activities carried out. Property Investment 18.9% 21.4% 13 Achieved better degree of operating leverage due to higher revenue. Construction 1.8% 3.9% >100 Higher value-added construction works recognised. Trading/Manufacturing 9.2% 8.5% -7 Remained fairly stable. Quarry 4.3% 4.4% 3 PBT Margin Ex-Assoc (%) 4.6% 6.8% 47 Figure #3 Construction order book as of 2QFY12 Projects Balance works (RM m) MRT Package V4 (Sec. 16-Semantan portal) 1,170 LRT KJ line extension Package B 541 Pinewood Iskandar 293 Legoland 27 UiTM campus expansion 146 Precinct 1, Putrajaya (Hotel & Office) 51 Bio-Xcell CUF, Nusajaya 24 Others 267 Total Malaysia 2,519 Singapore precast 364 Total Overseas 364 Total Order book 2,883 *Excluded Velocity and Pinnacle order worth RM694m as we consider it as internal orders. Page 3 of 7 29 August 2012

4 Figure #4 Effective unbilled property sales as of 2QFY12 Developments (RM m) Singapore 989 Sunway Damansara 197 Sunway South Quay 154 Velocity 134 China 65 Melawati 157 Suria 45 SPK 18 Penang 22 Others 63 Total 1,844 Figure #5 Sunway SOP valuation Division Methodology Stake Value (RM m) RM/share % Construction 14X Average of FY12-13 Earnings 100% Property NPV of profits + BV of Property 100% 3, Trading/Manufacturing 9X P/E 100% Quarry 9X P/E 100% Sub-Total (RM m) 4,843 No. of shares (m) 1,293 RM per share 3.75 Proceeds from warrants (RM m) Holding Company Net Debt (1,021) (0.66) (22) SOP (RM m) 4, Total no. of diluted shares (m) 1,551 Target Price (RM) 2.93 Figure #6 HLIB vs Consensus FYE Dec (RM m) FY12E FY13E FY14E HLIB Consensus (%) HLIB Consensus (%) HLIB Consensus (%) Revenue 3, , % 3, , % 4, , % PATAMI % % % Bloomberg, HLIB Page 4 of 7 29 August 2012

5 Figure #7 Company Peer comparison Mkt Cap Price Target (RM m) (RM) (RM) +/- (%) Rating EPS (sen) P/E (X) ROE (%) DY (%) FY12E FY13E FY12E FY13E FY12E FY13E Gamuda* 7, BUY IJM** 7, HOLD Sunway 2, BUY MRCB 2, BUY WCT 2, BUY Mudajaya 1, BUY Eversendai 1, BUY HSL BUY Benalec NR Naim NR Muhibbah NR Kimlun BUY TRC Synergy BUY Ahmad Zaki NR Bina Puri NR Average HLIB, Bloomberg *FYE Jul **FYE Mar Page 5 of 7 29 August 2012

6 Financial Projections for Sunway (TP: RM2.93) Income Statement Quarterly Financial Summary FYE 31 Dec (RM m) 2010A 2011A 2012E 2013E 2014E FYE 31 Dec (RM m) 2011Q2 2011Q3 2011Q4 2012Q1 2012Q2 Revenue 3, , , , ,225.9 Revenue 1, EBITDA Expenses (967.1) (897.9) (867.6) (770.5) (917.8) D&A (79.7) (89.7) (119.7) (136.8) (152.3) Other Income EBIT EBIT Interest Income Net Interest Expense (6.8) (18.2) (17.8) (18.6) (22.8) Finance Costs (101.1) (80.9) (93.7) (73.5) (63.0) Associates & JCE Associates/JCE Profit Before Tax Profit Before Tax Tax (30.7) (18.7) (59.1) (18.5) (30.3) Tax (86.1) (68.3) (77.4) (92.7) Net Profit Net Profit Minority Interests (7.9) (2.8) (7.2) (2.0) (8.5) Minority Interests (309.2) (40.4) (26.4) (24.7) (22.9) PATAMI PATAMI Exceptionals (31.5) 24.8 (24.5) (0.2) (76.7) Exceptionals Core Earnings Core Earnings W. Ave. Shares (m) 1, , , , ,292.5 Basic Shares (m) 1, , , , ,292.5 Core EPS (sen) Core EPS (sen) FD Core EPS (sen) FD Core EPS (sen) Balance Sheet Rates and Ratios FYE 31 Dec (RM m) 2010A 2011A 2012E 2013E 2014E FYE 31 Dec (RM m) 2010A 2011A 2012E 2013E 2014E Cash Core PER (x) Trade Receivables FD Core PER (x) Inventories Net DPS (sen) Development Costs Net DY (%) Associates/JCE 1, , , , ,507.0 BVPS (RM) PPE 2, , , , ,364.2 P/B (x) Goodwill NTA/Share (RM) Others Total Assets 6, , , , ,147.6 EBITDA Margin (%) Trade Payables , ,042.0 EBIT Margin (%) Total Debt 1, , , , ,506.1 PBT Margin (%) Others , , , ,238.6 PATAMI Margin (%) Total Liabilities 3, , , , ,786.7 ROE (%) Shareholders' Funds 3, , , , ,960.4 ROA (%) Minority Interests Total Capital 3, , , , ,360.9 Net Gearing (%) Cashflow Analysis Assumption Metrics FYE 31 Dec (RM m) 2010A 2011A 2012E 2013E 2014E FYE 31 Dec (RM m) 2010A 2011A 2012E 2013E 2014E EBITDA Revenue 3,102 3,692 3,478 3,774 4,226 Working Capital (52.9) (80.8) (153.4) Property ,047 Interest Received Property Investment Dividends fr Assoc Construction 1,005 1,221 1,112 1,255 1,463 Others (792.6) (186.5) (68.3) (77.4) (92.7) Trading/Manufacture CFO Quarry Capex (121.4) (142.2) (300.0) (300.0) (300.0) Purchase/Disposal 3,322.4 (71.2) Others (1,203.9) (79.6) EBIT Margins (%) CFI 1,997.0 (293.0) (300.0) (300.0) (300.0) Financing (273.0) (639.8) Shares Issued (128.0) (42.5) Dividends (1,958.3) (944.2) - (67.4) (72.2) Interest Paid (101.1) (80.9) (93.7) (73.5) (63.0) Others (92.7) CFF (2,233.2) (196.3) (366.7) (780.7) 30.0 Net Cashflow (91.2) 69.5 (642.9) Page 6 of 7 29 August 2012

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As of 29 August 2012, Hong Leong Investment Bank Berhad has proprietary interest in the following securities covered in this report: (a) As of 29 August 2012, the analyst, Jarod Soon Sien Ming, who prepared this report, has interest in the following securities covered in this report: (a) -. Published & Printed by Hong Leong Investment Bank Berhad (43526-P) Level 8, Menara HLA No. 3, Jalan Kia Peng Kuala Lumpur Tel / Fax Equity rating definitions BUY Positive recommendation of stock under coverage. Expected absolute return of more than +10% over 12-months, with low risk of sustained downside. TRADING BUY Positive recommendation of stock not under coverage. Expected absolute return of more than +10% over 6-months. Situational or arbitrage trading opportunity. HOLD Neutral recommendation of stock under coverage. Expected absolute return between -10% and +10% over 12-months, with low risk of sustained downside. TRADING SELL Negative recommendation of stock not under coverage. Expected absolute return of less than -10% over 6-months. Situational or arbitrage trading opportunity. SELL Negative recommendation of stock under coverage. High risk of negative absolute return of more than -10% over 12-months. NOT RATED No research coverage and report is intended purely for informational purposes. Industry rating definitions OVERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of more than +5% over 12-months. NEUTRAL The sector, based on weighted market capitalization, is expected to have absolute return between 5% and +5% over 12-months. UNDERWEIGHT The sector, based on weighted market capitalization, is expected to have absolute return of less than 5% over 12-months. Page 7 of 7 29 August 2012