Series 1: The Next Thematic Play Penang

Sector Update, Real Estate Series 1: The Next Thematic Play Penang Overweight (Maintained) Macro Risks Growth Value After the 13 th GE, we believe the Penang state government is now committed to carry out all the infra road projects. More importantly, this means the take off of E&O s STP2. Over the mainland, the opening of the Penang Second Bridge (PSB) in Sept will have a massive asset value unlocking impact. The potential entrance of the big players to the mainland will spark a re-rating of the Penang developers. The key Penang plays IJMLD, E&O and TILB will stand to benefit. Penang play next. The Penang state remains under the administration of the opposition. Approval backlog is, therefore, expected to be cleared soon, as readjustments of proposals are not needed. Moving forward, we expect the state to kick off all the road projects, which were already being planned. All these are likely to yield a positive impact on the real estate values in both the island and mainland. Commitment on road projects = commitment on STP2. Before the GE, the state government had indicated that some 110 acres (net) from Seri Tanjung Pinang 2 will be used as payment in lieu for the infra works on the island. From the state s perspective, the land is likely to be priced lucratively. We estimate a price range of MYR350-400 psf. This is particularly favourable to E&O, given its 760-acre land at STP 2 (to be reclaimed). E&O will soon become the market leader on the island. Re-rating coming soon as developers eyeing landbank on mainland. Based on our checks, many developers are now considering Penang mainland as one of their key landbanking destinations. The trend is expected, as the opening of PSB will result in significant improvement in connectivity between the southern part of island to Seberang Perai Selatan on the mainland. Besides the growing industrial activities, the state government has also planned to promote the tourism angle, by setting up a Premium Outlet near the PSB interchange. Similar to Iskandar, whereby aggressive landbanking has substantially driven up land values over the last two years, we expect to see the same trend on the Penang mainland over the next few years. We like IJMLD, E&O and TILB. Based on the latest share price, we rejig our top picks. We now choose IJMLD, E&O, TILB and Sunway. IJMLD, being the best representative of property sector, is still largely a laggard vs. its peers. Meanwhile, valuations of both E&O and TILB will be rise, given the STP2 announcement and the opening of PSB in 2H. Loong Kok Wen CFA +603 9280 2237 loong.kok.wen@rhb.com.my See important disclosures at the end of this report P/E (x) P/B (x) Yield (%) Company Name Price Target Dec-14F Dec-14F Dec-14F Rating Eastern & Oriental MYR2.00 MYR3.00 13.4 1.4 1.8 BUY Glomac MYR1.17 MYR1.08 6.6 1.0 5.2 TRADING BUY IJM Land MYR2.93 MYR3.76 13.0 1.3 1.5 BUY KSL Holdings MYR2.30 MYR2.45 4.9 0.7 3.0 BUY Mah Sing MYR3.04 MYR2.48 10.0 2.1 3.2 TRADING BUY Paramount Corp MYR1.61 MYR1.90 7.7 0.7 5.6 BUY SP Setia MYR3.75 MYR3.76 14.6 1.8 3.2 NEUTRAL Sunw ay MYR3.83 MYR4.28 10.9 1.2 2.0 BUY Tambun Indah Land MYR1.25 MYR1.55 6.2 1.3 5.7 BUY UEM Land MYR3.17 MYR3.30 22.6 2.1 1.3 TRADING BUY UOA Development MYR2.54 MYR2.60 9.0 1.3 5.5 BUY Source: Company data, RHB Estimates Powered by Enhanced Datasystems EFA TM Platform

Series 1: Penang Penang After the 13 th GE. We visited Penang a week after the 13 th General Election was held. The Penang state remains under the administration of the opposition. As there is no change in the state government, the previously held back development approvals are expected to be cleared soon, as readjustments in the proposals are not needed. We believe the key Penang developers will likely enjoy strong project news flow in 2H13. These include IJM Land s The Light Phase 2 commercial component, E&O s Seri Tanjung Pinang 2 masterplan, as well as some other JVs, land or even potential M&A transactions. Moving forward, we expect the state to kick off all the road projects worth a total MYR6.3bn, which have been planned previously. All these are crucial to ease the long-standing traffic congestion issues on the island, and will likely have positive implications for real estate values on both the island and mainland. The integrated road project, which is part of the Transport Master Plan, includes a 4.2km bypass from Gurney Drive and Lebuhraya Tun Dr Lim Chong Eu, a 4.6km bypass between Lebuhraya Tun Dr Lim Chong Eu and Bandar Baru Air Itam, a 12km-paired road from Jalan Tanjung Bungah to Teluk Bahang, and the 6.5km Penang-Butterworth sea tunnel. Out of the four road projects, only the tunnel will be tolled. While the construction of the sea tunnel will take years, properties in Gurney area on the island and the northern mainland area (Seberang Perai Utara, Bertam) will enjoy a positive spillover in a longer term. E&O will benefit the most from this as it is the key land owner at the northern part of Penang island, with its 980-acre STP 1 and 2. Figure 1 The proposed road projects on the Penang island Source: Invest Penang See important disclosures at the end of this report 2

Realisation of STP2 assured. Before the GE, the state government had indicated that some 110 acres (net basis) from STP2 would be used as payment in lieu for the infra works on the island. This means that the 760 acres yet-to-be reclaimed land forms an integral part of the solution for the state to fund the infra projects. Therefore, from the state s perspective, the land is likely to be priced lucratively. The land surrender is necessary for E&O (same for STP1), and we view it positively, as it will set a benchmark for land prices on the island. Once the masterplan is revealed some time in 3Q, market should gain further confidence on the materialisation of STP2. E&O will soon become the market leader on the Penang island, in terms of pricing and land ownership. Re-rating coming soon as developers eyeing landbank on mainland. Based on our recent discussion with many developers, many of them are now targeting Penang mainland as one of their landbanking destinations. The trend is not unexpected, as the PSB is due to open in Sept 2013, and this 24km bridge is likely to spur massive transformation at Batu Kawan/Nibong Tebal/South of Seberang Perai areas. The travelling distance from the island to the southern Penang mainland will only take about 30min with the new bridge compared to more than an hour using the existing bridge. Batu Kawan Industrial Park, which is spearheaded by the state government, is set to become a bustling industrial hub, similar to Bayan Lepas Free Industrial Park and the Prai Industrial Area. Besides the mushrooming industrial activities, given that Penang is already a famous tourism destination in, the state government also plans to emphasise the tourism angle by setting up a Premium Outlet near the PSB interchange. We understand that four companies have already submitted their proposal. Compared to Iskandar (Gerbang Nusajaya), which is a new area and the key magnet to the SMEs and industrial players based mainly in Singapore due to its proximity, Penang is already an industrial/e&e hub in the country. Many manufacturers from Japan, US etc have already set up plants in Penang, and more are coming to Batu Kawan. Although the projects are not large scale due to funding constraints, the previously lagging infrastructure developments are expected to pick up going forward. Similar to Iskandar, whereby aggressive land transactions have substantially driven up land and property values over the last two years, we expect to see the same trend on the Penang mainland over the next few years. Figure 2 Batu Kawan Industrial Park Source: Invest Penang See important disclosures at the end of this report 3

Property sales in Penang foreigners are also coming in In line with sector trends, growth in property prices in Penang has been consistent, and relatively less volatile than the prices in the Klang Valley area (KL and Selangor) in the recent quarters. Among the key states in, although it has the sharpest y-o-y fall of 48.5% in transaction volume, Penang has the highest growth of 54.1% in average property value transacted in 4Q12. House Price Index (HPI) for Penang grew 10% yoy in 4Q12. This is also among the highest, just after Sabah s 23% and KL s 11%. HPI growth for, Selangor and Johor is 8.3%, 7.4% and 6.4%, respectively during the quarter. Figure 3 Yoy growth in average house price 20% 18% Figure 4 Yoy % change in average property value transacted 55% 45% 16% 14% 12% 10% 8% KL Selangor Johor Penang 35% 25% 15% 5% 6% 4% -5% 1Q08 2Q08 3Q08 4Q08 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12 2% -15% 0% 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12-25% Kuala Lumpur Selangor Johor Penang Source: NAPIC ` Source: NAPIC Figure 5 Yoy % change in quarterly HPI 20% 15% 10% KL Selangor Johor 5% Penang 0% 1Q09 2Q09 3Q09 4Q09 1Q10 2Q10 3Q10 4Q10 1Q11 2Q11 3Q11 4Q11 1Q12 2Q12 3Q12 4Q12-5% Source: Invest Penang See important disclosures at the end of this report 4

Property sales on Penang remain fairly strong. From our recent visit, we understand that many of the projects on the island have attracted a strong pool of overseas buyers. This reinforces our view that foreign inflow of property buyers is a result of the influx of liquidity. Ivory/Dijaya s Penang World City has received encouraging response. The first phase of Tropicana Bay Residences (four blocks) was previewed in Jan/Feb 2013 at an average selling price of MYR678-788 psf for Tower A and B. Due to attractive discount offered and therefore lower effective pricing, both towers have achieved a booking of >80%. Tower C and D were subsequently opened at a higher selling price of MYR701-834 psf. The discounted price is comparable to the current market price for The Light Linear project by IJM Land, which was already completed in end 2012. Booking rate for Tower C and D has hit >60% thus far. IJM Land too, has seen strong demand. IJMLD s sales spiked in 3QFY13 (4QCY12) by MYR500m (from MYR450m in 2QFY12) largely due the successful conversion of bookings in Collection III into actual sales. Collection I and II have already achieved 85% take-up rate. Meanwhile, E&O s Andaman Block 1 and 2 has hit a take-up rate of over 70% and 60%, respectively. Block 3, the final block at Quayside STP1, is likely to be released in end 2013. E&O is expected to value add the design and specs in order to achieve another step-up in pricing from MYR1,400 psf in Andaman Block 2. Units in Block 3 are realigned in order to maximize the number of seaview units that can garner premium pricing. Penang, if not better, is equally appealing. Apart from the sizzling hot Iskandar, we believe that foreign buyers will continue to come to Penang in a big way. Note that, PSB is constructed by China Harbour Engineering Co and United Engineers. As for the new package of infra projects, the Penang state government has already awarded the tender to Consortium Zenith BUCG, a special purpose vehicle company set up by a JV between local company Construction Zenith, China Railway Construction Corporation Ltd (CRCC) together with Beijing Urban Construction Group (BUCG), Sri Tinggi Sdn Bhd and Juteras Sdn Bhd. BUCG is a major Chinese construction company that built the Beijing Olympic Stadium Bird Nest, and CRCC built most of railroads in China. Given the China connection, along with E&O s tie-up with Mitsui Fudosan in Japan, Temasek in Singapore, and the active marketing and property roadshow in overseas by many other Penang-based developers such as IJM Land, the potential flow of foreign buyers to the Penang island should not be underestimated. Valuations and stock picks The sector re-rating is expected to spread to the Penang plays soon. We think the potential of Penang has been largely overlooked, as the market has been focusing on the Iskandar theme. Considering that the valuations of many Iskandar-based players are getting richer, the Penang angle is looking relatively more attractive. Based on the latest share price, we re-jig our top picks. We now choose IJMLD, E&O, TILB and Sunway. IJMLD being the best representative of property sector (Please refer to our report dated 8 th Apr 2013), is still largely a laggard, given its share price appreciation of only 14%, vs. 17-33% for some of its peers in the top tier since 3 rd May 2013 (last trading day before the 13 th GE). Valuations for both E&O and TILB are expected to be held up, given the catalysts of STP2 announcement and the opening of PSB that will take place in 2H. See important disclosures at the end of this report 5

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